<PAGE> 1
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 June 29, 1997
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)
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 August 8, 1997, there were 41,902,141 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 31
<PAGE> 2
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
June 29, 1997 and December 29, 1996
Consolidated Statements of Earnings 4
for the three months ended June 29, 1997
and June 30, 1996
Consolidated Statements of Earnings for the 5
six months ended June 29, 1997 and
June 30, 1996
Consolidated Statements of Cash Flows 6
for the six months ended June 29, 1997
and June 30, 1996
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of 29
Security Holders
ITEM 6. Exhibits and Reports On Form 8-K 29
- 2 -
<PAGE> 3
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) *
JUNE 29, 1997 DECEMBER 29, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $132,601 $147,254
Current installments of notes receivable 7,068 7,792
Accounts receivable 16,536 13,463
Deferred income taxes 13,552 9,910
Other current assets 15,214 15,335
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 184,971 193,754
- -------------------------------------------------------------------------------------------------------------
Property and Equipment-Net 902,720 821,827
- -------------------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted 6,650 10,276
Securities available for sale 18,186 23,603
Notes receivable-less current installments 27,591 30,772
Investments in and notes from unconsolidated affiliates 8,604 8,823
Debt issuance and deferred licensing costs-net 21,277 22,851
Other long-term assets 16,988 10,910
- -------------------------------------------------------------------------------------------------------------
Total Other Assets 99,296 107,235
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,186,987 $1,122,816
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $14,361 $20,002
Current installments of long-term debt 2,304 4,101
Current installments of capital lease obligations 16,871 15,358
Accrued interest 7,207 5,486
Accrued payroll and related expenses 23,209 23,418
Other accrued expenses 30,173 31,542
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 94,125 99,907
- -------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-less current installments 454,600 455,002
Capital lease obligations-less current installments 92,514 56,740
Deferred income taxes 74,422 71,494
- -------------------------------------------------------------------------------------------------------------
Total Long-term Liabilities 621,536 583,236
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 715,661 683,143
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value, authorized 100,000 shares;
common stock issued and outstanding 41,897 and 41,796
at June 29, 1997 and December 29, 1996, respectively 419 418
Additional paid-in-capital 413,216 412,576
Net unrealized gains (losses) on securities available for sale (527) 1,358
Retained earnings 58,218 25,321
- -------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 471,327 439,673
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,186,988 $1,122,816
=============================================================================================================
</TABLE>
* FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS
-3-
<PAGE> 4
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------------
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
- --------------------------------------------------------------------------------
REVENUES:
Casino $113,628 $80,297
Hotel 9,514 6,622
Food and beverage 16,347 9,889
Management fee income 19,814 20,400
Retail and other income 3,488 2,965
- --------------------------------------------------------------------------------
Gross Revenues 162,791 120,173
Less: Promotional allowances (11,954) (7,196)
- --------------------------------------------------------------------------------
NET REVENUES 150,837 112,977
- --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 39,587 26,407
Hotel 2,291 1,580
Food and beverage 8,534 4,963
Other operating expenses 3,390 2,658
Depreciation and amortization 12,410 6,832
Lease expense 4,676 4,141
Selling, general and administrative 40,993 29,138
- --------------------------------------------------------------------------------
Total Costs and Expenses 111,881 75,719
- --------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 38,956 37,258
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 2,981 4,119
Interest expense (11,971) (4,840)
Other (25) 0
Loss of unconsolidated affiliates (100) (4,697)
- --------------------------------------------------------------------------------
Total other expense, net (9,115) (5,418)
- --------------------------------------------------------------------------------
Earnings before income taxes 29,841 31,840
Provision for income taxes 11,525 12,432
- --------------------------------------------------------------------------------
NET EARNINGS $18,316 $19,408
================================================================================
EARNINGS PER COMMON SHARE $0.43 $0.45
================================================================================
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 42,865 43,262
================================================================================
</TABLE>
-4-
<PAGE> 5
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
---------------------------------------
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
- --------------------------------------------------------------------------------
REVENUES:
Casino $222,308 $154,600
Hotel 16,576 12,039
Food and beverage 30,952 19,068
Management fee income 38,868 39,092
Retail and other income 6,425 5,335
- --------------------------------------------------------------------------------
Gross Revenues 315,129 230,134
Less: Promotional allowances (22,122) (13,320)
- --------------------------------------------------------------------------------
NET REVENUES 293,007 216,814
- --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 78,067 50,686
Hotel 4,110 3,048
Food and beverage 16,519 9,521
Other operating expenses 6,451 5,575
Depreciation and amortization 23,961 13,339
Lease expense 9,181 8,173
Selling, general and administrative 84,899 61,848
- --------------------------------------------------------------------------------
Total Costs and Expenses 223,188 152,190
- --------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 69,819 64,624
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 6,694 9,438
Interest expense (22,617) (10,566)
Other (113) (0)
Loss of unconsolidated affiliates (200) (3,839)
- --------------------------------------------------------------------------------
Total expense, net (16,236) (4,967)
- --------------------------------------------------------------------------------
Earnings before income taxes 53,583 59,657
