UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 1-12962
GRAND CASINOS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1689535
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
(Address of principal executive offices) (Zip Code)
(612) 449-9092
(Registrant's telephone number, including area code)
13705 First Avenue North 55441
Minneapolis, Minnesota (Former Zip Code)
(Former Name, Former Address and
Former Fiscal Year, If Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
As of November 12, 1996, there were 41,776,386 shares of Common Stock,
$0.01 par value per share, outstanding. Page 1 of 29
GRAND CASINOS, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of 3
September 29, 1996 and December 31, 1995
Consolidated Statements of Earnings 4
for the three months ended September 29, 1996
and October 1, 1995
Consolidated Statements of Earnings for 5
the nine months ended September 29, 1996 and
October 1, 1995.
Consolidated Statements of Cash Flows 6
for the nine months ended September 29, 1996
and October 1, 1995
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 3. Defaults Upon Senior Securities 26
ITEM 6. Exhibits and Reports On Form 8-K 27
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GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) *
SEPTEMBER 29, 1996 DECEMBER 31, 1995
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ASSETS
Current Assets:
Cash and cash equivalents $ 126,290 $ 334,772
Current installments of notes receivable 11,454 13,750
Accounts receivable 19,611 10,864
Deferred income taxes 7,278 6,747
Other current assets 15,186 13,736
---------- ----------
Total Current Assets 179,819 379,869
---------- ----------
Property and Equipment, Net 784,444 542,838
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Other Assets:
Cash and cash equivalents-restricted 6,253 6,902
Securities available for sale 33,559 14,200
Notes receivable, less current installments 36,333 43,594
Investments in and notes from unconsolidated affiliates 147,949 109,413
Debt issuance and deferred licensing costs-net 23,754 20,582
Other long-term assets 18,020 10,710
---------- ----------
Total Other Assets 265,868 205,401
---------- ----------
TOTAL ASSETS $1,230,131 $1,128,108
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 7,895 $ 6,252
Accounts payable-construction 18,188 12,517
Current installments of long-term debt and capital leases 11,277 11,562
Accrued interest 15,880 4,030
Accrued payroll and related expenses 18,843 17,157
Other accrued expenses 32,922 16,314
---------- ----------
Total Current Liabilities 105,005 67,832
---------- ----------
Long-term Liabilities:
Long-term debt-less current installments 468,121 459,070
Deferred income taxes 74,489 75,106
---------- ----------
Total Long-Term Liabilities 542,610 534,176
---------- ----------
TOTAL LIABILITIES 647,615 602,008
---------- ----------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Common stock, $.01 par value; authorized 100,000 shares;
issued and outstanding 41,768 and 40,988
at September 29, 1996 and December 31, 1995, respectively 418 410
Additional paid-in-capital 412,337 397,298
Net unrealized gains on securities available for sale 2,912 2,102
Retained earnings 166,849 126,290
---------- ----------
Total Shareholders' Equity 582,516 526,100
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,230,131 $1,128,108
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
* DERIVED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
------------------
SEPTEMBER 29, 1996 OCTOBER 1,1995
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REVENUES:
Casino $ 109,391 $ 71,157
Hotel 6,516 3,626
Food and beverage 14,941 8,940
Management fee income 22,447 20,991
Retail and other income 3,071 2,524
--------- ---------
Gross Revenues 156,366 107,238
Less: Promotional allowances (9,641) (3,828)
--------- ---------
NET REVENUES 146,725 103,410
--------- ---------
COSTS AND EXPENSES:
Casino 39,509 23,231
Hotel 1,512 1,026
Food and beverage 8,980 4,021
Other operating expenses 3,111 2,545
Depreciation and amortization 14,930 6,491
Lease expense 4,992 3,991
Selling, general and administrative 40,638 28,042
--------- ---------
Total Costs and Expenses 113,672 69,347
--------- ---------
EARNINGS FROM OPERATIONS 33,053 34,063
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 4,063 3,919
Interest expense (11,167) (7,078)
Gain on sale of investments/Other (expense) (245) 3,232
Equity in loss of unconsolidated affiliates (10,910) (136)
--------- ---------
Total other income (expense), net (18,259) (63)
--------- ---------
Earnings before income taxes and minority interest 14,794 34,000
Provision for income taxes 11,291 13,414
--------- ---------
Earnings before minority interest 3,503 20,586
Minority interest 0 897
--------- ---------
NET EARNINGS $ 3,503 $ 21,483
========= =========
EARNINGS PER COMMON SHARE $ 0.08 $ 0.61
========= =========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 42,827 35,175
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 29, 1996 OCTOBER 1, 1995
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REVENUES:
Casino $ 263,991 $ 201,664
Hotel 18,555 6,276
Food and beverage 34,009 25,230
Management fee income 61,539 52,004
Retail and other income 8,406 5,511
--------- ---------
Gross Revenues 386,500 290,685
Less: Promotional allowances (22,961) (11,016)
--------- ---------
NET REVENUES 363,539 279,669
--------- ---------
COSTS AND EXPENSES:
Casino 90,195 63,881
Hotel 4,561 2,079
Food and beverage 18,500 11,703
Other operating expenses 8,686 5,500
Depreciation and amortization 28,269 16,872
Lease expense 13,164 10,888
Selling, general and administrative 102,487 78,175
--------- ---------
Total Costs and Expenses 265,862 189,098
--------- ---------
EARNINGS FROM OPERATIONS 97,677 90,571
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 13,501 10,664
Interest expense (21,733) (19,290)
Gain on sale of investment/Other (expense) (245) 4,853
Equity in loss of unconsolidated affiliates (14,749) (406)
--------- ---------
Total other (expense), net (23,226) (4,179)
--------- ---------
Earnings before income taxes and minority interest 74,451 86,392
Provision for income taxes 33,892 33,920
--------- ---------
Earnings before minority interest $ 40,559 $ 52,472
Minority interest 0 2,353
--------- ---------
NET EARNINGS 40,559 54,825
========= =========
EARNINGS PER COMMON SHARE $ 0.94 $ 1.59
========= =========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 42,985 34,476
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 29, 1996 OCTOBER 1, 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 40,559 $ 54,825
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 26,527 14,318
Amortization of original issue discount and debt issuance costs 1,742 4,743
Gain on sale of investment 0 (4,853)
Equity in loss of unconsolidated affiliate 14,749 406
Decrease in minority interest 0 (2,353)
Change in deferred income taxes 616 0
Write-off of project note receivables (340) 0
Changes in operating assets and liabilities:
Current assets (15,460) (2,446)
Accounts payable 7,314 3,458
Accrued expenses and income taxes 34,849 26,085
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 110,556 94,183
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (453) (10,409)
Investment in and notes receivable from unconsolidated affiliates (53,664) (20,059)
Proceeds from repayment of notes receivable 10,349 17,675
