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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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. 0-19565
GRAND CASINOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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(612) 449-9092
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock $0.01 par value New York Stock Exchange
10.125% First Mortgage Notes due 2003 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act.
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Redeemable Common Stock Purchase Warrants, expiring June 30, 1997
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(Title of Class)
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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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 25, 1997, 41,850,886 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock held by
nonaffiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the New York Stock Exchange on March 25, 1997,
was $334,763,160. For purposes of this computation, affiliates of the Registrant
are deemed only to be the Registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
PART II AND IV -- Portions of the Registrant's Annual Report to
Shareholders for the year ended December 29, 1996, are incorporated by reference
into Items 5 through 8, inclusive.
PART III -- Portions of the Registrant's definitive proxy statement in
connection with the annual meeting of the shareholders to be held on May 9,
1997, are incorporated by reference into Items 10 through 13, inclusive.
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ITEM 1. BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Grand Casinos, Inc. (the "Company") could differ materially
from the Company's historical results of operations and those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "-Certain
Factors."
Grand Casinos, Inc. (the "Company") is a casino entertainment company that
develops, constructs and manages land-based and dockside casinos in emerging
gaming markets. The Company's strategy is to distinguish itself within its
markets by offering superior facilities with extensive nongaming amenities,
combined with experienced corporate and casino management and comprehensive
marketing programs.
The Company owns and operates Grand Casino Biloxi and Grand Casino
Gulfport, the two largest casinos on the Mississippi Gulf Coast. Grand Casino
Gulfport opened on May 14, 1993 and Grand Casino Biloxi opened on January 17,
1994.
The Company manages two land-based, Indian-owned casinos in Minnesota:
Grand Casino Mille Lacs in Onamia, Minnesota, and Grand Casino Hinckley in
Hinckley, Minnesota. Grand Casino Mille Lacs and Grand Casino Hinckley rank
among Minnesota's largest Indian gaming enterprises. In addition, the Company
manages two land-based, Indian-owned casinos in Louisiana: Grand Casino
Avoyelles, in Marksville, Louisiana, for the Tunica-Biloxi Tribe of Louisiana
("Tunica-Biloxi Tribe") and Grand Casino Coushatta, in Kinder, Louisiana, for
the Coushatta Tribe of Louisiana ("Coushatta Tribe").
Grand Casino Tunica opened on June 24, 1996 and is the largest dockside
casino in Mississippi and one of the largest casinos in the United States. The
Company is developing Grand Casino Tunica into a destination gaming resort
featuring a multi-themed casino. Grand Casino Tunica currently features two
hotels with an aggregate of 766 rooms. Other amenities include a Grand Casino
Kids Quest(SM) child care facility, a Grand Arcade, and valet and self-parking
for approximately 5,400 vehicles. Additions currently under construction include
an 18-hole professionally designed championship golf course and driving range
and a convention facility. Grand Casino Tunica offers a 400,000-square-foot,
three-story, multi-themed casino complex containing approximately 140,000 square
feet of gaming space with approximately 3,000 slot machines and 108 table games.
The Company owns approximately 42 percent 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. The
Company and Stratosphere have filed a Joint Plan of Reorganization in
Stratosphere's Chapter 11 proceeding.
The Company periodically evaluates its development program and may
determine to complete projects not described herein or may determine not to
develop any project, based upon market, financial, or regulatory factors. No
assurance can be given that any of these projects will be completed as scheduled
or contemplated.
Business Strategy
The Company develops casino properties with excellent access and visibility
that also offer the opportunity for long-term development of related
entertainment amenities. The Company intends to develop hotels, theaters,
recreational vehicle parks, and other complementary amenities designed to
enhance the customers' total entertainment experience and differentiate the
Company's facilities and operations from most of its competitors.
The Company is dedicated to providing high quality, comprehensive family
entertainment, with focused attention to customer service. The Company's modern
facilities, staffed with well trained local employees, offer a casual
environment designed to appeal to the family-oriented, middle income customer.
The Company
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strives to offer its customers creative gaming selections in a pleasant,
festive, and smoke- and climate-controlled setting. The Company also offers
reasonably priced, high-quality food, video arcades and Grand Casino Kids
Quest(SM), a professionally supervised entertainment and child care center.
Marketing
The Company targets its marketing strategy to attract and retain the repeat
customer. Management believes that its emphasis on enhancing the entertainment
value represented by the Grand Casino experience, coupled with marketing
programs, contributes to attracting the repeat customer.
The Company's strategy seeks to combine retail, gaming, and entertainment
marketing techniques. The Company profiles its customers utilizing available
demographic data, regularly conducted customer surveys, and other sources. Based
upon this data, the Company uses a variety of initial special promotions to
attract the first-time customer and, thereafter, seeks to leverage initial
customer satisfaction through a mix of marketing programs dedicated to
developing a repeat customer.
A variety of other events, facilities and entertainment media provide the
patron with a total entertainment experience. The Company markets these programs
through a variety of direct and media marketing techniques.
MISSISSIPPI CASINOS
Grand Casino Biloxi
Grand Casino Biloxi opened on January 17, 1994, and is the largest dockside
casino on the Mississippi Gulf Coast. Grand Casino Biloxi is located
approximately 15 miles east of Gulfport on U.S. Highway 90. The Grand Casino
Biloxi location is one of a few sites on the Mississippi Gulf Coast that permits
east-west orientation of the casino, thus maximizing visibility from the
highway.
Grand Casino Biloxi is a three story building built upon a moored steel
barge with approximately 250,000 square feet of interior space. Although the
structure is similar to Grand Casino Gulfport, Grand Casino Biloxi features a
different color scheme and theme to differentiate the casinos. The main casino
floor is located on the second level to facilitate customer movement directly
from the hotel lobby and show theater via covered walkways connecting the
facilities. A pedestrian walkway connects the casino to 3,500 parking spaces
available for guests.
As of March 25, 1997, the casino area featured approximately 110,000 square
feet of gaming space containing approximately 2,000 slot machines and
approximately 100 table games, including blackjack tables, craps tables,
roulette wheels, Big Six wheels, poker tables, a baccarat table, pai gow poker
tables, Caribbean stud tables, and mini-baccarat tables. Grand Casino Biloxi has
six restaurants, including a buffet, a full service restaurant, a steakhouse and
a themed, express diner featuring national and regional favorites, all located
on the facility's third floor. Grand Casino Biloxi opened a twelve-story, 500
room hotel adjacent to the casino, together with a Grand Casino Kids Quest(SM)
child care entertainment center located on the first floor. Grand Casino Biloxi
also owns and operates an 1,800-seat show theater adjacent to the casino that
features a production/variety show with matinee and evening performances, boxing
events, and other professional entertainment. The Company also owns land and
leases land adjacent to Grand Casino Biloxi for future hotel and/or retail
development.
Grand Casino Gulfport
Grand Casino Gulfport opened on May 14, 1993. Grand Casino Gulfport is
located on U.S. Highway 90 in the Gulfport harbor. The Grand Casino Gulfport
location utilizes an east-west orientation of the casino facility so as to
maximize visibility from the highway. Grand Casino Gulfport is visible from
Highway 49, the highway that connects Interstate 10 with the coast of
Mississippi, and is approximately three miles from the Gulfport/Biloxi airport.
A four-story high sign featuring the Grand Casino mark and promotional
advertisements is located in front of the casino along U.S. Highway 90.
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Grand Casino Gulfport is a three story building set upon moored steel
linked barges consisting of approximately 225,000 square feet of interior space.
There are 2,800 parking spaces available for guests. Grand Casino Gulfport also
offers a nightclub/entertainment complex adjacent to the casino that contains
separately themed nightclubs.
As of March 25, 1997, the casino area consisted of approximately 104,000
square feet of gaming area containing approximately 2,100 slot machines and 100
table games, including blackjack tables, craps tables, roulette wheels, Big Six
wheels, baccarat tables, pai gow poker tables, poker tables, Caribbean stud
tables, and mini-baccarat tables. The casino area is spacious with ample seating
provided for slot and table game guests. The casino is decorated in a colorful
"carnival" Mardi Gras theme and features a state-of-the-art smoke removal
system. The restaurants located in the casino include a buffet, a full service
restaurant, a themed diner, and a steakhouse. In general, the restaurants offer
moderately priced, high quality food to attract local and repeat guests. Other
amenities include a Grand Casino Kids Quest(SM), a Grand Arcade, a multi-venue
entertainment complex and America Live, a nightclub/entertainment complex
containing separately-themed nightclubs. Grand Casino Gulfport has a
seventeen-story, 400-room hotel adjacent to the casino. The Company owns or
leases land adjacent to Grand Casino Gulfport for future hotel and/or retail
development.
Grand Casino Tunica
Grand Casino Tunica opened on June 24, 1996 and is the largest dockside
casino in Mississippi and one of the largest casinos in the United States. The
Company is developing Grand Casino Tunica into a destination gaming resort
featuring a multi-themed casino. Grand Casino Tunica currently features two
hotels with an aggregate of 766 rooms. Other amenities include a Grand Casino
Kids Quest(SM) child care facility, a Grand Arcade, and valet and self-parking
for approximately 5,400 vehicles. Additions currently under construction include
an 18-hole professionally designed championship golf course and driving range
and a convention facility.
Grand Casino Tunica is located in Tunica County, Mississippi, approximately
15 miles south of the Memphis metropolitan area. Located directly on the
northern border of Tunica County, Grand Casino Tunica is currently the closest
legal gaming site to Memphis, Tennessee, and the only casino property in Tunica
County that has direct frontage on U.S. Highway 61, the most direct route from
Memphis to Tunica County gaming sites.
Grand Casino Tunica is a 400,000-square-foot, three-story, multi-themed
casino complex containing approximately 140,000 square feet of gaming space with
approximately 3,000 slot machines and 108 table games. Grand Casino Tunica
features four unique themes of festive Americana: Gold Rush Era San Francisco,
an 1890s Mississippi Riverboat Town, New Orleans Mardi Gras and the Great
American West of the 1870s. The ambiance of each themed segment is created
through elaborate decor reflective of each theme. Grand Casino Tunica offers its
guests a choice of six restaurants, as well as two entertainment lounges and a
Player's Club.