Provision for income taxes 20,686 22,601
- --------------------------------------------------------------------------------
Net Earnings $32,897 $37,056
================================================================================
EARNINGS PER COMMON SHARE $0.77 0.86
================================================================================
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 42,618 43,063
================================================================================
</TABLE>
-5-
<PAGE> 6
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
JUNE 29, 1997 JUNE 30, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $32,897 $37,056
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 23,961 13,339
Equity in loss of unconsolidated affiliates 200 3,839
Deferred income taxes 1,250 616
Changes in operating assets and liabilities:
Other current assets (3,927) (9,050)
Accounts payable (5,641) 27,547
Accrued expenses (1,106) 15,997
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 47,634 89,344
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of notes receivable 3,905 7,809
Investment in and notes receivable from unconsolidated affiliates - (4,364)
Payments for property and equipment (101,590) (195,946)
Purchases of securities available for sale - (19,750)
(Increase) decrease in cash and cash equivalents-restricted and other 3,626 (843)
Increase in other long-term assets (3,878) (11,461)
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (97,937) (224,555)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 641 13,020
Debt issuance costs and deferred financing costs (79) (4,774)
Proceeds from issuance of long-term debt 45,088 -
Payments on long-term debt and capital lease obligations (10,000) (6,634)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 35,650 1,612
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (14,653) (133,599)
Cash and cash equivalents - beginning of period 147,254 334,772
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $132,601 $201,173
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $27,325 $10,714
Income taxes $17,301 $8,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-6-
<PAGE> 7
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 1997
(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 and one dockside casino in
Tunica County, Mississippi, and manages two Indian-owned casinos in
Minnesota and two Indian-owned casinos in Louisiana. Related hotel and
entertainment facilities at Company-owned properties Grand Casino
Biloxi and Grand Casino Tunica projects are currently under
construction and will open at various times. In addition, related
hotel facilities at Indian-owned casinos Grand Casino Hinckley and
Grand Casino Mille Lacs are currently under construction and will open
at various times. The Company also owns approximately 42% of
Stratosphere Corporation (Stratosphere), which owns and operates
Stratosphere Tower, Casino & Hotel, an integrated casino/hotel and
entertainment complex located at the north end of Las Vegas Boulevard
South in Las Vegas, Nevada. Stratosphere filed for reorganization
under Chapter 11 of the Bankruptcy Code on January 27, 1997. See Note
7 for further discussion regarding Stratosphere's reorganization plan.
The consolidated financial statements include the accounts of Grand
Casinos, Inc. and its wholly-owned and majority-owned subsidiaries.
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.
- 7 -
<PAGE> 8
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
Operating results for the six months ended June 29, 1997, are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 28, 1997.
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 29, 1996.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENT
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128), which requires the disclosure of basic earnings per
share and diluted earnings per share. The Company expects to adopt
Statement 128 in fiscal 1997 and anticipates it will not have a
material impact on the financial position or the results of operations
of the Company.
NOTE 3 PREOPENING EXPENSES
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. These costs include direct payroll and other operating
costs incurred prior to commencement of operations. Depreciation and
amortization for the six months ended June 29, 1997 and June 30, 1996
includes approximately $1.0 million and $.3 million of preopening
amortization expense, respectively.
NOTE 4 INTEREST COSTS
The Company's policy is to capitalize interest incurred on debt during
the course of qualifying construction projects at Company-owned
facilities. Such costs are amortized over the related assets'
estimated useful lives. For the six months ended June 29, 1997 and
June 30, 1996, approximately $3.7 million and $13.1 million,
respectively, of interest cost was capitalized.
- 8 -
<PAGE> 9
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
June 29, 1997 Dec. 29, 1996
------------- -------------
<S> <C> <C>
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 21,693 23,800
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 11,504 12,558
Other, less allowance for doubtful accounts
of $3,050 and $3,050, respectively 1,462 2,206
------- -------
$34,659 $38,564
Less current installments of notes receivable (7,068) (7,792)
------- -------
Notes receivable-less current installments $27,591 $30,772
======= =======
</TABLE>
NOTE 6 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. The 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.
- 9 -
<PAGE> 10
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 LONG-TERM DEBT (CONTINUED)
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, is being 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 was used
for furniture, fixtures and equipment for the 340,000 square foot
casino complex. The balance of approximately $30 million was be used
to construct a 600-room hotel at Grand Casino Tunica. As of June 29,
1997, $120.0 million had been advanced and $109.4 million was the
balance owing under the Senior Secured Term Loan Facility.
NOTE 7 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
The Company owns approximately 42% of the equity in Stratosphere
Corporation. Stratosphere did not make its scheduled First Mortgage
Notes interest payment due on November 15, 1996. On January 6, 1997,
Stratosphere, the Company and an ad hoc committee representing the
holders of more than 57% of Stratosphere's First Mortgage Notes reached
an agreement-in-principle for restructuring the debt and equity of
Stratosphere.
On January 27, 1997, Stratosphere filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the
agreement-in-principle, Stratosphere and the Company filed a joint
proposed plan of reorganization for Stratosphere and a related
investment agreement, which stated the terms and conditions pursuant
to which the Company agreed to participate in the reorganization of
Stratosphere.