(Increase) decrease in cash and cash equivalents-restricted 649 (162,839)
Payments for property and equipment (261,508) (108,234)
Purchases of securities available for sale (19,750) 0
Proceeds from sale of investment 0 4,778
Increase in other long-term assets (13,455) (560)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (337,832) (279,648)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in accounts payable-construction 0 (329)
Proceeds from issuance of common stock-net 15,047 1,337
Debt issuance costs and deferred financing costs (5,018) (12,838)
Proceeds from issuance of long-term debt 18,429 235,500
Payments on long-term debt and capital lease obligations (9,664) (12,222)
Increase in minority interest due to
exercise of Stratosphere warrants 0 4,663
Gain on exercise of Stratosphere Corporation warrants 0 6,272
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,794 222,383
--------- ---------
Net increase (decrease) in cash and cash equivalents (208,482) 36,918
Cash and cash equivalents - beginning of period 334,772 29,797
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 126,290 $ 66,715
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $ 9,883 $ 20,027
Income taxes $ 15,719 $ 26,354
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for debt issuance costs $ 0 $ 4,000
Increase in goodwill due to an increase in
ownership of Stratosphere Corporation $ 0 $ 4,185
Increase in minority interest due to an increase in
ownership of Stratosphere Corporation $ 0 $ 16,296
Deferred income taxes on gain on exercise of
Stratosphere Corporation warrants $ 0 $ 2,200
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1996
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS
Grand Casinos, Inc. and Subsidiaries, collectively the
Company, develop, construct, and manage land-based and
dockside casinos and related hotel and entertainment
facilities primarily in emerging gaming jurisdictions. The
Company owns and operates two dockside casinos on the
Mississippi Gulf Coast, one dockside casino in Tunica County,
Mississippi, and manages two Indian-owned casinos in Minnesota
and two Indian-owned casinos in Louisiana. It is also an owner
of approximately 42% of Stratosphere Corporation
(Stratosphere), which constructed the Stratosphere project in
Las Vegas, Nevada, which opened on April 29, 1996. Related
hotel and entertainment facilities at the Grand Casino Biloxi
and Grand Casino Tunica projects are currently under
construction and will open at various times.
The consolidated financial statements include the accounts of
Grand Casinos, Inc. and its wholly-owned and majority-owned
subsidiaries. The prior year's accompanying consolidated
financial statements include the accounts of Stratosphere
through December 20, 1995, the date on which the Company owned
less than 50% of the voting stock of Stratosphere. Investments
in unconsolidated subsidiaries representing between 20% and
50% of voting stock are accounted for on the equity method.
All material intercompany balances and transactions have been
eliminated in the consolidation.
The accompanying unaudited consolidated financial statements
have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial
information, in accordance with the rules and regulations of
the Securities and Exchange Commission. Pursuant to such rules
and regulations, certain financial information and footnote
disclosures normally included in the consolidated financial
statements have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have
been included.
Operating results for the nine months ended September 29,
1996, are not necessarily indicative of the results that may
be expected for the fiscal year ending December 29, 1996.
The consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1995.
NOTE 2 INCOME RECOGNITION
The Company recognizes revenues from its owned and operated
casinos in accordance with industry practice. Casino revenue
is the net win from gaming activities (the difference between
gaming wins and losses). Casino revenues are net of accruals
for anticipated payouts of progressive and certain other slot
machine jackpots. Revenues include the retail value of food
and beverage and other items which are provided to customers
on a complimentary basis. A corresponding amount is deducted
as promotional allowances. The costs of such complimentaries
are included in casino costs and expenses in the accompanying
Consolidated Statements of Earnings. Revenue from the
management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the
management contracts.
NOTE 3 INVENTORIES
Inventories, consisting of food and beverage, retail and
operating supplies, are stated at the lower of cost or market.
Cost is determined using the first in, first out method.
NOTE 4 PREOPENING EXPENSES
Preopening expenses incurred prior to opening of Company-owned
facilities are capitalized and amortized to expense using the
straight-line method over the six months following the opening
of the respective facilities. The majority of these costs
include payroll, training, and marketing costs incurred prior
to commencement of operations. Depreciation and amortization
for the nine months ended September 29, 1996 and October 1,
1995 includes approximately $5.6 million and $.6 million of
preopening amortization expense, respectively. For the three
months ended September 29, 1996 and October 1, 1995,
approximately $5.2 million and $.4 million, respectively, of
preopening amortization was expensed.
NOTE 5 EARNINGS PER COMMON SHARE
Earnings per common share was determined by dividing net
earnings by the weighted average number of common shares and
common stock equivalents outstanding during the nine and three
months ended September 29, 1996 and October 1, 1995.
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except in the case
of capitalized lease assets, which are stated at the lower of
the present value of the future minimum lease payments or fair
market value at the inception of the lease. Expenditures for
additions, renewals and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred.
Depreciation of property and equipment is computed using the
straight-line method over useful lives of three to forty
years. Leasehold acquisition costs are amortized over the
shorter of the estimated useful life or the term of the
respective leases once the assets are placed in service.
NOTE 7 AMORTIZATION OF ORIGINAL ISSUE DISCOUNT AND DEBT ISSUANCE
COSTS
Original issue discounts are amortized using the effective
interest method, over the life of the related indebtedness.
Debt issuance costs are amortized using the straight-line and
effective interest methods, over the life of the related
indebtedness.
NOTE 8 INTEREST COSTS
Interest is capitalized in connection with the construction of
major facilities. The capitalized interest is recorded as part
of the asset to which it relates and is amortized over the
asset's estimated useful life once the asset is placed in
service. For the nine months ended September 29, 1996 and
October 1, 1995, approximately $14.1 million and $13.6
million, respectively, of interest cost was capitalized. For
the three months ended September 29, 1996 and October 1, 1995,
approximately $1.0 million and $5.4 million, respectively, of
interest cost was capitalized. Capitalized interest for
Stratosphere which was included in the consolidated financial
statements for the nine and three months ended October 1, 1995
was $7.7 million and $3.9 million, respectively.