Grand Casino Tunica's large size and expansive design is conducive to
significant long-term development of the site. Grand Casino Tunica's master plan
contemplates additional entertainment amenities, including additional hotels, a
second championship golf course, a village center containing additional hotel
sites, restaurants, retail shopping and other attractions, and residential
properties on the golf course. Such future developments are expected to be
funded partly from cash flow but primarily through third party financing and/or
other development arrangements. Such future developments, if completed, are
expected to further enhance Grand Casino Tunica's status as a premier
destination gaming resort and to encourage repeat visits. Any such additional
development, however, will be dependent upon the operating results of Grand
Casino Tunica and other future conditions, and no assurance can be given that
any such additions will be completed.
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MINNESOTA CASINOS
Grand Casino Mille Lacs
Grand Casino Mille Lacs, the first casino developed and managed by the
Company, is located approximately 90 miles northwest of Minneapolis on the Mille
Lacs Band of Ojibwe Indians' (the "Mille Lacs Band") reservation near Onamia,
Minnesota. Grand Casino Mille Lacs is located near Mille Lacs Lake, a 207 square
mile lake that is a year-round resort area.
Grand Casino Mille Lacs opened on April 2, 1991. Grand Casino Mille Lacs is
a 102,000 square foot facility that contains a 40,000-square-foot casino gaming
room with approximately 1,250 slot machines and 36 blackjack tables. Additional
facilities include a bingo hall, a full service restaurant, a buffet restaurant,
an alcohol-free sports bar, a snack bar, a video arcade, a Grand Casino Kids
Quest(SM) child entertainment center, a gift shop and parking for 1,400
vehicles. The Mille Lacs Band has constructed a 175-room hotel connected to
Grand Casino Mille Lacs, which was financed by an unrelated third party, and is
constructing another 109 rooms scheduled for completion in mid-1997.
On September 10, 1990, the Company and the Mille Lacs Band entered into a
construction agreement and management contract (the "Mille Lacs Agreement") for
the development, construction and management of Grand Casino Mille Lacs. The
term of the Mille Lacs Agreement expires on April 2, 1998. In October 1996, the
Company and the Mille Lacs Band entered into a restated management agreement
(the "Restated Mille Lacs Agreement") with respect to the Grand Casino Mille
Lacs facility. In accordance with its terms, the Restated Mille Lacs Agreement
will not be effective until such time as it is approved by the NIGC. The Company
believes the Restated Mille Lacs Agreement, which also expires on April 2, 1998,
is consistent with the terms and conditions of the Mille Lacs Agreement and
conforms to NIGC requirements. The NIGC is currently reviewing the Restated
Mille Lacs Agreement. Although the Company believes the Restated Mille Lacs
Agreement satisfies all the requirements of the Indian Gaming Regulatory Act of
1988 ("IGRA"), there can be no assurance that the NIGC will not seek to reduce
the management fee payable to the Company thereunder or demand other revisions
to the Restated Mille Lacs Agreement.
As manager, the Company deducts on a monthly basis the operating expenses
and a cash contingency reserve from the gross receipts of the casino. The
Restated Mille Lacs Agreement provides that the net distributable gaming
profits, if any, are distributed 70% to the Mille Lacs Band and 30% to the
Company, and that the Company receives an additional fee, determined pursuant to
a sliding scale formula, with respect to non-gaming revenues.
The Company loaned the Mille Lacs Band an aggregate of approximately $9.3
million to construct and open Grand Casino Mille Lacs, of which amount
approximately $6.3 million was not, but may need to be, approved by the Bureau
of Indian Affairs ("BIA") and/or the National Indian Gaming Commission ("NIGC").
As of December 29, 1996, the full amount of such loan had been repaid by the
Mille Lacs Band. The Company provided assistance to the Mille Lacs Band in
connection with certain leases of equipment used at Grand Casino Mille Lacs.
Each such lease provides the Mille Lacs Band with a purchase option at a nominal
price upon expiration of the lease term. The leases further provide that in the
event of default by the Mille Lacs Bands, the Company may not receive payments
under the Mille Lacs Agreement until such default has been cured.
Grand Casino Hinckley
Grand Casino Hinckley is located on a 20 acre parcel of land held by the
United States in trust for the Mille Lacs Band near the intersection of
Interstate Highway 35 and Minnesota State Highway 48, adjacent to Hinckley,
Minnesota. Hinckley is within 90 miles of the Minnesota cities of
Minneapolis/St. Paul and Duluth. Interstate 35 links Minneapolis/St. Paul and
Duluth, Minnesota's two largest population centers, and the Highway 48
intersection is a traditional rest stop for travelers. Grand Casino Hinckley is
located approximately 50 miles east of Grand Casino Mille Lacs.
Grand Casino Hinckley opened on May 15, 1992 and, as of March 25, 1997,
consisted of an approximately 46,000 square foot casino gaming room containing
approximately 1,700 slot machines and 46 blackjack tables. The facility also has
a Grand Casino Kids Quest(SM) child entertainment center, a video
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arcade, a full service restaurant, a buffet restaurant, a snack bar, a sports
bar that serves alcoholic beverages, a gift shop, a 220-space recreational
vehicle park, 50 fully furnished rental chalets, and parking for approximately
2,400 cars.
An unrelated third party operates a 150 room hotel in proximity to Grand
Casino Hinckley. The Company has guaranteed the repayment of certain
indebtedness secured by such hotel with an outstanding balance of $2.7 million
as of December 29, 1996. The Mille Lacs Band is constructing a 260 room hotel
adjacent to Grand Casino Hinckley, which is expected to be completed in the Fall
of 1997.
On September 10, 1990, the Company and the Mille Lacs Band entered into a
construction agreement and management contract (the "Hinckley Management
Agreement") for the development, construction and management of Grand Casino
Hinckley. The term of the Hinckley Management Agreement expires on May 15, 1999.
In October 1996, the Company and the Mille Lacs Band entered into a restated
management agreement (the "Restated Hinckley Agreement") with respect to the
Grand Casino Hinckley facility. In accordance with its terms, the Restated
Hinckley Agreement will not be effective until such time as it is approved by
the NIGC. The Company believes the Restated Hinckley Agreement, which also
expires on May 15, 1999, is consistent with the terms and conditions of the
Hinckley Management Agreement and conforms to NIGC requirements. The NIGC is
currently reviewing the Restated Hinckley Agreement. Although the Company
believes the Restated Hinckley Agreement satisfies all the requirements of the
IGRA, there can be no assurance that the NIGC will not seek to reduce the
management fee payable to the Company thereunder or demand other revisions to
the Restated Hinckley Agreement. In connection with the execution of the
Restated Hinckley Agreement, the Company sold approximately 400 acres of land
adjacent to the casino to the Mille Lacs Band for a price of $2.7 million.
The Company loaned the Mille Lacs Band approximately $14.2 million to
construct and open Grand Casino Hinckley, of which amount approximately $6.7
million was not, but may need to be, approved by the BIA and/or NIGC. As of
December 29, 1996, the full amount of such loan had been repaid by the Mille
Lacs Band. The Company provided assistance to the Mille Lacs Band in connection
with certain leases of equipment used at Grand Casino Hinckley. Each such lease
provides the Mille Lacs Band with a purchase option at a nominal price upon
expiration of the lease term. The leases further provide that in the event of
default by the Mille Lacs Band, the Company may not receive payments under the
Hinckley Management Agreement until such default has been cured.
The Restated Hinckley Agreement provides that net distributable gaming
profits, if any, are distributed 70% to the Mille Lacs Band and 30% to the
Company, and that the Company receives an additional fee, determined pursuant to
a sliding scale formula, with respect to non-gaming revenues.
Grand Casino Mille Lacs and Grand Casino Hinckley employ approximately
2,400 employees. The Company is obligated to give a hiring and promotion
preference and provide training , first to Mille Lacs Band members and their
spouses and then to qualified members of other Indian bands or tribes.
Substantially all of the Mille Lacs Band members who have sought employment at
Grand Casinos Mille Lacs or Hinckley have been employed. None of the employees
of Grand Casinos Mille Lacs or Hinckley are represented by a labor union, and
the Company believes employee relations at Grand Casinos Mille Lacs and Hinckley
are good.
LOUISIANA CASINOS
Grand Casino Avoyelles
Grand Casino Avoyelles opened on June 3, 1994 and consists of an
approximately 50,000 square foot casino gaming room containing approximately
1,550 slot machines and 53 table games. The facility also has a Grand Casino
Kids Quest(SM) child entertainment center, a video arcade, a full service
restaurant, a buffet restaurant, a gift shop and parking for approximately 1,300
vehicles.
Grand Casino Avoyelles is located approximately 50 miles west of Natchez,
Mississippi, and within approximately 200 miles of the Louisiana cities of Baton
Rouge, Lafayette, New Orleans, and Shreveport. The Company purchased
approximately 64 acres of land adjacent to the Tunica-Biloxi reservation for
$1.0 million. The Company has donated approximately 21 acres of this land to the
Tunica-Biloxi Tribe. This land has been
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placed in trust, has been approved for gaming, and is the site upon which Grand
Casino Avoyelles has been constructed.
The Company leases land to an unrelated third party in connection with the
development of a 220 room hotel which opened during 1996 and is located in
proximity to Grand Casino Avoyelles. The Tunica-Biloxi Tribe has agreed to
purchase this hotel from the current owner and operate it as a part of the Grand
Casino Avoyelles enterprise. The Company intends to donate the land to the
Tunica-Biloxi Tribe. In addition, the Company has agreed to guarantee up to
$16.5 million of Tunica-Biloxi Tribal indebtedness to be incurred in connection
with the purchase of the hotel. It is anticipated that such indebtedness will
have a repayment term of approximately three years.
The term of the Company's development and management agreement with the
Tunica-Biloxi Tribe (the "Tunica-Biloxi Agreement") expires on June 3, 2001. As
manager, the Company deducts on a monthly basis the operating expenses and a
cash contingency reserve from the gross receipts of the casino. The net
distributable profits, if any, are distributed 60% to the Tunica-Biloxi Tribe
and 40% to the Company.
The Company loaned the Tunica-Biloxi Tribe an aggregate of approximately
$23.5 million to construct and open Grand Casino Avoyelles, of which amount
approximately $3.5 million was not, but may need to be, approved by the BIA
and/or the NIGC. Approximately $12.6 million of such loans remained outstanding
at December 29, 1996. The loans bear interest at 1% over the prime rate and are
payable over the remaining term of the Tunica-Biloxi Agreement. The Company
arranged for, and guaranteed payment of, approximately $14.1 million in
equipment financing obtained by the Tunica-Biloxi Tribe. The equipment financing
agreements provide that the Company is precluded from receiving loan repayments
and payments under the Tunica-Biloxi Agreement if the tribe is in default under
the equipment financing agreements. As of December 29, 1996, approximately $6.8
million remained outstanding on the tribe's equipment financing indebtedness.