The proposed plan of reorganization and the related investment
agreement provided that the Company's obligations to participate in the
proposed reorganization were conditioned on Stratosphere obtaining
average monthly consolidated cash flow (as defined in the investment
agreement) of at least $2,267,000 for the months between October 1,
1996 and June 30, 1997. In June 1997, Stratosphere announced that its
average monthly consolidated cash flow for the eight-month period
ended May 25, 1997 was $1,470,996.
- 10 -
<PAGE> 11
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
As a result of Stratosphere's inability to satisfy the consolidated
cash flow condition, the Company terminated the original investment
agreement. On June 20, 1997, Stratosphere and the Company entered
into an amended investment agreement and filed an amended plan of
reorganization, establishing modified terms and conditions of the
Company's participation in the reorganization of Stratosphere. See
Stratosphere's Form 8-K filed on June 25, 1997 for further information
regarding the amended plan of reorganization.
On July 25, 1997, Stratosphere advised the Company that an independent
committee of Stratosphere's Board of Directors had reached a
preliminary determination that a restructuring proposal presented to
Stratosphere by High River Limited Partnership and American Real
Estate Partners, L.P. was more favorable than the restructuring
proposal contained in the amended investment agreement and plan of
reorganization. The Company intends to continue to explore with
Stratosphere and the Official Committee representing the holders of
Stratosphere's First Mortgage Notes alternatives for a consensual
reorganization of Stratosphere, including the possibility of further
amending the Company's previous restructuring proposal. If an
alternative consensual arrangement cannot be reached, however, the
Company may propose or participate in alternative plans of
reorganization without such an arrangement or may terminate altogether
the Company's participation in Stratosphere's reorganization process.
In connection with the issuance of Stratosphere's First Mortgage
Notes, the Company delivered a Standby Equity Commitment pursuant to
which the Company agreed, under the terms and conditions described in
the Standby Equity Commitment, to purchase up to $20 million of
additional equity in Stratosphere during each of the first three years
Stratosphere is operating (as defined in the Standby Equity
Commitment) to the extent Stratosphere's consolidated cash flow (as
defined in the Standby Equity Commitment) during each of such years
does not reach $50 million. As a result of Stratosphere's bankruptcy
filing and the application of federal bankruptcy laws, the Company has
contended that the enforceability of the Standby Equity Commitment is
in question. This issue is currently the subject of litigation in
Stratosphere's Chapter 11 proceedings. See Part II - Item 1. Legal
Proceedings of this Form 10-Q.
- 11 -
<PAGE> 12
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LOAN GUARANTY AGREEMENTS
The Company has guaranteed two loan and security agreements entered
into by the Tunica-Biloxi Tribe of Louisiana for $14.1 million for the
purpose of financing casino equipment and for $16.5 million for the
purpose of purchasing a hotel and additional casino equipment. The
agreements extend through 1998 and 2000, respectively, and as of June
29, 1997, the amounts outstanding were $4.9 million and $15.3 million,
respectively.
The Company has also 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 June 29,
1997, the amounts outstanding were $7.7 million. In addition, on May
1, 1997, the Company entered into a guaranty agreement related to a
loan agreement entered into by the Coushatta Tribe of Louisiana in the
amount of $25.0 million, for the purpose of constructing a hotel and
acquiring additional casino equipment. The agreement and the
underlying documents may be subject to the Bureau of Indian Affairs
(BIA) approval. Upon approval of the agreements by the BIA, the
guaranty would be outstanding for five years. As of June 29, 1997, no
advances relating to this loan had been made.
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 $2.6 million as of June 29, 1997.
The Company has provided a limited guaranty pursuant to the
Stratosphere Participation Agreement for the purpose of financing
hotel and casino equipment subject to a maximum limitation amount of
$8.7 million.
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.
- 12 -
<PAGE> 13
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 based on the net
distributable profits (as defined in the contracts) 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 29, 1996.
- 13 -
<PAGE> 14
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
OVERVIEW (CONTINUED)
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
SIX MONTHS ENDED JUNE 29, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1996
Earnings Per Common Share and Net Earnings
Earnings per common share for the six months ended June 29, 1997 were
$.77 versus $.86 for the prior year's comparable period based upon
weighted average common shares outstanding of 42.6 million and 43.1
million for the six month periods ended June 29, 1997 and June 30,
1996, respectively. Net earnings decreased $4.2 million to $32.9
million for the six months ended June 29, 1997 compared to the prior
year as a result of less interest capitalized during the six months
ended June 29, 1997 compared to the prior year. During the six months
ended June 30, 1996 capitalized interest on qualifying construction
projects was $13.1 million, whereas, for the six months ended June 29,
1997 capitalized interest on qualifying construction projects was $3.7
million, a decrease of $9.4 million or approximately $5.8 million
after taxes. The decrease in qualifying construction projects can
largely be attributable to the opening of the casino and related
projects of Grand Casino Tunica on June 24, 1996. In addition, the
results of 1996 included the Company's share of losses from
Stratosphere in the amount of $3.8 million, whereas 1997 does not
include any losses from Stratosphere.