NOTE 9 NOTES RECEIVABLE
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Notes receivable consist of the following (in thousands):
September 29, 1996 Dec. 31, 1995
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Notes from the Coushatta Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in 84
monthly installments through
January 2002 24,386 26,903
Notes from the Tunica-Biloxi Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in 84
monthly installments through June
2001 13,070 14,529
Notes from the Mille Lacs Band with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in
varying installments through October 1997 1,886 3,071
Notes from the Mille Lacs Band, with
interest at 9.75%, receivable in 60 monthly
installments through December 1997 1,577 2,435
Other 6,868 10,406
------- -------
$47,787 $57,344
Less current installments of notes receivable 11,454 13,750
------- -------
Notes receivable-less current installments $36,333 $43,594
======= =======
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NOTE 10 LONG-TERM DEBT
On November 30, 1995, the Company completed its public
offering of $450.0 million of eight year 10.125% First
Mortgage Notes due December 1, 2003, realizing net cash
proceeds of approximately $434.5 million after underwriting
and other related offering costs. The Company used $132.6
million of net proceeds to extinguish $115.0 million aggregate
principal amount of 12.5% First Mortgage Notes due on February
1, 2000 (including accrued interest of $4.8 million and $12.8
million related to a tender offer premium and expenses), and
$25.3 million to retire all outstanding principal and interest
due under a credit facility with First Interstate Bank of
Nevada, N.A. (F.I.B. Note). The balance of net proceeds of
approximately $275.7 million is to be used to develop and open
Grand Casino Tunica and to construct additional hotel rooms
and entertainment and gaming-related amenities at Grand Casino
Biloxi and Grand Casino Gulfport.
The 10.125% First Mortgage Notes are secured by substantially
all the assets of Grand Casino Biloxi and Grand Casino
Gulfport, Grand Casino Tunica assets included in Phase 1
development, capital stock owned by the Company in
Stratosphere, and certain existing notes receivable due the
Company from Tribes. The notes require semi-annual payments of
interest only on June 1 and December 1 of each year which
commenced June 1, 1996, until December 1, 2003, at which time
the entire principal plus accrued interest is due and payable.
The notes may be redeemed at the Company's option, in whole or
in part, anytime after December 1, 1999, at a premium,
declining ratably thereafter to par value on December 1, 2002,
to maturity.
On May 10, 1996, the Company completed a $120 million Senior
Secured Term Loan through BankAmerica Leasing and Capital
Group. The five-year Senior Secured Term Loan Facility, with
varying interest rates ranging from 1.75% to 2.50% over the
LIBO Rate, will be used for the continued development of the
Company's Grand Casino Tunica project, located in northern
Mississippi, just outside of Memphis,Tennessee. Approximately
$90 million of the loan will be used for furniture, fixtures
and equipment for the 340,000 square foot casino complex. The
balance of approximately $30 million will be used to construct
a 600-room hotel at Grand Casino Tunica. As of September 29,
1996, $18.4 million had been advanced under the Senior Secured
Term Loan Facility.
NOTE 11 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
On March 9, 1995, the Company converted $33.5 million of
outstanding advances to Stratosphere into an aggregate 8.25
million shares of common stock. The Company has agreed to
provide credit enhancements, subject to certain limitations,
to guarantee completion of construction of the project to a
limit of $50.0 million and to purchase up to $20.0 million of
additional equity in Stratosphere during each of the first
three years (up to $60.0 million total) Stratosphere is
operating to the extent Stratosphere's consolidated cash flow
does not reach $50.0 million in each of such years. As of
September 29, 1996 and October 1, 1996, the Company has loaned
$49.4 million and $50.0 million, respectively to Stratosphere
pursuant to the Completion Guarantee.
On October 24, 1996, Stratosphere announced that it continues
to seek additional financing and is discussing restructuring
both its existing First Mortgage Note indebtedness and capital
lease obligation. Based on Stratosphere's current and
projected cash position, Stratosphere does not plan to make
the First Mortgage Note interest payment of $14.5 million that
is due November 15, 1996. Failure to make such payment will
result in an event of default that gives the note holders the
right to accelerate such indebtedness. This right does not
vest until the expiration of the 30 day right to cure this
default by Stratosphere. Stratosphere does not currently have
the ability to repay the indebtedness. It is likely that
Stratosphere's negotiations with its creditors, whether
successful or not at arriving at a restructuring, will involve
a bankruptcy filing by Stratosphere as a means of formalizing
and approving a consensual or nonconsensual restructuring.
Stratosphere has suspended construction of Phase II. If
Stratosphere cannot restructure its existing indebtedness,
there will be serious doubt as to whether or not Stratosphere
will be able to continue as a going concern. Depending upon
the terms of any restructuring of Stratosphere, the Company's
participation in any such restructuring, and the valuation of
the Company's position in Stratosphere following any such
restructuring, the Company may be required to write off a
substantial portion or all of its previous investment in
Stratosphere. Any such write-off would have a material adverse
effect on the Company's results of operations and financial
position.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed a loan and security agreement
entered into by the Tunica-Biloxi Tribe of Louisiana for $14.1
million for the purpose of financing casino equipment. The
agreement extends through 1998, and as of September 29, 1996,
the amount outstanding was $7.6 million.
In addition, the Company has guaranteed loan and security
agreements entered into by the Coushatta Tribe of Louisiana
for $22.3 million for the purpose of financing casino
equipment. The agreements are for three years and have various
maturity dates through 1998, and as of September 29, 1996, the
amounts outstanding were $16.1 million.
The Company has entered into a master hotel development
agreement with Casino Resource Corporation for the hotel
adjacent to Grand Casino Hinckley. The Company has guaranteed
the mortgage related to the hotel in the amount of $2.8
million as of September 29, 1996.
OTHER
The Company is a defendant in various pending litigation. In
management's opinion, the ultimate outcome of such litigation
will not have a material adverse effect on the results of
operations or the financial position of the Company. See Part
II -- Item 1. Legal Proceedings of this Form 10-Q.
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, constructs and manages land-based and
dockside casinos primarily in emerging gaming jurisdictions.
The Company's revenues are derived from the Company-owned
casinos of Grand Casino Biloxi, Grand Casino Gulfport, and
Grand Casino Tunica, and from management fee income from Grand
Casino Mille Lacs, Grand Casino Hinckley, Grand Casino
Avoyelles, and Grand Casino Coushatta.
Pursuant to the Mille Lacs, Hinckley, Avoyelles, and Coushatta
management contracts, the Company receives a fee equal to 40%
of the net distributable profits generated by Grand Casino
Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and
Grand Casino Coushatta.
The Company commenced operations in August 1990, and opened
its Company-owned casinos, Grand Casino Gulfport, Grand Casino
Biloxi and Grand Casino Tunica in May 1993, January 1994 and
June 1996, respectively. Therefore, the Company's limited
operating history may not be indicative of the Company's
future performance. In addition, a comparison of results from
year to year may not be meaningful due to the opening of new
facilities during such years. The Company's growth strategy
contemplates expanding existing operations and establishing
additional gaming operations. The successful implementation of
this growth strategy is contingent upon the satisfaction of
various conditions and the occurrence of certain events,
including obtaining governmental approvals and increased
competition, many of which are beyond the control of the
Company. The following discussion and analysis should be read
in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
The casino operations of Grand Casino Tunica opened to the
public on June 24, 1996. Accordingly, there are only
approximately three months of Grand Casino Tunica's operations
included in the results of operations for the nine month
period ended September 29, 1996. The Company's long term plan
was, and continues to be, to develop Grand Casino Tunica into
a destination resort with the development of hotels and other
amenities over the next several months.