The Tunica-Biloxi Agreement was approved by the BIA on February 27, 1992.
The Tunica-Biloxi Tribe and the State of Louisiana entered into a tribal-state
compact on September 29, 1992, which was approved by the Secretary of the
Interior on November 18, 1992. The compact expires on November 18, 1999 and will
automatically renew for an additional seven year period unless either the
Tunica-Biloxi Tribe or the State of Louisiana delivers to the other prior
written notice of non-renewal. In the event the compact is not renewed, legal
gaming will not be permitted at Grand Casino Avoyelles. There can be no
assurance that the compact with be renewed. The Company has been certified by
the Louisiana State Police in order to manage the casino.
Grand Casino Coushatta
Grand Casino Coushatta opened on January 16, 1995 and consists of an
approximately 71,000 square foot casino gaming room containing approximately
2,100 slot machines and 72 table games. The facility also has a Grand Casino
Kids Quest(SM), a full service restaurant, a buffet restaurant, a snack bar, a
gift shop, and parking for approximately 1,600 vehicles.
On February 25, 1992, the Company entered into a construction agreement and
management contract (the "Coushatta Agreement") with the Coushatta Tribe for the
development, construction, and management of a casino facility in Elton,
Louisiana, on Highway 165. Grand Casino Coushatta is located approximately 60
miles south of Alexandria, Louisiana, and within 200 miles of Houston, Texas.
The Company purchased approximately 688 acres of land adjacent to the Coushatta
reservation for approximately $3.6 million. The Company has donated
approximately 530 acres to the Coushatta Tribe. This land has been placed in
trust for the Coushatta Tribe.
The Company loaned the Coushatta Tribe an aggregate of approximately $38.3
million to construct and open Grand Casino Coushatta, of which amount up to
approximately $20.3 million was not, but may need to be, approved by the BIA
and/or NIGC. The loans bear interest at 1% over the prime rate and are payable
over the remaining term of the Coushatta Agreement. Approximately $23.8 million
of such loans remained outstanding as of December 29, 1996. The Company arranged
for, and guaranteed payment of, approximately $22.3 million in equipment
financing obtained by the Coushatta Tribe. The equipment financing agreements
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provide that the Company is precluded from receiving payments under the loans or
the Coushatta Agreement if the tribe is in default under the equipment financing
agreements. As of December 29, 1996, approximately $11.5 million remained
outstanding on the tribe's equipment financing indebtedness.
The Coushatta Tribe is constructing a hotel on land owned by the Tribe
located in proximity to the casino. The Company has agreed to guarantee up to
$20 million of indebtedness to be incurred by the Tribe in connection therewith.
Such indebtedness is expected to have a repayment term of approximately four
years.
The Coushatta Agreement was approved by the BIA on February 27, 1992. The
Coushatta Tribe and the State of Louisiana entered into a tribal-state compact
on September 15, 1992, which was approved by the Secretary of the Interior on
November 4, 1992. The compact expires on November 4, 1999, and will
automatically renew for an additional seven year period unless either the
Coushatta Tribe or the State of Louisiana delivers to the other prior written
notice of non-renewal. In the event the compact is not renewed, legal gaming
will not be permitted at Grand Casino Coushatta. There can be no assurance that
the compact will be renewed. The Company has been certified by the Louisiana
State Police in order to manage the casino.
The term of the Coushatta Agreement expires on January 16, 2002. As
manager, the Company deducts on a monthly basis the operating expenses and a
cash contingency reserve from the gross receipts of the casino. The net
distributable profits, if any, are distributed 60% to the Coushatta Tribe and
40% to the Company.
Funding Agreements
The Company has entered into agreements (the "Funding Agreements") with
each of the Tunica-Biloxi and Coushatta Tribes to provide temporary funding, if
necessary, for the construction of certain additional amenities on Grand Casino
Avoyelles and Grand Casino Coushatta. The terms of the Funding Agreements
require each party to advance money for the payment of construction costs if and
when the casino operating funds designated for such purpose are insufficient.
Any funds advanced are to be repaid, together with interest at the prime rate
plus 1 percent, over the remaining term of the respective management agreement.
The Company's estimated aggregate maximum commitment under the Funding
Agreements is approximately $14 million. No advances have been made as of March
25, 1997.
STRATOSPHERE CORPORATION
The Company owns approximately 42% of Stratosphere. Stratosphere owns and
operates the 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 is centered around the Stratosphere Tower.
Stratosphere filed for reorganization under Chapter 11 of the Bankruptcy Code on
January 27, 1997. The Company and Stratosphere have filed a Joint Plan of
Reorganization in Stratosphere's Chapter 11 proceeding. Lyle Berman, Stanley M.
Taube and Neil I. Sell, directors, executive officers or principal shareholders
of the Company, are directors of Stratosphere. Mr. Berman is also Stratosphere's
Chief Executive Officer.
OTHER PROJECTS
The Company continues to pursue gaming opportunities throughout the United
States and Canada.
COMPETITION
General
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; riverboat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos owned or managed by the Company
compete with all these forms of gaming, and will compete with any new forms of
gaming that may be legalized in additional jurisdictions, as well as with other
types of entertainment. The Company also competes with other gaming companies
for opportunities to acquire legal gaming sites in emerging gaming jurisdictions
and for the opportunity to manage casinos on Indian land. Some of the
competitors of the Company have more personnel and greater financial and other
resources than the Company. Further expansion of gaming could also significantly
affect the Company's business.
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Mississippi and Louisiana
The Mississippi and Louisiana gaming markets are emerging and are expected
to continue to be highly competitive. As of March 18, 1997, eleven casinos were
operating on the Mississippi Gulf Coast, one of which is currently in
bankruptcy, seeking reorganization of its debt. At least two more additional
licensed casinos are expected to open, and at least four license applications
are pending before the Mississippi Gaming Commission for additional Gulf Coast
casinos, although several of such applicants are involved in litigation over
siting approval or other permits. Mirage Resorts is currently constructing a
casino resort in Biloxi that is scheduled to open in late 1998. The Company
expects that competition from this casino and other casino projects that have
been publicly announced will affect Grand Casinos Gulfport and Biloxi.
As of March 18, 1997, eleven casinos were operating in Tunica County,
Mississippi and no additional applications were pending for Tunica County
dockside casinos. The Company does not expect other Mississippi non-Gulf Coast
casinos to compete directly with the Company's Gulf Coast casinos, but these
casinos do compete with Grand Casino Tunica and may compete with Grand Casinos
Coushatta and Avoyelles. Grand Casinos Gulfport and Biloxi compete with one
another. The Mississippi gaming environment is, and is expected to continue to
be, highly competitive.
The State of Louisiana has approved a single land-based casino to be
located in New Orleans. Louisiana has also legalized riverboat gaming. Video
poker machines may be located in facilities that serve liquor, at truck stops,
and at pari-mutuel racetracks and off-track betting facilities. The New Orleans
casino and the riverboats will compete with the Company's Mississippi and
Louisiana casinos.
Minnesota
The Company believes that Grand Casino Mille Lacs and Grand Casino Hinckley
draw most of their patrons from within driving distance of the casinos, which
includes most of the Twin Cities metropolitan area, and, for Grand Casino
Hinckley, most of the Duluth metropolitan area. Grand Casino Mille Lacs and
Grand Casino Hinckley compete with one another. There are seventeen Indian
gaming casinos operating in Minnesota, including Grand Casinos Mille Lacs and
Hinckley. All of these casinos have either recently expanded or have announced
plans to expand their operations. Management has identified Mystic Lake Casino,
Treasure Island Bingo and Casino, Little Six Casino and Bingo Hall, Black Bear
Casino, Fond du Luth Casino, and Jackpot Junction Casino as significant
competition for Grand Casino Hinckley and Grand Casino Mille Lacs because of
such competitors' proximity to the Twin Cities, and, because of their proximity
to Duluth, the Fond du Luth Casino and Black Bear Casino compete with Grand
Casino Hinckley. Because of their locations, the Company does not believe that
the remaining Minnesota Indian gaming casinos will have a significant
competitive impact on Grand Casino Mille Lacs or Grand Casino Hinckley. At least
two Indian gaming casinos located in western Wisconsin also compete with Grand
Casinos Mille Lacs and Hinckley. Three Wisconsin tribes have petitioned the
Secretary of the U.S. Department of Interior to permit the development of an
Indian casino at a dog track near Hudson, Wisconsin. If that proposal is
approved, the casino will compete with Grand Casinos Mille Lacs and Hinckley.
Grand Casinos Mille Lacs and Hinckley also compete with other forms of legalized
gaming such as lotteries, charitable gaming, and pari-mutuel betting locations
in Wisconsin. The Minnesota legislature is also considering legalizing other
forms of gaming that may compete with Grand Casino Mille Lacs and Grand Casino
Hinckley.
REGULATION
General
The ownership, management, and operation of gaming facilities are subject
to extensive federal, state, provincial, tribal and/or local laws, regulations,
and ordinances, which are administered by the relevant regulatory agency or
agencies in each jurisdiction (the "Regulatory Authorities"). These laws,
regulations, and ordinances vary from jurisdiction to jurisdiction, but
generally concern the responsibility, financial stability and character of the
owners and managers of gaming operations as well as persons financially
interested or involved in gaming operations. Certain common basic provisions
that are currently applicable to the Company are described below.
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Neither the Company nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with the Company or any of its
subsidiaries, including officers, directors, employees, and security holders of
the Company or its subsidiaries. In the event a Regulatory Authority were to
find a security holder to be unsuitable, the Company may be sanctioned, and may
lose its licenses and approvals if the Company recognizes any rights in such
unsuitable person in connection with such securities. The Company may be
required to repurchase its securities at fair market value from security holders
that the Regulatory Authorities deem unsuitable. The Company's Articles of
Incorporation authorize the Company to redeem securities held by persons whose
status as a security holder, in the opinion of the Board of Directors,
jeopardizes gaming licenses or approvals of the Company or its subsidiaries.