- 14 -
<PAGE> 15
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Gross Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $222.3 million in gross casino revenue and $54.0 million in
gross hotel, food, beverage, retail and entertainment revenue during
the six months ended June 29, 1997. During the six months ended June
30, 1996, Grand Casino Tunica, Grand Casino Biloxi and Grand Casino
Gulfport generated $154.6 million in gross casino revenue and $36.4
million in gross food, beverage, and retail revenue. The increase in
gross revenues is primarily related to the opening of Grand Casino
Tunica which contributed $86.6 million of gross revenues for the six
months ended June 29, 1997. Combined gross revenues for Grand Casino
Biloxi and Grand Casino Gulfport increased $3.7 million for the six
months ended June 29, 1997 compared to the same period in the prior
year. Lastly, management fees were approximately the same for the six
months ended June 29, 1997 compared to the same period in the prior
year ($.2 million decrease from 1996 was principally related to
management fee income from Stratosphere in 1996, whereas 1997 does not
include Stratosphere management fee income).
Net Revenues
Net revenues for the Company increased $76.2 million for the six
months ended June 29, 1997 compared to the same period in the prior
year. The increase in net revenues is primarily due to the opening of
Grand Casino Tunica, which contributed revenues of $78.6 million
during the six months ended June 29, 1997 compared to $4.8 million
during the six months ended June 30, 1996. In addition, combined net
revenues of Grand Casino Biloxi and Grand Casino Gulfport increased
$2.7 million for the six months ended June 29, 1997 compared to the
same period in the prior year. The Company implemented a new
Marketing campaign in 1997 for Grand Casino Biloxi and Grand Casino
Gulfport which has increased the level of play; however, it has only
slightly impacted win due to lower win percentages in table games and
slots. The increase in net revenues for Grand Casino Biloxi and Grand
Casino Gulfport has principally been due to non-gaming revenues.
Costs and Expenses
Total costs and expenses increased $71.0 million from $152.2 million
for the six months ended June 30, 1996 to $223.2 million for the six
month period ended June 29, 1997.
- 15 -
<PAGE> 16
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Costs and Expenses (Continued)
Casino expenses were $78.1 million for the six month period June 29,
1997 compared to $50.7 million for the comparable period last year.
The increase of $27.4 million was comprised of additional casino
expenses for Grand Casino Tunica in the amount of $23.9 million as
Grand Casino Tunica was open all of 1997, whereas, approximately one
week of operations were included in 1996 results. Included in the
$23.9 million increase is depreciation and amortization for Grand
Casino Tunica in the amount of $9.5 million. The increase for Grand
Casino Biloxi and Grand Casino Gulfport for the six months ended June
29, 1997 compared to the same period in the prior year in the amount
of $3.5 million was principally a result of additional
complimentaries and labor to service and attract guests. Food and
beverage expenses increased $7.0 million to $16.5 million for the six
month period ended June 29, 1996, $5.5 million of which relates to
the opening of Grand Casino Tunica.
Selling, general, and administrative expenses increased in the
amount of $23.1 million from $61.8 million for the six months ended
June 30, 1996 to $84.9 million for the six months ended June 29,
1997. Grand Casino Tunica's selling, general, and administrative
expenses increased $27.3 million from the six months ended June 30,
1996 to the six months ended June 29, 1997. In addition, combined
selling, general, and administrative expenses for Grand Casino
Biloxi and Grand Casino Gulfport increased slightly from 1996 to
1997 ($.4 million). Lastly, corporate expense decreased $3.2
million from the six months ended June 30, 1996 to the six months
ended June 29, 1997 as a result of the corporate reorganization plan
implemented in late 1996.
Other
Interest income decreased by $2.7 million to $6.7 million for the
six months ended June 29, 1997 from the comparable period last year.
This decrease is primarily attributable to lower cash balances due
to construction at Grand Casino Biloxi and Grand Casino Tunica. In
addition, interest expense increased by $12.0 million to $22.6
million for the six months ended June 29, 1997 compared to $10.6
million for the six months ended June 30, 1996. The increase is the
result of a reduction in capitalized interest relating to the
construction of Grand Casino Tunica and interest incurred under the
$120 million Senior Secured Term Loan. Capitalized interest was
$3.7 million and $13.1 million for the six months ended June 29,
1997 and June 30, 1996, respectively.
- 16 -
<PAGE> 17
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 29, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
Earnings Per Common Share and Net Earnings
Earnings per common share for the three months ended June 29, 1997
were $.43 versus $.45 for the prior year's comparable period based
upon weighted average common shares outstanding of 42.9 million and
43.3 million for the three month periods ended June 29, 1997 and
June 30, 1996, respectively. Net earnings decreased $1.1 million to
$18.3 million for the three months ended June 29, 1997 compared to
the same period in the prior year as a result of interest incurred
on new property financing for Grand Casino Tunica and less interest
capitalized during the three months ended June 29, 1997 compared to
the prior year. During the three months ended June 30, 1996,
capitalized interest on qualifying construction projects was $6.9
million, whereas, for the three months ended June 29, 1997
capitalized interest on qualifying construction projects was $1.3
million, a decrease of $5.6 million or approximately $3.4 million
after taxes. The decrease in qualifying construction projects can
be attributed to the opening of the casino and related
projects of Grand Casino Tunica on June 24, 1996. In addition, the
results for the three months ended June 30, 1996 included the
Company's share of losses from Stratosphere in the amount of $4.7
million, whereas 1997 does not include any losses from Stratosphere.