A 188 room hotel opened on September 22, 1996 and 1,200
additional rooms are currently under development. Until such
time that such hotels and other amenities are fully
operational, Grand Casino Tunica will be dependent on the
highly competitive day trip market. Although Grand Casino
Tunica has only been open for a short period of time, gaming
revenue for the period of time since opening is below
expectations. The Company believes that the addition of hotels
and other amenities will improve Grand Casino Tunica's
performance. However, there can be no assurance that results
will improve as such additional amenities are added.
Revenues from owned and operated casinos are calculated in
accordance with generally accepted accounting principles and
are presented in a manner consistent with industry practice.
Net distributable profits from Grand Casino Mille Lacs, Grand
Casino Hinckley, Grand Casino Avoyelles, and Grand Casino
Coushatta are computed using a modified cash basis of
accounting in accordance with the management contracts. The
effect of the use of the modified cash basis of accounting is
to accelerate the write-off of capital equipment and leased
assets, which thereby impacts the timing of net distributable
profits.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 29, 1996 COMPARED TO THE NINE
MONTHS ENDED OCTOBER 1, 1995
Earnings Per Common Share and Net Earnings
Earnings per common share for the nine months ended September
29, 1996 were $.94 versus $1.59 for the prior year's
comparable period based upon weighted average common shares
outstanding of 43.0 million and 34.5 million for the nine
month periods ended September 29, 1996 and October 1, 1995,
respectively. The increase in the weighted average common
shares outstanding was primarily a result of the acquisition
of Gaming Corporation of America and Grand Gaming Corp. on
November 30, 1995 in which 7.3 million shares of common stock
were issued.
Net earnings decreased $14.3 million to $40.6 million for the
nine months ended September 29, 1996 compared to the prior
year. Net earnings were negatively impacted by pre-opening
costs from Grand Casino Tunica in the amount of $5.2 million.
Earnings were also impacted by Grand's 42% equity share in the
Stratosphere loss in the amount of $14.8 million during the
period.
Net Revenues
Net revenues for the Company increased $83.9 million for the
nine months ended September 29, 1996 compared to the same
period in the prior year. The increase in net revenues is
primarily due to increased revenues at Company owned
facilities on the Gulf Coast of Mississippi and Tunica County,
Mississippi in the amount of $39.7 million and $35.1 million,
respectively, and increased management fee income from
Indian-owned casinos in the amount of $9.5 million. Grand
Casino Tunica opened on June 24, 1996. Accordingly, only three
months of Grand Casino Tunica's operations are included in the
results for the nine months ended September 29, 1996.
Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino
Tunica generated $264.0 million in gross casino revenue and
$61.0 million in gross hotel, food, beverage, retail, and
entertainment revenue during the nine months ended September
29, 1996. During the nine months ended October 1, 1995, Grand
Casino Biloxi and Grand Casino Gulfport generated $201.7
million in gross casino revenue and $37.0 million in gross
hotel, food, beverage and retail revenue. The increase in
gross revenue is primarily a result of hotels opened at both
Grand Casino Biloxi and Grand Casino Gulfport for the entire
nine months ended September 29, 1996 and Grand Casino Tunica
being open for approximately three months. The Biloxi Hotel
and Gulfport Hotel opened in April 1995 and October 1995,
respectively.
Costs and Expenses
Total costs and expenses increased $76.8 million from $189.1
million for the nine months ended October 1, 1995 to $265.9
million for the nine month period ended September 29, 1996.
Casino expenses were $90.2 million for the nine month period
ended September 29, 1996 compared to $63.9 million for the
comparable period.
This casino expense increase is principally related to the
increase of $39.7 million in casino revenues at Biloxi and
Gulfport and the opening of Grand Casino Tunica. As a result
of additional overnight guests at Grand Casino Biloxi and
Grand Casino Gulfport, additional casino expenses in the form
of complimentary rooms and entertainment have increased casino
expenses. Food and beverage expenses increased $6.8 million to
$18.5 million for the nine month period ended September 29,
1996, of which $3.7 million was a result of the opening of
Grand Casino Tunica.
Increases in selling, general and administrative expenses in
the amount of $24.3 million are primarily attributable to
increases in marketing expenses in the amount of $7.2 million
for the Biloxi and Gulfport properties as a result of air
charter programs and additional promotions, marketing expenses
for Grand Casino Tunica in the amount of $4.4 million,
increases in indirect expenses associated with the Biloxi and
Gulfport Hotels, as well as additional costs relating to the
opening of Grand Casino Tunica in the amount of $7.6 million.
Other
Interest income increased by $2.8 million to $13.5 million for
the nine months ended September 29, 1996. This increase is
primarily attributable to interest income earned on the
proceeds of the Company's $450.0 million First Mortgage Note
offering that closed on November 30, 1995. In addition,
interest expense increased by $2.4 million to $21.7 million
for the nine months ended September 29, 1996 compared to $19.3
million for the nine months ended October 1, 1995. The
increase is the result of increased interest due to $450
million First Mortgage Notes and advances under $120 million
Senior Secured Term Loan.
THREE MONTHS ENDED SEPTEMBER 29, 1996 COMPARED TO THE THREE
MONTHS ENDED OCTOBER 1, 1995
Earnings Per Common Share and Net Earnings
Earnings per common share for the three months ended September
29, 1996 were $.08 versus $.61 for the prior year's comparable
period based upon weighted average common shares outstanding
of 42.8 million and 35.2 million for the three month periods
ended September 29, 1996 and October 1, 1995, respectively.
The increase in the weighted average common shares outstanding
was primarily a result of the acquisition of Gaming
Corporation of America and Grand Gaming Corp. on November 30,
1995 in which 7.3 million shares of common stock were issued.
Net earnings decreased $18.0 million to $3.5 million for the
three months ended September 29, 1996 compared to the prior
year. Net earnings per share were negatively impacted by
pre-opening costs from Grand Casino Tunica and Grand's 42%
share of Stratosphere preopening costs in the amount of $5.2
and $5.1 million, respectively. In addition, earnings includes
a $4.3 million net loss from operations at Tunica and Grand's
42% equity share in the Stratosphere loss in the amount of
$8.8 million during the period.
Net Revenues
Net revenues for the Company increased $43.3 million for the
three months ended September 29, 1996 compared to the same
period in the prior year. The increase in net revenues is
primarily due to increased revenues at Company owned
facilities Grand Casino Biloxi, Grand Casino Gulfport and
Grand Casino Tunica and increased management fee income from
Indian owned casinos. Grand Casino Biloxi and Grand Casino
Gulfport generated net revenues of $94.0 million during the
three months ended September 29, 1996, an increase of $11.7
million compared to the comparable period in the prior year
and Grand Casino Tunica generated $30.3 million net revenues
for the quarter. Management fee income from Indian owned
casinos increased by $1.5 million during the three month
period ended September 29, 1996 compared to the comparable
period. Grand Casino Biloxi, Grand Casino Gulfport and Grand
Casino Tunica generated $109.4 million in gross casino revenue
and $24.5 million in gross hotel, food, beverage, retail and
entertainment revenue during the three months ended September
29, 1996.