Once obtained, licenses, permits, and approvals must be periodically
renewed and generally are not transferable. The Regulatory Authorities may at
any time revoke, suspend, condition, limit, or restrict a license for any cause
they deem reasonable. Fines for violations may be levied against the holder of a
license, and in certain jurisdictions, including Mississippi, gaming operation
revenues can be forfeited to the State under certain circumstances. No assurance
can be given that any licenses, permits, or approvals will be obtained by the
Company or its subsidiaries, or if obtained, will be renewed or not revoked in
the future. In addition, the rejection or termination of a license, permit, or
approval of the Company or any of its employees or security holders in any
jurisdiction may have adverse consequences in other jurisdictions. Certain
jurisdictions, including the state of Mississippi, require gaming operators
licensed therein to seek approval from the state of Mississippi before
conducting gaming in other jurisdictions. The Company and its subsidiaries may
be required to submit detailed financial and operating reports to Regulatory
Authorities.
The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on the Company.
Certain specific provisions to which the Company is currently subject are
described below.
Mississippi
The ownership and operation of casino facilities in Mississippi are subject
to extensive state and local regulation. Regulation is primarily effected
through the licensing and regulatory control of the Mississippi Gaming
Commission and the regulatory control of the Mississippi State Tax Commission,
(collectively, "The Mississippi Gaming Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Gaming Commission adopted regulations that are also similar in
many respects to the Nevada gaming regulations.
The laws, regulations, and supervisory procedures of Mississippi and the
Mississippi Gaming Commission seek to (i) prevent unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Gaming Authorities; (iv) prevent
cheating and fraudulent practices; (v) provide a source of state and local
revenues through taxation and licensing fees; and (vi) ensure that gaming
licensees, to the extent practicable, employ Mississippi residents. The
regulations are subject to amendment and interpretation by the Mississippi
Gaming Commission. Changes in Mississippi law or regulations or their
interpretation may limit or otherwise materially affect the types of gaming that
may be conducted and could have an adverse effect on the Company and the
Company's Mississippi gaming operations.
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The Mississippi Act provides for legalized dockside gaming in 14 counties
that either border the Mississippi Gulf Coast or the Mississippi River, but only
if the voters in such counties have not voted to prohibit gaming in that county.
As of March 18, 1997, dockside gaming was permissible in nine of the 14 eligible
counties in the state, and gaming operations had commenced in Adams, Coahoma,
Hancock, Harrison, Tunica, Warren, and Washington counties. Under Mississippi
law, gaming vessels must be located on the Mississippi River, or on navigable
waters in eligible counties along the Mississippi River, or in the waters of the
state of Mississippi lying south of the state in eligible counties along the
Mississippi Gulf Coast. At least one lawsuit is pending with respect to the
expansion of eligible gaming sites in the Mississippi Gulf Coast counties. The
law permits unlimited stakes gaming on permanently moored vessels on a 24-hour
basis and does not restrict the percentage of space that may be utilized for
gaming. There are currently no limitations on the number of gaming licenses that
may be issued in Mississippi.
The Company is required periodically to submit detailed financial and
operating reports to the Mississippi Gaming Commission and furnish any other
information that the Mississippi Gaming Commission may require. The Company and
any subsidiary of the Company that operates a casino in Mississippi (a "Gaming
Subsidiary"), are subject to the licensing and regulatory control of the
Mississippi Gaming Authorities. The Company is registered as a publicly traded
holding company under the Mississippi Act as part of the licensing process for
its Gaming Subsidiaries. If the Company is unable to continue to satisfy the
registration requirements of the Mississippi Act, the Company and its Gaming
Subsidiaries cannot own or operate gaming facilities in Mississippi.
Each Gaming Subsidiary must obtain a gaming license from the Mississippi
Gaming Commission to operate casinos in Mississippi. A gaming license is issued
by the Mississippi Gaming Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations and physical
inspection of the casino prior to opening. Gaming licenses are non-transferable,
are initially issued for a two-year period, and must be renewed periodically
thereafter. Grand Casino Gulfport's gaming license was renewed by the
Mississippi Gaming Commission on October 14, 1996. Grand Casino Biloxi's gaming
license was renewed by the Mississippi Gaming Commission on November 18, 1996.
Grand Casino Tunica's gaming license was renewed by the Mississippi Gaming
Commission on May 20, 1996. The gaming licenses for Grand Casinos Gulfport,
Grand Casino Biloxi, and Grand Casino Tunica, issued for two-year terms, must be
renewed during 1998. No person may become a shareholder of or receive any
percentage of profits from a gaming licensee subsidiary of a holding company
without first obtaining approvals from the Mississippi Gaming Commission. The
Company obtained such approvals in connection with the licensing of its Gaming
Subsidiaries.
Certain officers and employees of the Company and the officers and
directors and certain key directors and employees of the Company's Gaming
Subsidiaries must be found suitable by the Mississippi Gaming Commission. The
Company believes that it has obtained or applied for all necessary findings of
suitability with respect to such persons, although the Mississippi Gaming
Commission in its discretion may require additional persons to file applications
for findings of suitability. Employees associated with gaming must also obtain
work permits that are subject to immediate suspension under certain
circumstances. In addition, any person having a material relationship or
involvement with the Company may be required to be found suitable or licensed,
in which case those persons must pay the costs and fees associated with such
investigation. The Mississippi Gaming Commission may deny an application for a
license or finding of suitability for any cause that it deems reasonable.
Changes in licensed positions must be reported to the Mississippi Gaming
Commission. In addition to its authority to deny an application for a license or
finding of suitability, the Mississippi Gaming Commission has jurisdiction to
disapprove a change in corporate position. The Mississippi Gaming Commission has
the power to require any Gaming Subsidiary and the Company to suspend or dismiss
officers, directors and other key employees or sever relationships with other
persons who refuse to file appropriate applications or whom the authorities find
unsuitable to act in such capacities.
At any time, the Mississippi Gaming Commission has the power to investigate
and require the finding of suitability of any record or beneficial security
holder of the Company. Mississippi law requires any person who acquires more
than 5% of the Company's common stock of a publicly traded holding company to
report the acquisition to the Mississippi Gaming Commission, and such person may
be required to be found suitable.
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Also, any person who becomes a beneficial owner of more than 10% of the
Company's common stock of a publicly traded holding company, as reported to the
Securities and Exchange Commission (the "SEC"), must apply for a finding of
suitability by the Mississippi Gaming Commission and must pay the costs and fees
that the Mississippi Gaming Commission incurs in conducting the investigation.
The Mississippi Gaming Commission has generally exercised its discretion to
require a finding of suitability of any beneficial owner of more than 5% of a
public company's common stock. However, the Mississippi Gaming Commission has
adopted a policy that permits certain institutional investors to beneficially
own up to 10% of a public company's common stock without a finding of
suitability. If a shareholder who must be found suitable is a corporation,
partnership, or trust, it must submit detailed business and financial
information including a list of beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty (30) days after being ordered to do so by the Mississippi
Gaming Commission may be found unsuitable. Any person found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the securities of the
Company beyond such time as the Mississippi Gaming Commission prescribes, may be
guilty of a misdemeanor. The Company is subject to disciplinary action if, after
receiving notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its Gaming Subsidiaries, the Company: (i)
pays the unsuitable person any dividend or other distribution upon the voting
securities of the Company; (ii) recognizes the exercise, directly or indirectly,
or any voting rights conferred by securities held by the unsuitable person;
(iii) pays the unsuitable person any remuneration in any form for services
rendered or otherwise, except in certain limited and specific circumstances; or
(iv) fails to pursue all lawful efforts to require the unsuitable person to
divest himself of the securities, including, if necessary, the immediate
purchase of the securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Gaming
Commission upon request the identities of security holders, including holders of
any debt securities. In addition, the Mississippi Gaming Commission under the
Mississippi Act may, in its discretion, (i) require holders of debt securities
of such registered corporations to file applications; (ii) investigate such
holders, and (iii) require such holders to be found suitable to own such debt
securities. Although the Mississippi Gaming Commission generally does not
require the individual holders of obligations such as notes to be investigated
and found suitable, the Mississippi Gaming Commission retains the discretion to
do so for any reason, including but not limited to a default, or where the
holder of the debt instrument exercises a material influence over the gaming
operations of the entity in question. Any holder of debt securities required to
apply for a finding of suitability must pay all investigative fees and costs of
the Mississippi Gaming Commission in connection with such an investigation.
The Gaming Subsidiaries must maintain a current stock ledger in their
principal offices in Mississippi and the Company must maintain a current list of
stockholders in the principal offices of the Gaming Subsidiaries that must
reflect the record ownership of each outstanding share of any class of equity
security issued by the Company. The stockholder list may thereafter be
maintained by adding reports regarding the ownership of such securities that it
receives from the Company's transfer agent. The ledger and stockholder lists
must be available for inspection by the Mississippi Gaming Commission at any
time. If any securities of the Company are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Mississippi Gaming Commission. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
must also render maximum assistance in determining the identity of the
beneficial owner.
The Mississippi Act requires that certificates representing securities of a
publicly traded corporation that has a gaming subsidiary (as defined in the
Mississippi Act) bear a legend to the general effect that such securities are
subject to the Mississippi Act and the regulations of the Mississippi Gaming
Commission. The Company has received an exemption from this legend requirement
from the Mississippi Gaming Commission. The Mississippi Gaming Commission has
the power to impose additional restrictions on the holders of the Company's
securities at any time.
Substantially all loans, leases, sales of securities, and similar financing
transactions by a Gaming Subsidiary must be reported to or approved by the
Mississippi Gaming Commission. A Gaming Subsidiary
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may not make a public offering of its securities, but may pledge or mortgage
casino facilities, if it obtains the prior approval of the Mississippi Gaming
Commission. The Company may not issue securities without the prior approval of
the Mississippi Gaming Commission if any part of the proceeds of the offering is
to be used to finance the construction, acquisition or operation of gaming
facilities in Mississippi or to retire or extend obligations incurred for one or
more such purposes. Such approval, if given, does not constitute a
recommendation or approval of the investment merits of the securities subject to
the offering.
Changes in control of the Company through merger, consolidation,
acquisition of assets, management or consulting agreement, or any form of
takeover, and certain recapitalizations and stock repurchases by the Company,
cannot occur without the prior approval of the Mississippi Gaming Commission.