Gross Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $113.6 million in gross casino revenue and $29.3 million
in gross hotel, food, beverage, retail, and entertainment revenue
during the three months ended June 29, 1997. During the three
months ended June 30, 1996, Grand Casino Tunica, Grand Casino Biloxi
and Grand Casino Gulfport generated $80.3 million in gross casino
revenue and $19.5 million in gross hotel, food, beverage and retail
revenue. The increase in gross revenues is primarily related to the
opening of Grand Casino Tunica which contributed $47.5 million of
gross revenues for the three months ended June 29, 1997. Combined
gross revenues for Grand Casino Biloxi and Grand Casino Gulfport
increased $.5 million for the three months ended June 29, 1997
compared to the same period in the prior year. Lastly, management
fees were approximately the same for the three months ended June 29,
1997 compared to the same period in the prior year ($.6 million
decrease from 1996 was principally related to management fee income
from Stratosphere in 1996, whereas 1997 does not include
Stratosphere management fee income).
- 17 -
<PAGE> 18
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Net Revenues
Net revenues for the Company increased $37.9 million for the three
months ended June 29, 1997 compared to the same period in the prior
year. The increase in net revenues is primarily due to the opening
of Grand Casino Tunica, which contributed net revenues of $42.7
million during the three months ended June 29, 1997, compared to
$4.8 million during the three months ended June 30, 1996. In
addition, combined net revenues of Grand Casino Biloxi and Grand
Casino Gulfport increased $.6 million for the three months ended
June 29, 1997 compared to the same period in the prior year. The
Company implemented a new Marketing campaign in 1997 for Grand
Casino Biloxi and Grand Casino Gulfport, which has increased the
level of play; however, it has only slightly impacted win due to
lower win percentages in table games and slots. The increase in net
revenues for Grand Casino Biloxi and Grand Casino Gulfport has
principally been due to non-gaming revenues.
Costs and Expenses
Total costs and expenses increased $36.2 million from $75.7 million
for the three months ended June 30, 1996 to $111.9 million for the
three month period ended June 29, 1997. Casino expenses were $39.6
million for the three month period ended June 29, 1997 compared to
$26.4 million for the comparable period in 1996. The increase of
$13.2 million was comprised of additional casino expenses for Grand
Casino Tunica in the amount of $11.8 million as Grand Casino Tunica
was open the entire three months ended June 29, 1997, whereas,
approximately one week of operations were included in 1996 results.
The increase for Grand Casino Biloxi and Grand Casino Gulfport for
the three months ended June 29, 1997 compared to the same period in
the prior year in the amount of $1.4 million was principally a result
of additional complimentaries and labor to service and attract
guests. Food and beverage expenses increased $3.6 million to $8.5
million for the three month period ended June 29, 1997, of which $2.8
million was a result of the opening of Grand Casino Tunica. Selling,
general, and administrative expenses increased in the amount of $11.9
million from $29.1 million for the three months ended June 30, 1996
to $41.0 million for the three months ended June 29, 1997.
- 18 -
<PAGE> 19
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Costs and Expenses (Continued)
Grand Casino Tunica's selling, general, and administrative expenses
increased $13.6 million from the three months ended June 30, 1996 to
the three months ended June 29, 1997. In addition, combined
selling, general, and administrative expenses for Grand Casino
Biloxi and Grand Casino Gulfport decreased $1.6 million from the
three months ended June 30, 1996 to the three months ended June 29,
1997 primarily due to a reduction of Marketing expenses with the new
Marketing campaign implemented in late 1996.
Other
Interest income decreased by $1.1 million to $3.0 million for the
three months ended June 29, 1997. This decrease is primarily
attributable to lower cash balances due to construction at Grand
Casino Biloxi and Grand Casino Tunica. In addition, interest
expense increased by $7.1 million to $12.0 million for the three
months ended June 29, 1997 compared to $4.9 million for the three
months ended June 30, 1996. The increase is the result of a
reduction in capitalized interest relating to the construction of
Grand Casino Tunica and advances under the $120 million Senior
Secured Term Loan. Capitalized interest was $1.3 million and $6.9
million for the three months ended June 29, 1997 and June 30, 1996,
respectively.
CAPITAL RESOURCES AND LIQUIDITY
As of June 29, 1997, the company had cash and cash equivalents of
$132.6 million. For the six months ended June 29, 1997, capital
expenditures were $101.6 million compared to $195.9 million for the
comparable period in the prior year. The majority of expenditures
for the six months ended June 29, 1997, related to additional
construction at Grand Casino Biloxi and Grand Casino Tunica. Based
on the projected cash generated from operations and current cash and
cash equivalents, the Company believes it will have sufficient
resources to fund operations and proposed capital expenditures
during the next twelve months.
Pursuant to the Company's covenants related to the $450.0 million
First Mortgage Notes, the Company is restricted from paying cash
dividends and must maintain certain financial ratios. 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.
- 19 -
<PAGE> 20
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
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" under the Federal Private
Securities Litigation Reform Act of 1995.