During the three months ended October 1, 1995, Grand Casino
Biloxi and Grand Casino Gulfport generated $71.2 million in
gross casino revenue and $14.9 million in gross hotel, food,
beverage and retail revenue. The increase in gross revenue is
primarily a result of hotels opened at both Grand Casino
Biloxi and Grand Casino Gulfport for the entire three months
ended September 29, 1996, whereas, only the Biloxi Hotel was
open during the three months ended October 1, 1995. In
addition, Grand Casino Tunica revenues were included for the
entire three months ended September 29, 1996.
Costs and Expenses
Total costs and expenses increased $44.3 million from $69.3
million for the three months ended October 1, 1995 to $113.7
million for the three month period ended September 29, 1996.
Casino expenses were $39.5 million for the three month period
ended September 29, 1996 compared to $23.2 million for the
comparable period, principally due to the increase of $38.2
million in casino revenues. As a result of additional
overnight guests at Biloxi and Gulfport, additional casino
expenses in the form of complimentary rooms and entertainment
have increased casino expenses. Food and beverage expenses
increased $5.0 million to $9.0 million for the three month
period ended September 29, 1996, of which Grand Casino Tunica
accounted for $3.4 million of the increase. Increases in
selling, general and administrative expenses in the amount of
$12.6 million are primarily attributable to increases in
marketing expenses in the amount of $1.0 million for the
Biloxi and Gulfport properties, marketing expenses in the
amount of $4.3 million for Grand Casino Tunica, and indirect
expenses for Grand Casino Tunica in the amount of $6.8
million.
Other
Interest expense increased by $4.1 million to $11.2 million
for the three months ended September 29, 1996 compared to $7.1
million for the three months ended October 1, 1995. The
increase is the result of increased interest due to $450
million First Mortgage Notes and advances under the $120
million Senior Secured Term Loan.
CAPITAL RESOURCES AND LIQUIDITY
As of September 29, 1996, the company had cash and cash
equivalents of $126.3 million. For the nine months ended
September 29, 1996, capital expenditures were $261.5 million
compared to $108.2 million for the comparable period in the
prior year. The majority of expenditures, $242.9 million for
the nine months ended September 29, 1996, related to
construction of Grand Casino Tunica. Based upon current
construction plans, the Company expects that development,
construction, equipping and furnishing Grand Casino Tunica
will require an aggregate of approximately $490 million, of
which $342.4 million was expended as of September 29, 1996.
The Company secured $120.0 million in Senior Secured Term Loan
Facility for the Grand Casino Tunica project. Based on the
current construction plans, the continued development of Grand
Casino Tunica will require $147.6 million of additional
capital, of which $101.6 million is anticipated to be funded
through the Senior Secured Term Loan Facility for the Grand
Casino Tunica project. These estimates are based upon current
construction plans, which are subject to change, and the scope
and cost of each of the Company's projects may vary
significantly from that which is currently anticipated.
The Company, in conjunction with the closing of Stratosphere
Corporation's First Mortgage Notes, agreed to provide credit
enhancements, subject to certain limitations, to guarantee
completion of construction of the Stratosphere project up to a
limit of $50.0 million and to purchase up to $20.0 million of
additional equity in Stratosphere Corporation during each of
the first three years (up to $60.0 million total) after
Stratosphere Corporation commences operations to the extent
Stratosphere's consolidated cash flow does not reach $50.0
million in each of such years.
As of October 1, 1996, the Company has loaned $50.0 million to
Stratosphere pursuant to the Completion Guarantee. Based on
Stratosphere's net loss reported for the third quarter of 1996
in the amount of $26.0 million and the factors discussed
below, there can be no assurance that Stratosphere will
generate sufficient cash flow to service this debt.
Pursuant to the terms of the Completion Guarantee,
Stratosphere is permitted to defer the payment of interest and
principal on such indebtedness. Stratosphere has announced
that its cash on hand and projected internally generated funds
will not be sufficient to fund Stratosphere's cash
requirements for existing operations, including debt service.
The Company is not obligated to provide funds to Stratosphere
other than as noted above.
Stratosphere has announced that its cash on hand and
internally generated funds will not be sufficient to fund the
cash requirements of its existing operations, current trade
and construction payables and debt service. Stratosphere has
also announced that it does not plan to make its regularly
scheduled interest payment on its First Mortgage Notes due on
November 15, 1996, of $14.5 million. Failure of Stratosphere
to service debt will result in an event of default under
Stratosphere's First Mortgage Note Indenture that gives the
Stratosphere note holders the right to accelerate such
indebtedness. This right does not vest until the expiration of
the 30 day right to cure this default by Stratosphere. It is
likely that Stratosphere's negotiations with its creditors,
whether successful or not at arriving at a restructuring, will
involve a bankruptcy filing by Stratosphere as a means of
formalizing and approving a consensual or nonconsensual
restructuring. If Stratosphere cannot restructure its existing
indebtedness, there will be serious doubt as to whether or not
Stratosphere will be able to continue as a going concern.
Depending upon the terms of any restructuring of Stratosphere,
the Company's participation in any such restructuring, and the
valuation of the Company's position in Stratosphere following
any such restructuring, the Company may be required to write
off a substantial portion or all of its previous investment in
Stratosphere. Any such write-off would have a material adverse
effect on the Company's results of operations and financial
position.
On October 10, 1996, Stratosphere paid $2.3 million to the
Company pursuant to the Management and Development Agreement
entered into on July 1, 1994. The Company has agreed to either
refund the $2.3 million to Stratosphere or advance the amount
as a loan by November 5, 1996. As of November 13, 1996, such
amount has not been paid to Stratosphere. In addition,
Stratosphere has purchased certain equipment from a
wholly-owned subsidiary of the Company in the approximate
amount of $3.7 million. As of November 13, 1996, approximately
$2.5 million of such amount remained unpaid. Stratosphere has
advised the Company that is has accrued this cost and intends
to pay such amount as part of the final funding of Phase I.
Pursuant to the Company's covenants related to the $450.0
million First Mortgage Notes, the Company is restricted from
paying cash dividends and from transferring funds from certain
subsidiaries to the Company. Because of such restrictions and
to provide funds for the growth of the Company, no cash
dividends are expected to be paid on common shares in the
foreseeable future.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides
a `safe harbor' for forward-looking statements. Certain
information included in this Form 10-Q and other materials
filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by
the Company) contains statements that are forward-looking,
such as statements relating to plans for future expansion and
other busines development activities as well as other capital
spending, financing sources and the effects of regulation
(including gaming and tax regulation) and competition.
Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating
to development and construction activities, dependence on
existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or
global economic conditions, changes in federal or state tax
laws or the administration of such laws and changes in gaming
laws or regulations (including the legalization of gaming in
certain jurisdictions).
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Stratosphere Shareholders Lawsuits - Federal Court
The Company's Quarterly Report Form on Form 10-Q for the
fiscal quarter ended June 30, 1996 described a lawsuit (the
`Ceasar Lawsuit') entitled Michael Ceasar, et al v.
Stratosphere Corporation, et al which was filed on August 5,
1996 in the United States District Court for the District of
Nevada. The Ceasar Lawsuit involves claims against
Stratosphere Corporation, the Company, Bob Stupak (a former
officer and director of Stratosphere), David R. Wirshing (a
former officer and director of Stratosphere), Lyle A. Berman
(an officer and director of the Company and an officer and
director of Stratosphere), Thomas A. Lettero (an officer of
Stratosphere), Andrew S. Blumen (an officer and director of
Stratosphere), Bob Stupak Enterprises and Thomas G. Bell (a
director of Stratosphere).
The complaint in the Ceasar Lawsuit purports to seek relief on
behalf of a class of plaintiffs who purchased Stratosphere
common stock during the period from December 19, 1995 through
and including July 22, 1996. That complaint alleges that the
defendants made misrepresentations and engaged in other
wrongdoing.
In August, September and October 1996, complaints in the
following lawsuits were filed in the United States District
Court for the District of Nevada against the defendants in the
Ceasar Lawsuit (and in one instance also against Stanley Taube
- an officer and director of the Company and a director of
Stratosphere) alleging, in a manner nearly identical to the
complaint in the Ceasar Lawsuit, that the defendants made
misrepresentations and engaged in other wrongdoing:
<TABLE>
<CAPTION>
Name of Lawsuit Date Filed
<S> <C>
Regina Peltz, et al v. Stratosphere Corporation August 13, 1996
Grand Casinos, Inc., Bob Stupak, David R.
Wirshing, Lyle A. Berman, Thomas A. Lettero
Andrew Blumen, Bob Stupak Enterprises and
Thomas G. Bell
Robert Stengel, et al v. Stratosphere Corporation August 13, 1996
Corporation, Grand Casinos, Inc., Bob Stupak,
David R. Wirshing, Lyle A. Berman, Thomas A.
Lettero, Andrew S. Blumen, Bob Stupak
Enterprises and Thomas G. Bell
Robert Johnson, et al v. Stratosphere Corporation, Sept. 19, 1996
Grand Casinos, Inc., David R. Wirshing, Lyle A.
Berman, Thomas A. Lettero, Andrew S. Blumen,
Bob Stupak Enterprises and Thomas G. Bell
David Vallee, et al v. Stratosphere Corporation, Sept. 25, 1996
Grand Casinos, Inc., Bob Stupak, David R.
Wirshing, Lyle A. Berman, Thomas A. Lettero,
Andrew S. Blumen, Bob Stupak Enterprises and
Thomas G. Bell
Anthony L. Poli, et al v. Stratosphere Corporation, Sept. 25, 1996
Grand Casinos, Inc., Bob Stupak, David R.
Wirshing, Lyle A. Berman, Thomas A. Lettero,
Bob Stupak Enterprises, Thomas G. Bell and
Stanley M. Taube
Darrell Russell and Gail Russell, et al v. October 7, 1996
Stratosphere Corporation, Grand Casinos, Inc.,
Bob Stupak, David R. Wirshing, Lyle A. Berman,
Thomas A. Lettero, Andrew S. Blumen, Bob
Stupak Enterprises and Thomas G. Bell
Mitchell Gordon, et al v. Stratosphere October 7, 1996
Corporation, Grand Casinos, Inc., Bob Stupak,
David R. Wirshing, Lyle A. Berman, Thomas A.
Lettero, Andrew S. Blumen, Bob Stupak
Enterprises and Thomas G. Bell
</TABLE>
The Company believes that the claims made in the complaint in
each of the above lawsuits are without merit and plans to
vigorously defend such claims.
2. Stratosphere Shareholders Lawsuit - State Action
On August 16, 1996, a complaint was filed in the District
Court for Clark County, Nevada (Victor M. Opitz, et al v.
Robert E. Stupak, et al) against Robert E. Stupak (a former
officer and director of Stratosphere), Lyle A. Berman (an
officer and director of the Company and an officer and
director of Stratosphere), Patrick R. Cruzen (a former officer
and director of Stratosphere), Timothy J. Cope (an officer of
the Company) and Stanley M. Taube (an officer and director of
the Company and a director of Stratosphere). The complaint
purports to seek relief on behalf of a class of plaintiffs who
purchased Stratosphere common stock during the period from
December 19, 1995 through July 22, 1996. The complaint alleges
that the defendants made representations and engaged in other
wrongdoing.
The Company believes that the claims made in the Victor M.
Opitz, et al v. Stratosphere Corp., et al complaint are
without merit and plans to vigorously defend such claims.
3. Grand Shareholders Lawsuits - Federal Court
The following complaints have been filed in the United States
District Court for the District of Minnesota against the
Company, Lyle A. Berman (an officer and director of the
Company), Patrick R. Cruzen (a former officer and director of
the Company), Timothy J. Cope (an officer of the Company) and
Stanley M. Taube (an officer and director of the Company):
<TABLE>
<CAPTION>
Name of Lawsuit Date Filed
<S> <C>
Joel Blake v. Grand Casinos, Inc., Lyle A. September 9, 1996
Berman, Patrick R. Cruzen, Timothy J.
Cope and Stanley M. Taube
Robert D. Marcus v. Grand Casinos, Inc., October 25, 1996
Lyle A. Berman, Patrick R. Cruzen,
Timothy J. Cope and Stanley M. Taube.
</TABLE>
The complaint in each of the above lawsuits purports to seek
relief on behalf of a class of plaintiffs who purchased common
stock of the Company during the period from December 19, 1995
through July 22, 1996. The complaint in each of the above
actions makes nearly identical allegations and alleges that
the defendants made misrepresentations and engaged in other
wrongdoing.
The Company believes that the claims made in each of the above
lawsuits are without merit and plans to vigorously defend such
claims.
See the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 and the Company's Quarterly
Reports on Form 10-Q for the fiscal quarter ended March 31,
1996 and June 30, 1996 for information regarding other pending
legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - STRATOSPHERE CORPORATION
The Company is the owner of approximately 42% of Stratosphere
Corporation (Stratosphere) and has an investment in and
advances due from Stratosphere in the amount of $145.6 million
as of September 29, 1996. Based upon Stratosphere's third
quarter results, Stratosphere determined that it would not
meet certain financial covenants which would constitute an
event of default under Stratosphere's capital lease that would
give the lender the right to accelerate maturity. On October
30, 1996, Stratosphere entered into a Standstill Agreement
with the lenders that will remain in effect until the earlier
of the bankruptcy filing or payment default.