The Mississippi Gaming Commission may also require controlling stockholders,
officers, directors, and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities, and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Gaming Commission has established a regulatory scheme to ameliorate
the potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to (i) ensure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi Gaming
Commission before the company may make exceptional repurchases of voting
securities above the current market price of its common stock or before a
corporate acquisition opposed by management may be consummated. Mississippi's
gaming regulations will also require prior approval by the Mississippi Gaming
Commission if the Company adopts a plan of recapitalization proposed by its
Board of Directors opposing a tender offer made directly to the shareholders for
the purpose of acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Gaming Commission or a waiver of such
approval. The Mississippi Gaming Commission may require determinations that,
among other things, there are means for the Mississippi Gaming Commission to
have access to information concerning the out-of-state gaming operations of the
Company and its affiliates. The Mississippi Gaming Commission has approved the
Company's operations in Nevada, Minnesota and Louisiana but must approve the
Company's operations in any other jurisdiction. Affiliates, which are holding
companies of a licensee and/or entities that directly or through intermediaries
control or are controlled by a licensee or its holding company, would include
the Company's subsidiaries.
If the Mississippi Gaming Commission decides that a Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Gaming Commission could
limit, condition, suspend, or revoke the license of the Gaming Subsidiary. In
addition, a Gaming Subsidiary, the Company, and the persons involved could be
subject to substantial fines for each separate violation. Because of such a
violation, the Mississippi Gaming Commission could seek to appoint a supervisor
to operate the casino facilities. Limitation, conditioning, or suspension of any
gaming license or the appointment of a supervisor could (and revocation of any
gaming license would) materially adversely affect the Company's and the Gaming
Subsidiaries gaming operations.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the counties and
cities in which a Gaming Subsidiary's respective operations will be conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino, (iii) the number of table
games operated by the casino or (iv) the numbers of patrons entering the casino.
The license fee payable to the State of Mississippi is based upon "gaming
receipts" (generally defined as gross receipts less payouts to customers as
winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6% of
gaming receipts over
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$50,000 and less than $134,000 per month, and 8% of gaming receipts over
$134,000. The foregoing license fees are allowed as a credit against the
Company's Mississippi corporate income tax liability for the year paid.
In October of 1994, the Mississippi Gaming Commission adopted two
regulations that will affect the Company's Mississippi Gaming Subsidiaries.
Under the first regulation, as a condition to licensure or license renewal,
casino vessels on the Mississippi Gulf Coast that are not self-propelled must be
moored to withstand a Category 4 hurricane with 155-mile-per-hour winds and
15-foot tidal surge. The Company believes that both Grand Casino Gulfport and
Grand Casino Biloxi currently meet this requirement.
The second regulation requires as a condition of licensure or license
renewal that a gaming establishment's plan include a 500 car parking facility in
close proximity to the casino complex and infrastructure facilities that will
amount to at least 25% of the casino cost. Such facilities shall include any of
the following: a 250 room hotel of at least a two star rating as defined by the
current edition of the Mobil Travel Guide, a theme park, golf courses, marinas,
a tennis complex, entertainment facilities, or any other such facility as
approved by the Mississippi Gaming Commission as infrastructure. Parking
facilities, roads, sewage and water systems, or facilities normally provided by
cities and/or counties are excluded. The Mississippi Gaming Commission may in
its discretion reduce the number of rooms required, where it is shown to the
Commission's satisfaction that sufficient rooms are available to accommodate the
anticipated visitor load. The Company believes that Grand Casino Gulfport, Grand
Casino Biloxi and Grand Casino Tunica currently meet this requirement.
The sale of food or alcoholic beverages at the Company's Mississippi
properties is subject to licensing, control and regulation by the applicable
state and local authorities. The agencies involved have full power to limit,
condition, suspend or revoke any such license, and any such disciplinary action
could (and revocation would) have a material adverse effect upon the operations
of the affected casino or casinos. Certain officers and managers of the Company
and its subsidiaries must be investigated by the Alcoholic Beverage Control
Division of the State Tax Commission (the "ABC") in connection with their liquor
permits. Changes in licensed positions must be approved by the ABC.
Indian Gaming
The terms and conditions of management contracts and the operation of
casinos, and of all gaming on Indian land in the United States, are subject to
the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the
National Indian Gaming Commission ("NIGC"), and also are subject to the
provisions of statutes relating to contracts with Indian tribes, which are
administered by the Secretary of the Interior (the "Secretary") and the Bureau
of Indian Affairs (the "BIA"). The regulations and guidelines under which NIGC
will administer IGRA are evolving. IGRA and those regulations and guidelines are
subject to interpretation by the Secretary and NIGC and may be subject to
judicial and legislative clarification or amendment.
The Company may need to provide the BIA or NIGC with background information
on each of its directors and each shareholder who holds five percent or more of
the Company's stock ("5% Shareholders"), including a complete financial
statement, a description of such person's gaming experience, and a list of
jurisdictions in which such person holds gaming licenses. Background
investigations of key employees also may be required. The Company's Articles of
Incorporation contain provisions requiring directors and 5% shareholders to
provide such information.
IGRA requires NIGC to approve management contracts and certain collateral
agreements. Prior to NIGC assuming its management contract approval
responsibility, management contracts and other agreements were approved by the
BIA. All of the Company's current management contracts and collateral agreements
(except the Restated Mille Lacs Agreement and the Restated Hinckley Agreement)
were approved by the BIA; however, the Company expects that NIGC may review such
management contracts and collateral agreements for compliance with IGRA in the
future. The NIGC will not approve a management contract if a director or a 5%
Shareholder of the management company (i) is an elected member of the Indian
tribal government that owns the facility purchasing or leasing the games; (ii)
has been or is convicted of a felony gaming offense; (iii) has knowingly and
willfully provided materially false information to the NIGC or
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the tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto. In addition, the NIGC will not
approve a management contract if the management company or any of its agents
have attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has materially breached the
terms of the management contract or the tribe's gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs; and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of profits; provided that the NIGC
may approve up to a seven year term and a management fee not to exceed 40% of
profits if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify, the larger profit
allocation and longer term. While the Company believes that its management
contracts meet all requirements of IGRA, there is a risk that the NIGC may
reduce the term or the management fee provided for in any such contracts.
IGRA established three separate classes of tribal gaming -- Class I, Class
II, and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punchboards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.
IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the host state that specifically
authorizes the types of commercial gaming the tribe may offer (a "tribal-state
compact"). IGRA requires states to negotiate in good faith with tribes that seek
tribal-state compacts, and grants Indian tribes the right to seek a federal
court order to compel such negotiations. Many states have refused to enter into
such negotiations. Tribes in several states have sought federal court orders to
compel such negotiations under IGRA; however, the Supreme Court of the United
States held in 1996 that the Eleventh Amendment to the United States
Constitution immunizes states from suit by Indian tribes in federal court
without the state's consent. Because Indian tribes are currently unable to
compel states to negotiate tribal-state compacts, the Company may not be able to
develop and manage casinos in states that refuse to enter into tribal-state
compacts.
The State of Minnesota has entered into a tribal-state compact with the
Mille Lacs Band and the State of Louisiana has entered into tribal-state
compacts with the Coushatta Tribe and the Tunica-Biloxi Tribe. The Minnesota
compact does not provide for an expiration date. Each of the Louisiana compacts
expires in November 1999. Upon expiration, the Louisiana (Coushatta and
Avoyelles) compacts will automatically renew for additional terms unless either
party delivers to the other prior written notice of non-renewal. In the event
either of the Louisiana compacts is not renewed, legal gaming will not be
permitted at the applicable casino location. There can be no assurance that
either of the Louisiana compacts will be renewed.
In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the host state's law permits gaming by non-Indian
entities, which may change over time. Any such changes in state law may have a
material adverse effect on the casinos managed by the Company.
Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value ... in consideration of services for said Indians relative to
their lands ... unless such contract or agreement be executed and approved" by
the Secretary of the Interior (the
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"Secretary") or his or her designee. An agreement or contract for services
relative to Indian lands that fails to conform with the requirements of Section
81 will be void and unenforceable. All money or other thing of value paid to any
person by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture. The Company believes
that it has complied with the requirements of Section 81 with respect to its
management contracts for Grand Casino Mille Lacs, Grand Casino Hinckley, Grand
Casino Avoyelles and Grand Casino Coushatta.
The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit all merchandise offered for sale to the Indians or
found in his possession, and shall moreover be liable to a penalty of $500 ...."
No such licenses have been issued to the Company to date. The applicability of
ITLA to management contracts is unclear. The Company believes that ITLA is not
applicable to its management contracts, under which the Company provides
services rather than goods to Indian tribes. The Company further believes that
ITLA has been superseded by IGRA.
Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Therefore, persons engaged in gaming activities, including the
Company, are subject to the provisions of tribal ordinances and regulations on
gaming. These ordinances are subject to review by NIGC under certain standards
established by IGRA. The possession of valid licenses from the Mille Lacs Band
is an ongoing condition of the Mille Lacs Agreement and the Hinckley Management
Agreement; the possession of valid licenses from the Coushatta Tribe and Tunica-
Biloxi Tribe are conditions of the Coushatta Agreement and the Tunica-Biloxi
Agreement, respectively.
Nevada Regulatory Matters
The ownership and operation of casino gaming facilities, the operation of
inter-casino linked systems and the manufacture and distribution of gaming
devices are subject to (i) the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local
ordinances and regulations. Gaming operations in Nevada are subject to the
licensing and regulatory control of the Nevada Gaming Commission ("Nevada
Commission"), the Nevada State Gaming Control Board ("Nevada Board") and various
other county and city regulatory agencies, collectively referred to as the
"Nevada Gaming Authorities." The manufacture and distribution of gaming devices
are subject to the licensing and regulatory control of the Nevada Board and the
Nevada Commission.
The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) maintenance of effective
control over the manufacture, distribution and selling of gaming devices and
equipment; (v) the prevention of cheating and fraudulent practices; and (vi)
providing a source of state and local revenues through taxation and licensing
fees. Change in such laws, regulations and procedures could have an adverse
effect on the Company.
All gaming devices and cashless wagering systems that are manufactured,
sold, or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers, distributed or sold by
licensed distributors, and approved by the Nevada Commission. The approval
process includes rigorous testing by the Nevada Board, a field trial, and a
determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Gaming Authorities.
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Associated equipment must be administratively approved by the Chairman of the
Nevada Board before it is distributed for use in Nevada.
The Company is registered with the Nevada Commission as a publicly traded
corporation (a "Registered Corporation") and has been found suitable by the
Nevada Commission as a shareholder and controlling shareholder of Stratosphere
Corporation ("Stratosphere"), which is also a registered corporation.