Forward-looking statements are those which include statements
regarding projections, plans and objectives, and future economic
performance, together with statements regarding any assumptions
pertaining to such projections, plans and objectives, and future
economic performance. While these forward-looking statements
reflect the best judgment of the Company, based on information
available on the date of this Form 10-Q, such statements are all
subject to risks and uncertainties that could cause actual results
to vary from the forward-looking statements made in this Form 10-Q.
Those variances could be significant.
Such forward-looking statements involve risks and uncertainties that
could significantly affect future results, 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), changes in competitive conditions,
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). In addition to any specific risks and uncertainties
mentioned or discussed in this Form 10-Q, the risks and
uncertainties discussed in detail in the Company's 1996 Form 10-K,
provide information which should be considered in evaluating any of
the Company's forward-looking statements. In addition, you should
be aware that the facts and circumstances which exist when any
forward-looking statements are made and on which those
forward-looking statements are based, may significantly change in
the future, thereby rendering obsolete the forward-looking
statements on which such facts and circumstances were based.
- 20 -
<PAGE> 21
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following descriptions are summaries of the status of each of the
following legal proceedings as of August 1, 1997. More complete
information may be obtained by reviewing the court files pertaining to
such actions.
COHEN - FEDERAL ACTION
In April 1994, Harvey Cohen brought an action in the United States
District Court for the District of Nevada -- Harvey Cohen, et. al. v.
Stratosphere Corporation, et. al. - Case No. CV-S-94-00334 DWH (LRL)
-- against various defendants, including Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company. Cohen alleges
federal securities law violations and various state law claims in
connection with the initial public offering (the "IPO") for
Stratosphere Corporation ("Stratosphere"). Cohen brought the action as
a class action, and alleges that the defendants deprived the
plaintiffs of the opportunity to purchase Stratosphere common stock
in the IPO.
In April 1995, the federal district court dismissed the action. In
May 1995, the plaintiffs filed a notice of appeal of the dismissal
with the United States Court of Appeals for the Ninth Circuit. The
appeal -- Case No. CA 95-16098 -- was subsequently briefed and argued,
and in June 1997, the Appeals Court issued its decision affirming the
district court's dismissal of the action.
COHEN - STATE ACTION
In August 1995, Harvey Cohen brought an action in the District Court
for Clark County, Nevada -- Harvey J. Cohen, et. al. v. Stratosphere
Corporation, et. al. - Case No. A349985 -- against various defendants,
including Grand Casinos Resorts, Inc., a wholly-owned subsidiary of
the Company. Cohen brought the action as a class action, and makes
substantially the same claims as made in the federal action brought by
Cohen and described above.
The state action has, by agreement of the parties, been stayed pending
a decision in the federal court action.
- 21 -
<PAGE> 22
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
CALIFORNIA VIDEO POKER LITIGATION
In April 1996, three plaintiffs brought an action in the Superior
Court of California, County of San Diego -- Tom Payne, et. al. v.
Aztar Corporation, et. al. - Case No. 698592 -- against several
defendants, including the Company. The plaintiffs allege that the
defendants participated in fraudulent and misleading conduct
intended to induce plaintiffs to play video poker machines based on
false beliefs regarding how such machines operate, and that the
defendants' alleged conduct violates various provisions of
California law. The plaintiffs seek to have the action certified a
class action, compensatory and punitive damages and other relief.
The defendants attempted to remove the action to federal court, but
that attempt was unsuccessful. The defendants then submitted
various motions to dismiss the action, including a motion based on
the claim that the California court does not have jurisdiction over
the defendants named in the action.
In March 1997, the court required the plaintiffs to file a
complaint stating more clearly the basis on which the plaintiffs
claim the defendants violated California law. In April 1997, the
plaintiffs filed an amended complaint. The amended complaint
includes allegations that the defendants directed advertisements to
California residents which include false statements regarding video
poker machines. The Company asserts that the California courts do
not have jurisdiction over the Company, and, therefore, has asked
the court to dismiss the action with respect to the Company.
SLOT MACHINE LITIGATION - NEVADA
In April 1994, William H. Poulos brought an action in the United
States District Court for the Middle District of Florida, Orlando
Division -- William H. Poulos, et. al. vs. Caesars World, Inc. et.
al. - Case No. 39-478-CIV-ORL-22 -- in which various parties
(including the Company) alleged to operate casinos or be slot
machine manufacturers were named as defendants. The plaintiff
sought to have the action certified as a class action.
A subsequently filed action -- William Ahearn, et. al. vs. Caesars
World, Inc., et. al. - Case No. 94-532-CIV-ORL-22 -- made similar
allegations and was consolidated with the Poulos action.
- 22 -
<PAGE> 23
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
SLOT MACHINE LITIGATION - NEVADA (CONTINUED)
Both actions included claims under the federal
Racketeering-Influenced and Corrupt Organizations Act and under
state law, and sought compensatory and punitive damages. The
plaintiffs claimed that the defendants are involved in a scheme to
induce people to play electronic video poker and slot machines
based on false beliefs regarding how such machines operate and the
extent to which a player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the
United States District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the United
States District Court for the District of Nevada -- Larry Schreier,
et. al. vs. Caesars World, Inc., et. al. - Case No.
CV-S-95-00923-DWH (RJJ).