Pursuant to the agreement, Stratosphere made its scheduled
payment on October 31, 1996, of $3.2 million. In addition, the
agreement required the return of $4.2 million (including
interest) remaining in the escrow account to the lenders to be
applied to the principal balance on a pro rata basis. The
amount was applied to the principal balance on October 30,
1996, reducing it to a total of $28.3 million. In the event
the Standstill Agreement is terminated for reasons mentioned
and the lenders accelerate Stratosphere's capital lease
indebtedness, Stratosphere would not have the ability to repay
such indebtedness. The acceleration of Stratosphere's capital
lease indebtedness would also constitute an event of default
under Stratosphere's First Mortgage Note Indenture by reason
of a cross default provision included in such Indenture.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number 10.01 - Funding Agreement dated as
of September 27, 1996 by and among Grand Casinos,
Inc. and Stratosphere Corporation
Exhibit Number 10.02 - Letter Agreement dated as
of September 27, 1996 by and among Grand Casinos,
Inc., Stratosphere Corporation and Stratosphere
Gaming Corp.
Exhibit Number 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the
quarterly period ended September 29, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 1996 GRAND CASINOS, INC.
-------------------
Registrant
By/ S /THOMAS J. BROSIG
Thomas J. Brosig, President
/ S / TIMOTHY J. COPE
Timothy J. Cope, Chief Financial Officer
FUNDING AGREEMENT
UNDER NOTES COMPLETION GUARANTEE
This FUNDING AGREEMENT dated as of September 27, 1996 (this
"Agreement") is by and among GRAND CASINOS, INC., a Minnesota corporation
("Grand"), STRATOSPHERE CORPORATION, a Delaware corporation ("Stratosphere"),
and STRATOSPHERE GAMING CORP., a Nevada corporation ("Gaming Corp." and,
together with Stratosphere, the "Obligors").
RECITALS
WHEREAS, pursuant to that certain Indenture dated as of March
9, 1995 by and among Stratosphere, Gaming Corp. and American Bank National
Association, a national banking association (the "Trustee"), as trustee
thereunder, Stratosphere has issued $203,000,000 principal amount of its 14-1/4%
First Mortgage Notes due 2002 With Contingent Interest (the "Notes");
WHEREAS, the Obligors have entered into the Indenture and
issued the Notes to finance, in part, the completion of the Resort (as defined
in the Indenture);
WHEREAS, Stratosphere and Gaming Corp. have entered into that
certain Disbursement and Escrow Agreement dated as of March 9, 1995 (the "Escrow
Agreement") among First Interstate Bank of Nevada, N.A., a national banking
association, Lawyers Title of Nevada, Inc., a Nevada corporation, the Trustee,
Stratosphere and Gaming Corp.
WHEREAS, Grand is the beneficial owner of a substantial equity
interest in Stratosphere and has executed that certain Notes Completion
Guarantee dated as of March 9, 1995 (the "Guarantee") for the benefit of the
holders of the Notes from time to time (the "Holders"), pursuant to which Grand
has agreed, subject to the terms and conditions therein set forth, to guarantee
(i) the Obligors' obligations to complete the construction of the Resort so that
the Resort is Operating (as defined in the Indenture) in accordance with the
terms of the Indenture and the Escrow Agreement and (ii) the payment of all
Amounts Required For Completion (as defined in the Guarantee) payable by the
Obligors on or prior to the date on which the Resort becomes Operating or the
occurrence of a Terminating Event (as defined in the Guarantee);
WHEREAS, the amount of Grand's obligations under the Guarantee
are limited to $50,000,000 in the aggregate;
WHEREAS, any amounts advanced or paid by Grand under the
Guarantee constitute loans to Stratosphere from Grand and accrue interest at the
rate of 14-1/4% per annum;
WHEREAS, due to increases in the Project Budget, the amount of
Available Funds (as defined in the Escrow Agreement) from the proceeds of the
issuance of the Notes was not sufficient to allow Stratosphere to complete
construction of the Resort in accordance with the terms of the Escrow Agreement;
WHEREAS, Grand has previously advanced $18,551,902 under the
Guarantee; and,
WHEREAS, Grand and Stratosphere are entering into this
Agreement to acknowledge application of amounts previously advanced by Grand
under the Guarantee and to evidence certain understandings regarding the funding
of Grand's remaining obligations under the Guarantee.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby covenant and agree as follows:
1. Costs of Completing Resort. Stratosphere represents and
warrants that Schedule I hereto is a true and correct schedule of all costs
which Stratosphere has incurred in connection with the development,
construction, equipping and opening of the Resort and of all such amounts which
Stratosphere expects to incur in order for the Resort to become Operating (as
defined in the Indenture) on or before September 30, 1996.
2. Prior Advances. Stratosphere and Grand acknowledge and
agree that Grand has previously advanced an aggregate of $18,551,902 under the
Guarantee and that such amounts have been paid by Grand in partial satisfaction
of the Obligations (as defined in the Guarantee). The parties acknowledge that
all funds advanced by Grand under the Guarantee have been applied by
Stratosphere either to pay costs incurred for the Resort to become Operating (as
defined in the Indenture) or to pay certain Amounts Required For Completion (as
defined in the Guarantee) payable by the Obligors on or prior to the date on
which the Resort becomes Operating, all of which costs and amounts are described
on Schedule I hereto.
3. Additional Advances. Contemporaneously with or subsequent
to the execution hereof, Grand will advance an additional $31,448,098 in
complete satisfaction of its remaining obligations under the Guarantee. The
funds paid by Grand shall be applied by Stratosphere to pay costs incurred for
the Resort to become Operating (as defined in the Indenture) on or before
September 30, 1996 or to pay Amounts Required For Completion (as defined in the
Guarantee) which are payable by the Obligors on or prior to the date on which
the Resort becomes Operating, and the funds paid directly to Stratosphere will
constitute reimbursement for such costs and amounts funded by Stratosphere into
the Escrow Account, all of which costs and amounts are described on Schedule I
hereto. Upon the advance by Grand of such funds as described herein, Grand shall
have advanced an aggregate of $50,000,000 pursuant to the Guarantee, and
Stratosphere acknowledges and agrees that such advance discharges and satisfies
in full all obligations and liabilities of Grand under the Guarantee. In
accordance with the Guarantee, funds advanced by Grand pursuant to the Guarantee
will constitute loans to Stratosphere and will be evidenced by one or more
promissory notes bearing interest at the rate of 14-1/4% per annum, will mature
one year after the maturity of the Notes, and will be subordinated to the full
repayment in cash of all principal, premium (if any), interest and other
payments under the Notes.