Stratosphere has been found suitable to own the stock of Stratosphere Gaming
Corp. (the "Nevada Gaming Subsidiary"), which has been issued a nonrestricted
gaming license to conduct casino gaming operations at the Stratosphere Tower,
Hotel & Casino. The Nevada Gaming Subsidiary is a corporate licensee ("Corporate
Licensee") under the terms of the Nevada Act. Certain officers and directors of
the Company, including Lyle S. Berman, also have been found suitable by the
Nevada Commission. Mr. Berman has also been found suitable by the Nevada
Commission as a controlling shareholder of the Company. The Company,
Stratosphere, and the Nevada Gaming Subsidiary have obtained from the Nevada
Gaming Authorities the various registrations, approvals, permits, findings of
suitability, and licenses required in order to engage in gaming activities in
Nevada.
As Registered Corporations, the Company and Stratosphere are required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
require. In addition, no person may become a stockholder of, or receive any
percentage of profits from, the Nevada Gaming Subsidiary without first obtaining
licenses and approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or a
Corporate Licensee in order to determine whether such individual is suitable or
should be licensed as a business associate of a Corporate Licensee. Officers,
directors, and certain key employees of the Nevada Gaming Subsidiary may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing or a finding of
suitability for any cause that they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Stratosphere, or the Nevada Gaming Subsidiary,
such companies would have to sever all relationships with such person. In
addition, the Nevada Commission may require the Company, Stratosphere, or the
Nevada Gaming Subsidiary to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and Stratosphere are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities, and similar financing transactions by the Nevada
Gaming Subsidiary are also required to be reported to or approved by the Nevada
Commission.
If it were determined that the Nevada Act was violated by the Company,
Stratosphere, or the Nevada Gaming Subsidiary, the companies and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Limitation,
conditioning, or suspension of the Company's or Stratosphere's registration and
finding of suitability could (and revocation would) materially adversely affect
the Company.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his or her suitability as a beneficial
holder of the Registered Corporation's voting securities determined if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada.
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The applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, that
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies, or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action that the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities that
are not deemed to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the voting securities
of the Company beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company will be subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with them, it (i) pays that
person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated,
and be found suitable to own the debt security of a Registered Corporation if
the Nevada Commission has reason to believe that such ownership would otherwise
be consistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company and Stratosphere are required to maintain a current stock
ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any
time. If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Nevada Gaming Authorities. A failure to make such disclosure may be
grounds for finding the record holder unsuitable. The Company is also required
to render maximum assistance in determining the identity of the beneficial
owner. The Company and Stratosphere may also be required to disclose to the
Nevada Commission,
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upon its request, the identities of any of its security holders. Although the
Nevada Commission has the power to require that the stock certificates of the
Company or Stratosphere bear a legend indicating that the securities are subject
to the Nevada Act, it has not yet done so.
Neither the Company nor Stratosphere may make a public offering of its
securities without the prior approval of the Nevada Commission if the securities
or proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. Approval of a public offering does not constitute a finding,
recommendation, or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he or she obtains control, may not
occur without the prior approval of the Nevada Commission. Entities seeking to
acquire control of a Registered Corporation must satisfy the Nevada Board and
Nevada Commission in a variety of stringent standards prior to assuming control
of such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors, and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to (i) ensure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the state of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease by the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
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Nongaming Regulations
The Company and its subsidiaries are subject to certain federal, state and
local, safety and health laws, regulations pertaining to operation of barges and
other marine laws, and regulations and ordinances that apply to non-gaming
businesses generally, such as the Clean Air Act, Clean Water Act, Occupational
Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. The Company believes
that it is currently in material compliance with such regulations. The coverage
and attendant compliance costs associated with such laws, regulations and
ordinances may result in future additional cost to the Company's operations. In
addition, in order for the barges on which Grand Casinos Gulfport, Tunica and
Biloxi are located to have United States flag registry, the Company must
maintain "United States citizenship" as defined in the Shipping Act of 1916, as
amended, and the Merchant Marine Act of 1936, as amended. A corporation
operating any vessel subject to such Acts, such as the Company, is not
considered a United States citizen unless United States citizens own a
percentage of its outstanding capital stock specified in such Acts and/or U.S.
Coast Guard requirements. If foreign citizens acquire in excess of the
applicable percentage of the common stock of the Company, the Company's Articles
of Incorporation would permit the Company to redeem such Common Stock in order
to continue to operate the Mississippi Casinos. If the Company did not redeem
such Common Stock, it would be required to restructure the ownership of the
barges to comply with applicable U.S. Coast Guard requirements.
EMPLOYEES
As of December 29, 1996, the Company had approximately 7,300 employees. No
employee of the Company currently is represented by a labor union and management
considers its employee relations to be good. In addition, the Company has
provided training for the approximately 5,700 employees of the tribes which own
Grand Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles and Grand
Casino Coushatta. The Company believes that it will be able to attract and
retain a sufficient number of qualified employees to operate all of the casinos
that it may own or manage in the future. Mississippi law requires that the
Company give a hiring preference to Mississippi residents with respect to the
Mississippi Casinos.
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CERTAIN FACTORS
In addition factors discussed elsewhere in this Annual Report Form 10-K,
the following are important factors that could cause actual results or events to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company.
RISKS OF LEVERAGED FINANCIAL POSITION
ABILITY TO SERVICE DEBT
The Company has substantial annual debt service along with other operating
expenses. As of December 29, 1996, (excluding Stratosphere Corporation) the
Company had total indebtedness of approximately $511.7 million, which includes
the Company's $450 million 10 1/8% First Mortgage Notes due 2003 (the "First
Mortgage Notes") and approximately $61.7 million of other senior indebtedness,
including capitalized lease obligations. The Company may have additional
contingent obligations with respect to Stratosphere Corporation. The First
Mortgage Notes are senior obligations of the Company and rank pari passu in
right of payment with all other senior indebtedness. The First Mortgage Notes
and certain other permitted senior indebtedness, including a senior credit
facility, are secured on an equal and ratable basis (with certain exceptions) by
substantially all of the assets of the Company and the stock of certain of the
Company's wholly owned subsidiaries. The ability of the Company to make interest
payments on the First Mortgage Notes and other indebtedness will depend on its
ability to generate sufficient cash flows from operations. There can be no
assurance that the Company will be able to generate sufficient cash flows from
operations to make interest payments on the First Mortgage Notes and such other
indebtedness.
RISK OF INCURRENCE OF ADDITIONAL DEBT
The indenture pursuant to which the First Mortgage Notes were issued (the "
First Mortgage Notes Indenture") permits, under certain circumstances,
additional first mortgage indebtedness which would be collateralized and rank
pari passu with the First Mortgage Notes. Such incurrence will also be subject
to certain other conditions. In addition, the First Mortgage Notes Indenture
permits the Company and its subsidiaries, under certain circumstances, to incur
additional unsecured indebtedness, or indebtedness secured by assets that do not
constitute collateral for the First Mortgage Notes or other senior indebtedness,
such as future gaming facilities owned or operated by the Company. The ability
of the Company to satisfy its obligations relating to any additional
indebtedness will depend on its operating cash flow. Any inability of the
Company to satisfy such debt obligations could adversely affect the Company's
ability to conduct its operations or finance its capital needs.
STRATOSPHERE COMMITMENTS
The Company has made certain commitments relating to the proposed
reorganization of Stratosphere Corporation. These commitments, which are subject
to a number of contingencies, would obligate the Company to invest up to an
additional $75 million in Stratosphere Corporation and the Company would also
provide a completion guarantee in the form of subordinated debt of up to $25
million in cost overruns on completion of additional hotel rooms. Among the
conditions to be satisfied prior to the effectiveness of the Company's
obligations under the proposed reorganization is Stratosphere's consolidated
cash flows (as defined therein) for the months between October 1, 1996, and June
30, 1997, averaging not less than $2,267,000 per month. The average for the five
months ended February 23, 1997 was $1,615,736. There can be no assurance that
all of the conditions relating to the Company's commitments will be satisfied or
that the proposed reorganization will be approved by the Bankruptcy Court.
Further, if the Company does make these additional investments in Stratosphere
Corporation, there can be no assurance that the results of operations of
Stratosphere Corporation will meet or exceed the Company's expectations.
GAMING INDUSTRY IS HIGHLY COMPETITIVE
The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; riverboat and dockside gaming; casino gaming on
Indian land; state-sponsored lotteries and video poker in
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restaurants, bars and hotels; parimutuel betting on horse racing, dog racing and
jai-alai; sports bookmaking; and card rooms. The casinos owned, managed and
being developed by the Company compete, and will in the future compete, with all
these forms of gaming, and will compete with any new forms of gaming that may be
legalized in additional jurisdictions, as well as with other types of
entertainment. Several large, well capitalized and experienced gaming operators
have announced plans to enter the already highly competitive Mississippi Gulf
Coast market. The Tunica Mississippi gaming market is also highly competitive.
The Company also competes with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Some of the competitors of
the Company have more personnel and greater financial and other resources than
the Company. Such competition in the gaming industry could adversely affect the
Company's ability to attract customers and thus, adversely affect its operating
results. In addition, further expansion of gaming into new jurisdictions could
also adversely affect the Company's business by diverting its customers to
competitors in such jurisdictions.
HIGHLY REGULATED INDUSTRY
The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulations, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction (the "Regulatory Authorities"). These laws, regulations and
ordinances vary from jurisdiction to jurisdiction, but generally concern the
responsibility, financial stability and character of the owners and managers of
gaming operations as well as persons financially interested or involved in
gaming operations.
MANAGEMENT CONTRACTS OF LIMITED DURATION
The Company cannot have an ownership interest in any casino it manages for
Indian tribes. The management contracts for the various Indian-owned casinos
that the Company manages for Indian tribes generally have a term of seven years.
The management contracts for Grand Casino Mille Lacs and for Grand Casino
Hinckley expire April 2, 1998 and May 15, 1999, respectively, and the management
contracts for Grand Casino Avoyelles and Grand Casino Coushatta expire June 3,
2001 and January 16, 2002, respectively. There can be no assurance that any of
these agreements or any other management contract will he renewed upon
expiration or approved by the National Indian Gaming Commission ("NIGC") upon
any such review. The failure to renew the Company's management contracts would
result in the loss of revenues to the Company derived from such contracts, which
would have an adverse effect on the Company's results of operations. The
Coushatta Tribe and the Tunica-Biloxi Tribe each entered into tribal-state
compacts with the State of Louisiana on September 29, 1992. These compacts were
approved in November, 1992 by the Secretary of the Interior. Each compact
expires in November, 1999 and will automatically renew for an additional seven
year terms unless either the tribe or the State of Louisiana delivers to the
other prior written notice of non-renewal. The Company's management agreements
with the Tunica-Biloxi Tribe and the Coushatta Tribe expire after November 1999.