The plaintiffs' allegations in the Schreier action were similar to
those made by the plaintiffs in the Poulos and Ahearn actions,
except that Schreier claimed to represent a more precisely defined
class of plaintiffs than Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier
actions consolidated under the title William H. Poulos, et. al. vs.
Caesars World, Inc., et. al. - Case No. CV-S-94-1126 - DAE (RJJ) -
(Base File), and required the plaintiffs to file a consolidated and
amended complaint. In February 1997, the plaintiffs filed a
consolidated and amended complaint.
In March 1997, various defendants (including the Company) filed (i)
motions to dismiss the amended complaint, and (ii) motions to stay
the consolidated action pending consideration of the plaintiff's
allegations by various gaming regulatory authorities. As of August
1, 1997, the court has not issued a decision regarding any of such
motions.
- 23 -
<PAGE> 24
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL
In August 1996, a complaint was filed in the United States District
Court for the District of Nevada -- Michael Caesar, et. al. v.
Stratosphere Corporation, et. al. -- against Stratosphere
Corporation and others, including the Company. The complaint was
filed as a class action, and sought relief on behalf of
Stratosphere shareholders who purchased their stock between
December 19, 1995 and July 22, 1996. The complaint included
allegations of misrepresentations, federal securities law
violations and various state law claims.
In August through October 1996, several other nearly identical
complaints were filed by various plaintiffs in the United States
District Court for the District of Nevada. Those complaints
include the following:
- Regina Peltz, et. al. v. Stratosphere Corporation, et. al.
- Robert Stengel, et. al. v. Stratosphere Corporation, et. al.
- Robert Johnson, et. al. v. Stratosphere Corporation, et. al.
- David Vallee, et. al. v. Stratosphere Corporation, et. al.
- Anthony L. Poli, et. al. v. Stratosphere Corporation, et. al.
- Darrell Russell and Gail Russell, et. al. v. Stratosphere
Corporation, et. al.
- Mitchell Gordon, et. al. v. Stratosphere Corporation, et. al.
- James J. Enright, Jr. v. Stratosphere Corporation, et. al.
The defendants in the above actions submitted motions requesting
that all of the actions be consolidated. Those motions were granted
on January 15, 1997, and the consolidated action is entitled IN Re:
Stratosphere Corporation Securities Litigation - Master File No.
CV-S-96-00708 PMP (RLH).
- 24 -
<PAGE> 25
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In February 1997, the plaintiffs filed a consolidated and amended
complaint naming various defendants, including the Company and
certain officers and directors of the Company. The amended
complaint includes claims under federal securities laws and Nevada
laws based on acts alleged to have occurred between December 19,
1995 and July 26, 1996.
In February 1997, various defendants, including the Company and the
Company's officers and directors named as defendants, submitted
motions to dismiss the amended complaint on various grounds,
including the Company's claim that the amended complaint failed to
state a valid cause of action against the Company and the Company's
officers and directors.
In May 1997, the court issued an order dismissing the action. The
original dismissal order did not allow the plaintiffs to amend
their complaint in an attempt to state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its
dismissal order. In July 1997, the court amended its dismissal
order to provide that the amended complaint was dismissed, but that
the plaintiffs could submit a second amended complaint by August
22, 1997. As of August 1, 1997, the plaintiffs have not filed a
second amended complaint.
STRATOSPHERE SECURITIES LITIGATION - STATE
In August 1996, a complaint was filed in the District Court for
Clark County, Nevada -- Victor M. Opitz, et. al. v. Robert E.
Stupak, et. al. - Case No. A363019 -- against various defendants,
including the Company. The complaint seeks relief on behalf of
Stratosphere Corporation shareholders who purchased stock between
December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state
claims.
The Company and certain defendants submitted motions to (i)
dismiss, or (ii) stay the state court proceedings pending
resolution of the federal court actions described above. The court
has stayed further proceedings pending the proceedings in federal
district court IN Re: Stratosphere Securities Litigation.
- 25 -
<PAGE> 26
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
GRAND SECURITIES LITIGATION - FEDERAL
In September and October 1996, two actions (Joel Blake, et. al. v.
Grand Casinos, Inc., et. al. and Robert D. Marcus, et. al. v. Grand
Casinos, Inc., et. al.) were filed in the United States District
Court for the District of Minnesota against the Company and certain
of the Company's directors and officers.
The complaints allege misrepresentations, federal securities law
violations and other claims in connection with the Stratosphere
project.
The actions have been consolidated -- IN Re: Grand Casinos, Inc.
Securities Litigation - Master File No. 4-96-890 -- and the
plaintiffs filed a consolidated complaint. The defendants have
submitted a motion to dismiss the consolidated complaint. The
court heard arguments regarding the motion in May 1997, but has not
issued a decision regarding the motion to dismiss.
MICHAELS COMPANY OF NEVADA
In December 1996, a complaint was filed in the United States
District Court for the District of Nevada -- Michaels Company of
Nevada v. Grand Casinos, Inc., et. al. - Case No. CV-S-96-01006-PMP
(RLH) -- against the Company and others, including certain
directors and officers of the Company. The complaint alleges that
the Company improperly withdrew from an agreement to finance and
develop a potential Indian-owned gaming project in California.