4. Completion of Resort. Stratosphere represents and warrants
that upon payment by Grand in Section 3 hereof, sufficient funds will be
available to pay in full (a) all costs remaining to be incurred in order for the
Resort to become Operating (as defined in the Indenture) on or before September
30, 1996 and (b) all Amounts Required For Completion (as defined in the
Guarantee) payable by the Obligors on or prior to the date on which the Resort
becomes Operating. On or before September 30, 1996, Stratosphere shall take all
actions necessary to ensure that the Resort is Operating (as defined in the
Indenture) by that date.
5. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada, including the
Gaming Control Act and the regulations promulgated thereunder, without giving
effect to the principles of conflict of laws thereof.
(b) No provision of this Agreement or right granted
hereunder may be amended or waived in whole or in part, except by a writing duly
executed by authorized officers of each of Stratosphere and Grand, and no other
consents or approvals (of any additional beneficiaries or otherwise) shall be
required.
(c) This Agreement is intended only for the benefit
of Stratosphere and Grand and is not intended to benefit any other third party,
including the Trustee, the Holders or any other creditor of Stratosphere.
(d) Should any term, covenant, condition or provision
of this Agreement be determined to be invalid or unenforceable, it is the intent
of the parties that all other terms, covenants, conditions and provisions hereof
shall nonetheless remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
Funding Agreement as of the date first above written.
STRATOSPHERE CORPORATION
By: /s/ Andrew Blumen
Title: E.V.P.
STRATOSPHERE GAMING CORP.
By: /s/ Andrew Blumen
Title: EVP
GRAND CASINOS, INC.
By: Timothy J. Cope
Title: CFO
Schedule I
The Company will furnish Schedule I to the Commission upon request.
Grand Casinos, Inc. Letterhead
September 27, 1996
STRATOSPHERE CORPORATION
2000 Las Vegas Boulevard South
Las Vegas, Nevada 89104
Attn: Andrew S. Blumen
Gentlemen:
This letter sets forth certain understandings between Grand Casinos,
Inc. ("Grand") and Stratosphere Corporation ("Stratosphere") regarding amounts
owed by Stratosphere to Grand and amounts which will be loaned or refunded by
Grand to Stratosphere.
Stratosphere hereby acknowledges that an aggregate of $2,318,873.43 is
currently due and owing from Stratosphere to Grand and payable at this time
under that certain Management and Development Agreement dated July 1, 1994, as
amended and modified from time to time (the "Management Agreement"), consisting
of consulting fees in the amount of $526,999.37 and reimbursement for expenses
in the amount of $1,791,874.06. In accordance with the Management Agreement,
Grand has demanded execution of this Letter Agreement by 10:00 a.m. (P.D.T.)
September 27, 1996 and timely payment of the amounts currently due thereunder.
In addition, Stratosphere has requested that Grand provide a loan to
Stratosphere in the amount of $2,300,000 to fund certain working capital
deficits that are expected to occur from the date hereof through December 31,
1996. In consideration for the payment by Stratosphere to Grand of the amounts
currently due and owing under the Management Agreement, Grand agrees to make a
loan to Stratosphere or to refund to Stratosphere the sum of $2,300,000. If
Grand elects to make the loan rather than refund the $2,300,000, and unless
other terms are negotiated by Grand and the Ad Hoc Committee (as defined below),
such loan shall include the following terms: (i) such loan shall be subordinated
in right of payment pursuant to the terms and conditions set forth in that
certain Completion Guarantor Subordination Agreement dated as of March 9, 1995;
(ii) such loan shall have a maturity of no earlier than May 15, 2002 (provided
that principal and interest may be prepaid, without premium, so long as such
prepayment is permitted pursuant to Section 4.07 of Stratosphere's Indenture
dated as of March 9, 1995 (the "Indenture") and no Event of Default (as defined
therein) shall have occurred and be continuing or would occur as a consequence
thereof); and (iii) no payment with respect to such loan shall be payable at any
time a default or Event of Default has occurred and is continuing under the
Indenture. The applicable rate of interest on the loan will be mutually
agreeable to Stratosphere and Grand, and in no event greater than 14 1/4%. In
the event Grand elects to refund the sum of $2,300,000, Stratosphere
acknowledges that Grand shall have a valid and enforceable claim under the
Management Agreement against Stratosphere for payment of such amount.
Grand will either refund the sum of $2,300,000 or advance the proceeds
of the loan to Stratosphere on the earliest to occur of the following: (i) Grand
shall reach an agreement with the informal committee of the holders of a
majority of the First Mortgage Notes (the "Ad Hoc Committee") regarding the
funding of such loan, the terms and conditions of which shall be
reasonably satisfactory to Grand and Stratosphere; (ii) Stratosphere shall
demonstrate to Grand's reasonable satisfaction that such funds are needed by
Stratosphere for current working capital purposes; or (iii) November 5, 1996.
To permit Grand to have a meaningful opportunity to negotiate the terms
of the loan with the Ad Hoc Committee, Stratosphere agrees that the existence of
this document and the loan or refund (as applicable) which is the subject
hereof, and all information and details relating thereto (collectively the
"Information"), shall be kept strictly confidential, except as required by law,
regulation or debt covenants in any existing financing instrument of
Stratosphere, and except that Information may be disclosed to officers,
directors, employees and advisors of Stratosphere provided that such persons
agree to keep the Information confidential. If Stratosphere is requested or
believes that it is otherwise obligated to disclose the Information,
Stratosphere agrees to give Grand five (5) business days notice of such request
or obligation to disclose during which time Stratosphere shall not disclose the
Information.
In addition, Stratosphere has purchased certain equipment from
affiliates of Grand in the approximate amount of $3,600,000. In connection
therewith, Stratosphere acknowledges to Grand and its affiliates that: (a) the
debt owing from Stratosphere to Grand and its affiliates for such equipment is a
transaction in the ordinary course of Stratosphere's business; (b) the payment
by Stratosphere of the amounts owed to Grand and its affiliates in respect of
such equipment as required hereunder is in the ordinary course of Stratosphere's
business; and (c) such payment is an arm's length transaction between Grand, its
affiliates and Stratosphere and is made according to ordinary business terms.
Within ten (10) days following execution hereof, Stratosphere shall pay
or cause to be paid to Grand the sum of $2,318,873.43 due and owing under the
Management Agreement and the sum of $3,600,000 for the equipment purchase.
If the foregoing correctly sets forth our understandings with respect
to the matters contained herein, please so indicate by signing below.
Very truly yours,
GRAND CASINOS, INC.
By: /s/ Timothy Cope
Title: Chief Executive Officer
Acknowledged as agreed as of
October 2, 1996
STRATOSPHERE CORPORATION
By: /s/ Andrew Blumen
Title: Executive Vice President
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<PERIOD-END> SEP-29-1996
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0
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