In the event the compacts are not renewed, legal gaming will not be permitted at
Grand Casino Avoyelles or Grand Casino Coushatta. There can be no assurance that
these compacts will be renewed on terms and conditions acceptable to either of
the tribes.
MANAGEMENT CONTRACTS SUBJECT TO GOVERNMENTAL MODIFICATION
NIGC has the power to require modifications to Indian management contracts
under certain circumstances or to void such contracts or ancillary agreements
including loan agreements if the management company fails to obtain requisite
approvals or to comply with applicable laws and regulations. While the Company
believes that its management contracts meet the requirements of the Indian
Gaming Regulatory Act (the "IGRA"), NIGC has the right to review each contract
and has the authority to reduce the term of a management contract or the
management fee or otherwise require modification of the contract, which could
have an adverse effect on the Company. In addition, the Company has made loans
to Indian tribes in excess of the loan ceilings set forth in each of the Indian
management contracts. Under certain circumstances, these loans may not be
enforceable by the Company.
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LIMITED RECOURSE AGAINST TRIBAL ASSETS
The Company has made, and will make, substantial loans to tribes for the
construction, development, equipment and operations of casinos managed by the
Company. The Company's only recourse for collection of indebtedness from a tribe
or money damages for breach or wrongful termination of a management contract is
from revenues, if any, from casino operations. The Company has subordinated, and
may in the future subordinate, the repayment of the Company's loans to a tribe
and other distributions due to the Company from a tribe in favor of other
obligations of the tribe related to the casino operations. Accordingly, in the
event of a default by a tribe, the Company's loans and other claims against the
tribe will not be repaid until such default has been cured or the tribe's senior
casino-related creditors have been repaid in full.
GRAND CASINO GULFPORT -- POTENTIAL EARLY TERMINATION OF LEASE
On May 21, 1992, the Company entered into a lease (the "Port Lease") with
the Mississippi State Port Authority (the "Authority") for the Grand Casino
Gulfport mooring site and adjoining land for five years with renewal options
totaling 45 years. The Authority has the option to cancel the Port Lease at any
time upon 12 months' written notice if the Authority expands its own facilities
to handle expanded shipping and related commerce activities. The Authority's
liability to Grand Casino Gulfport upon such cancellation is limited to the
depreciated value of the leased property (which does not include the casino).
Although the Company does not believe that the Authority will exercise its
option to cancel the Port Lease, any such cancellation would require the Company
to find substitute property suitable for mooring Grand Casino Gulfport, which,
if not then available on terms acceptable to the Company, would cause Grand
Casino Gulfport to cease operations. In addition, all mooring sites would need
to be approved by the Mississippi Gaming Commission.
SEVERE WEATHER CONDITIONS ON THE GULF COAST; RISK OF FLOODING AT GRAND CASINO
TUNICA
Grand Casino Gulfport and Grand Casino Biloxi are constructed on barges
located adjacent to Gulf-front property and are subject to the risk of severe
weather, including high winds, water action and hurricanes. In the event of
severe weather, the Company has plans to securely moor the barges to their
mooring sites. The Company also maintains insurance policies that contain
casualty cost and certain business interruption coverage for casualties
resulting from severe weather, including hurricanes. However, a hurricane or
other severe weather could cause significant physical damage to Grand Casinos
Gulfport and Biloxi and, for a period of time, reduce the number of people
traveling to the Gulf Coast, either of which could have a material adverse
effect on the Company.
Certain improvements at Grand Casino Tunica, including one of its hotels
and certain of the parking lots adjacent to the Grand Casino Tunica are located
on the river side of a levee. The parking lots are graded to approximately the
25-year flood plain, which means that, statistically, such grade level floods at
least once during every 25-year period. Flooding may disrupt the casino
operations and other amenities at Grand Casino Tunica and any such disruptions
could have a material adverse effect on the Company.
PENDING LITIGATION
The Company and certain of its directors and officers are defendants in
several lawsuits related to the Company's investment in Stratosphere
Corporation. The Company has not maintained directors' and officers' insurance.
Under Minnesota corporate law, the Company is required, subject to certain
limitations and exclusions, to indemnify its officers and directors.
Accordingly, the Company will bear the cost of defending itself and its
directors and officers in these matters and may be obligated to indemnify its
officers and directors for any settlement or judgment of such matters. Although
these lawsuits are in their early stages and the Company believes they are
without merit and plans to vigorously defend itself, there can be no assurance
that the costs of defense and any indemnifiable settlement or judgment will not
have an adverse effect on the Company.
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ITEM 2. PROPERTIES
The Company leases approximately 30,000 square feet of office space in
Minneapolis, Minnesota for its former corporate offices at an annual rent of
approximately $187,000 plus a pro rata share of building operating costs. The
lease terminates on September 30, 1998. The Company subleases approximately 60
percent of the office space to New Horizon Enterprises, Inc. and approximately
40 percent to Game Financial Corporation. The subleases provide that each
subtenant is required to pay its proportionate share of amounts due under the
lease.
The Company has entered into a lease agreement dated February 1, 1996 for
its current corporate office space of approximately 65,000 square feet with a
lease term of fifteen years. The lease commenced on October 14, 1996 and the
annual base rent is $768,300 plus building operating costs.
Mississippi Gulfcoast
Gulfport
On May 21, 1992, the Company entered into a lease (as amended the "Port
Lease") with the Mississippi State Port Authority (the "Authority") for the
Grand Casino Gulfport mooring site and approximately 14 acres of adjoining land
(the Port Site ). The Company assigned the Port Lease to Grand Casino Gulfport.
The initial term of the Port Lease is five years subject to renewal for three
additional five-year terms and three additional ten-year terms. The Company
constructed a 400-room hotel on the Port Site which opened in October 1995. The
Company is obligated to complete construction of an Exhibit Hall/Convention
Support Complex by May 1, 1998. The annual base rent under the Port Lease ranges
from $800,000 to $1,200,000 throughout the lease term. The Port Lease also
requires Grand Casino Gulfport to pay the Authority 5% of Grand Casino
Gulfport's gross gaming revenues, as defined in the Mississippi Gaming Control
Act, in excess of $25.0 million each year, plus 3% of all nongaming revenues.
Grand Casino Gulfport granted a leasehold deed of trust on the Port Lease to the
trustee for the benefit of the holders of the $450 million principal amount of
debt securities that were issued by the Company in November 1995 (the "First
Mortgage Notes") as security for the First Mortgage Notes.
The Port Lease requires Grand Casino Gulfport to develop and maintain barge
mooring facilities, parking and associated facilities on the leased property.
These improvements and the Grand Casino Gulfport hotel (not including the
casino) will become the property of the Authority upon lease termination. Grand
Casino Gulfport replaced and relocated commercial piers located within the
leased area, and constructed on Authority land a road to the relocated
commercial piers, parking facilities, and a harbormaster's office. The Authority
may expand the port facilities as it deems reasonably necessary to accommodate
the gaming operations of Grand Casino Gulfport and its competitors operating in
the State Port, with the cost to be borne by Grand Casino Gulfport and any of
its competitors operating in the State Port on a pro rata basis.
Grand Casino Gulfport owns, and is acquiring additional land across U.S.
Highway 90. A portion of this land initially will be used for casino parking,
and in the future may be used by Grand Casino Gulfport for casino-related
development, which may include hotels, entertainment or convention facilities or
office space.
Biloxi
On June 23, 1992, Grand Casino Biloxi entered into a 99-year ground lease
(the "Biloxi Lease") of the Grand Casino Biloxi mooring site and approximately
17 acres of adjoining land (the "Biloxi Property"). The leased property includes
1,200 lineal feet of Gulf frontage, eleven acres adjacent to the frontage and
six acres located directly across U.S. Highway 90 from the frontage property.
The Company constructed a 500-room hotel on the Biloxi Property which opened in
April 1995. The Biloxi Lease as amended on November 9, 1992 provides for base
rent of $2.5 million per year, which will be increased in proportion to
increases in the consumer price index every ten years. In addition, Grand Casino
Biloxi has agreed to pay the lessor 5% of Grand Casino Biloxi's gross gaming
revenues, as defined in the Mississippi Gaming Control Act, in excess of $50.0
million per year (the "Percentage Rent"), plus 10% of the net profits per year
from any activities on the
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leased premises that are not related to gaming, hotel, parking, dining or liquor
operations. Grand Casino Biloxi granted a leasehold deed of trust on the Biloxi
Lease to the trustee for the benefit of the holders of the First Mortgage Notes
as security for the First Mortgage Notes. Grand Casino Biloxi has entered into a
15-year lease (the "Submerged Land Lease") with the State of Mississippi for the
submerged land adjacent to Grand Casino Biloxi. Grand Casino Biloxi has also
granted a leasehold deed of trust on the submerged land to the trustee for the
benefit of the holders of the First Mortgage Notes as security for the First
Mortgage Notes. The Company has the option to extend the Submerged Land Lease
for five years after the expiration of the initial 15-year term. The Submerged
Land Lease provides for rent of $405,000 during the first year of its term and
annual increases of $73,750, subject to adjustment as provided for by
Mississippi law.
Grand Casino Biloxi may terminate the Biloxi Lease at any time after
destruction of the improvements on the leased premises, by paying one-half of
the annual base rent in effect at the time of termination.
Tunica County
In connection with the development of Grand Casino Tunica, the Company owns
approximately 2,000 acres located in northernmost Tunica County, Mississippi.
Buck Lake, on which the casino is moored, is an approximately 60 acre oxbow lake
formed from the Mississippi River.