The complaint seeks lost profits which the plaintiff claims it
would have received had the Company not withdrawn. The Company
believes that it had legitimate business reasons to withdraw from
the proposed project.
The Company and the other defendants have submitted answers denying
the allegations of the complaint. The parties to the action are
engaged in discovery.
- 26 -
<PAGE> 27
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
DERIVATIVE ACTION
In February 1997, certain shareholders of the Company brought an
action in the Hennepin County, Minnesota District Court -- Lloyd
Drilling, et. al. v. Lyle Berman, et. al. - Court File No.
MC97-002807 -- against certain officers and directors of the
Company. The plaintiffs allege that those officers and directors
breached certain fiduciary duties to the shareholders of the
Company as a result of certain transactions involving the
Stratosphere project.
The Company's Board of Directors appointed an independent special
litigation committee to evaluate whether the Company should pursue
the claims against the officers and directors.
The Company's officers and directors named as defendants in the
action have filed an answer to the complaint. The special
litigation committee has asked the court stay discovery in the
action pending completion of the special litigation committee's
evaluation.
STRATOSPHERE VACATION CLUB LITIGATION
In late April, 1997, the Company and Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company, were served
with a summons and a second amended complaint in an action in
District Court in Clark County, Nevada -- Richard Duncan, et. al.
vs. Bob and Jane Doe Stupak, et. al. - Case No. A370127. The
plaintiffs allege that the defendants, including the Company and
Resorts, engaged in acts which constitute "consumer fraud" under
Nevada law in connection with vacation packages which the
defendants claim to have purchased from Bob Stupak. The plaintiffs
also allege "unjust enrichment", breach of contract and other
claims under Nevada law. The plaintiffs seek to pursue their claims
as a class action, and ask for various remedies including
compensatory damages and punitive damages.
The Company has submitted a motion to dismiss the complaint as it
pertains to Company and Resorts. The court denied the motion to
dismiss. The Company is evaluating whether to submit a request for
reconsideration of the denial of the dismissal.
- 27 -
<PAGE> 28
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the
"Committee") in the Chapter 11 bankruptcy proceeding for
Stratosphere Corporation ("Stratosphere") pending in the United
States Bankruptcy Court for the District of Nevada (the "Bankruptcy
Court") filed a motion by which the Committee sought Bankruptcy
Court approval for assumption (on behalf of Stratosphere's
bankruptcy estate) of the March 1995 Standby Equity Commitment (the
"Standby Equity Commitment") between Stratosphere and the Company.
In the motion, the Committee seeks Bankruptcy Court authorization to
compel the Company to fund up to $60 million in "capital
contributions" to Stratosphere over three years, based on the
Committee's claim that such "contributions" are required by the
Standby Equity Commitment.
Both the Company and Stratosphere opposed the Committee's motion.
The Bankruptcy Court held a preliminary hearing on the Committee's
motion in June 1997, and set future evidentiary hearings on the
issues raised by the Committee's motion and the Company's opposition
to that motion.
The Company anticipates filing a motion for summary judgment with
respect to some of the legal issues raised by the Committee's motion
and the Company's opposition to that motion. The Company has
asserted, in its opposition to the Committee's motion, that the
Standby Equity Commitment is not enforceable in the Stratosphere
bankruptcy proceeding as a matter of law.
Discovery is ongoing with respect to some of the factual issues
raised by the Committee's motion and the Company's opposition to
that motion. Accordingly, the Bankruptcy Court has not issued a
definitive ruling regarding the Committee's motion.
- 28 -
<PAGE> 29
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 9, 1997.
(b) Matters voted upon:
(1) Directors elected at meeting:
Affirmative Negative
Votes Votes Abstentions
----------- -------- -----------
Lyle Berman 27,974,712 360,367 13,515,807
Thomas J. Brosig 28,003,131 331,928 13,515,807
Morris Goldfarb 27,991,569 343,510 13,515,807
Ronald Kramer 27,991,215 343,864 13,515,807
David L. Rogers 27,989,476 345,604 13,515,807
Neil I. Sell 27,881,675 453,404 13,515,807
Stanley M. Taube 27,994,275 340,804 13,515,807
Joel N. Waller 27,992,873 342,206 13,515,807
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarterly period
ended June 29, 1997.
- 29 -
<PAGE> 30
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: August 13, 1997 GRAND CASINOS, INC.
-------------------
Registrant
By: _______________________________
Thomas J. Brosig, President
___________________________________
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
-30-
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<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 132,601
<SECURITIES> 0
<RECEIVABLES> 16,536
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<INVENTORY> 5,844
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<PP&E> 902,720
<DEPRECIATION> 82,229
<TOTAL-ASSETS> 1,186,987
<CURRENT-LIABILITIES> 94,125
<BONDS> 454,600
0
0
<COMMON> 419
<OTHER-SE> 470,907
<TOTAL-LIABILITY-AND-EQUITY> 1,186,987
<SALES> 293,007
<TOTAL-REVENUES> 315,129
<CGS> 105,147
<TOTAL-COSTS> 223,188
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,617
<INCOME-PRETAX> 53,583
<INCOME-TAX> 20,686
<INCOME-CONTINUING> 32,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,897
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