The Company has also leased from the Board of Levee Commissioners for the
Yazoo-Mississippi Delta (the "Levee Board") approximately 55 acres between Buck
Lake and the mainline Mississippi river levee on which the Company has
constructed its port facilities. In addition, the Levee Board has agreed,
pursuant to the lease with the Company, that it will not lease any land that it
owns along Buck Lake to others in competition with the Company. Because of its
ownership of land surrounding Buck Lake and its lease with the Levee Board, the
Company believes it has the exclusive right to develop casino facilities on Buck
Lake. The Company pays rent of $2.58 million per year, increasing each year in
proportion to the increases in the Consumer Price Index. The term of the lease
is, initially, for six years, with nine six-year renewal options, for a total of
60 years. The Company has the right, during the initial term only and at no
cost, to terminate the lease at any time after June 30, 1996. Thereafter, once
the Company has exercised an option to renew for a six-year term, the Company
will have no termination rights during such renewal term. Beginning rent in any
renewal term shall be the greater of (i) the rent based on increases in the
Consumer Price Index during the prior term, or (ii) 130% of the beginning rent
for the prior six-year term. In addition, the Levee Board agreed in the lease to
grant to the Company necessary crossing permits, to cooperate with the Company
in obtaining any additional development approvals, and not to lease other land
on Buck Lake to others for use in competition with the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company beneficially owns approximately 42% of Stratosphere Corporation
("Stratosphere"). Stratosphere and Stratosphere Gaming Corp. ("SGC"), a
wholly-owned subsidiary of Stratosphere, filed voluntary petitions on January
27, 1997 for Chapter 11 reorganization pursuant to the United States Bankruptcy
Code. Stratosphere and SGC are acting as debtors-in-possession on behalf of
their respective bankruptcy estates and are authorized as such to operate their
business subject to bankruptcy court supervision.
STRATOSPHERE SHAREHOLDERS LITIGATION -- FEDERAL COURT
Michael Ceasar, et al v. Stratosphere Corporation, et al 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
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<PAGE> 26
July 22, 1996. That complaint alleges that the defendants made
misrepresentations and engaged in other wrongdoing.
In August, September and October 1996, eight additional complaints were
filed purportedly on behalf of Stratosphere shareholders 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. On January 15, 1997,
the Court ordered these eight additional lawsuits to be consolidated with the
Ceaser Lawsuit under the caption "In re Stratosphere Corporation Securities
Litigation."
On February 14, 1997, plaintiffs filed a Consolidated and Amended Class
Action Complaint naming as defendants the Company, Bob Stupak, Lyle A. Berman,
Stanley M. Taube, David R. Wirshing, Thomas A. Lettero, Andrew S. Blumen, Thomas
G. Ben, Bob Stupak Enterprises, BT Securities Corporation and Montgomery
Securities, Inc. The Consolidated and Amended Class Action Complaint alleges
causes of action under the federal securities laws and Nevada law for purported
misrepresentations during the period between December 19, 1995 and July 26,
1996. On February 25, 1997, the Company, against individual defendants, filed a
Motion to dismiss the Complaint. The Court has scheduled a hearing on that
Motion on April 25, 1997. Discovery and other proceedings have been stayed
pending the Court's ruling on that Motion.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
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.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In re Grand Casinos, Inc. Securities Litigation was 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). In re
Grand Casinos, Inc. Securities Litigation constitutes a consolidation of two
previously filed complaints initiated by individual shareholders. The
consolidated complaint purports to seek relief on behalf of two classes of
plaintiffs. The first class consists of individuals who purchased common stock
of the Company during the period from December 19, 1995 through July 22, 1996.
The second class consists of individuals who purchased common stock of the
Company during the period from February 14, 1996 through February 22, 1996. The
complaint alleges that the defendants violated Federal securities laws by making
misrepresentations and engaging in proscribed trading activity. The defendants
have filed a motion to dismiss the lawsuit, which motion is currently pending.
Discovery and other proceedings have been stayed pending the Court's ruling on
that Motion.
DERIVATIVE LITIGATION
On February 6, 1997, certain current and former directors and officers of
the Company were served with a complaint in the District Court for Hennepin
County, Minnesota (Lloyd Drilling et al. v. Lyle Berman, et al.). The complaint
purports to seek relief on behalf of the Company against Lyle Berman, Patrick
Cruzen, Timothy Cope, Stanley Taube, David Anderson, Morris Goldfarb, Ronald
Kramer, and David Rogers. The complaint alleges the defendants breached their
respective fiduciary duties and, in the case of defendants Berman, Cruzen, Cope
and Taube, were also unjustly enriched as a result of certain trading activity.
The
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<PAGE> 27
Company has, pursuant to the Minnesota Business Corporation Act, approved a
special committee to investigate whether it is in the best interests of the
Company to bring such an action against the Defendants.
COHEN LITIGATION -- FEDERAL ACTION
On April 3, 1994, a complaint was filed in the United States District Court
for the District of Nevada (Harvey Cohen, et al. v. Stratosphere Corporation, et
al.) against Grand Casinos Resorts, Inc. ("Resorts"), a wholly owned subsidiary
of the Company, Mr. Stupak, Lyle Berman, Stratosphere Corporation
("Stratosphere") and others. By Order filed April 10, 1995, the district court
dismissed the federal securities law claims with prejudice and dismissed the
common law claims without prejudice. On May 3, 1995, the plaintiffs filed a
notice of appeal of the district court Order's with the United States Court of
Appeals for the Ninth Circuit. The complaint purported to seek relief in
connection with the Stratosphere initial public offering (the "IPO"), each
consisting of one share of Common Stock and one warrant, on behalf of two
classes of plaintiffs for unspecified monetary damages. The complaint alleged
that the defendants made misrepresentations, breached a contract and engaged in
other wrongdoing in connection with the IPO, so that the defendants and their
affiliates, associates and friends could, while avoiding all economic risk,
purchase IPO units in the IPO rather than one plaintiff class, and that this
alleged conduct caused a second dealer class to lose out on other profits it
allegedly deserved. The Company believes that the claims made in the complaint
are without merit and have asked the Court of Appeals to affirm the district
court's dismissal order.
COHEN LITIGATION -- STATE ACTION
On or about August 29, 1995, a complaint was filed in the District Court,
Clark County, Nevada (Harvey J. Cohen, et al. vs. Stratosphere Corporation, et
al.) against Resorts, Mr. Stupak, Lyle Berman, Stratosphere and others. The
complaint purports to represent a class of plaintiffs and seeks relief for
misrepresentation, breach of contract and tortious interference with contract
regarding the IPO. The Company believes that the claims made in the complaint
are without merit and plans to vigorously defend against such claims.
SLOT MACHINE LITIGATION
The Company and more than 40 other major casino operators, as well as
various manufacturers and distributors of video poker and electronic slot
machines, have been named as defendants in an action originally filed in the
United States District Court for the Middle District of Florida, Orlando
Division, entitled William H. Poulos, On Behalf of Himself and All Others
Similarly Situated v. Caesars World, Inc., et al, Case No. 39-478-CIV-ORL-22,
filed on April 26, 1994. This action was consolidated with another subsequently
filed action in that court entitled William Ahearn, On Behalf of Himself and All
Others Similarly Situated v. Caesars World, Inc. et al., Case No.
94-532-CIV-ORL-22 (the "Actions" or collectively, the "Poulos/Ahearn Case").
Both Actions were brought under RICO and state common law and seek compensatory
and punitive damages in excess of $1 billion from the defendants. The complaints
allege that the defendants took part in a scheme intended to induce people to
play video poker and electronic slot machines based on false beliefs concerning
how those machines actually operate as well as the extent to which there is
actually an opportunity to win on any given play. The precise nature of the
Company's alleged role in the alleged fraud and conspiracy to defraud is not
discernible from the complaints.
On December 9, 1994, the Florida Court ordered that the consolidated cases
be transferred to the United States District Court for the District of Nevada.
That transfer has occurred and the Nevada Court has assumed control of the
cases. The new case numbers are CV-S-94-1126-LDG(RJJ) and CV-S-94-1137-LDG(RJJ).
Numerous defendants (including the Company) have moved to dismiss the complaint
for failure to state a claim. In an order entered April 17, 1996, United States
District Court Judge Lloyd D. George granted the defendants' motions and
dismissed the complaint without prejudice. By order dated August 17, 1996, the
Poulos/Ahearn case was transferred to Judge David Ezra and assigned the new Case
No. CV-S-94-1126-DAE(RJJ)-BASE FILE. By order entered December 30, 1994, the
Court stayed all discovery. The plaintiffs filed a motion on July 12, 1996,
seeking to lift the stay of discovery and seeking leave to add additional
defendants.
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<PAGE> 28
On September 26, 1995, an action entitled Larry Schreier, On Behalf of
Himself and All Others Similarly Situated v. Caesars World, Inc., et al, Case
No. CV-S-95-00923-DWH(RJJ) (the "Schreier Case") was commenced in the United
States District Court for the District of Nevada. The case was thereafter
transferred to Judge Lloyd D. George and assigned the Case No.
CV-S-95-00923-LDG(RJJ). The Schreier Case is identical to the Poulos/Ahearn Case
in all material respects, except that the named plaintiff purports to represent
a smaller and more precisely defined class of persons than the plaintiffs. The
defendants (including the Company) have moved to dismiss the complaint on the
same grounds as in the previously described Poulos/Ahearn Case, as well as on
the ground that this case was filed for an improper purpose, an attempt to
circumvent prior rulings of the Court in the Poulos/Ahearn Case. On August 15,
1996, District Judge Lloyd D. George granted the motion to dismiss, without
prejudice. An amended complaint containing the same principal allegations was
filed on September 30, 1996. The defendants (including the Company) have filed
motions to dismiss the amended complaint for failure to state a claim and on
other grounds. The Plaintiff has opposed these motions.
On December 13, 1996, a status conference was held in the Poulos/Ahearn
Case before Judge Ezra, who entered the following orders:
A. The Poulos/Ahearn Case and Schreier Case will be consolidated, as shall
the action entitled William H. Poulos, On Behalf of Himself and All Others
Similarly Situated vs. Ambassador Cruise Lines, Inc., et al., Case No.
CV-S-95-936 LDG(RLH) (the "Cruise Ship Case"). The allegations in the Cruise
Ship Case are nearly identical to those made in the Poulos/Ahearn Case and
Schreier Case, and are made against a group of defendants consisting of several
manufacturers and distributors of gaming devices, as well as numerous cruise
ship operators and companies which operate cruise ship casinos.)
B. The plaintiffs shall by February 14, 1997, file one consolidated
complaint in the three cases, and this has been done.
C. All pending motions in the three cases are deemed withdrawn without
prejudice.
D. The Defendants shall appoint a steering committee.
E. The Defendants shall, to the extent possible, file consolidated
pleadings in response to the consolidated complaint.
F. By February 14, 1997, the parties shall file a case management order. A
proposed case management order was filed on February 21, 1997.
PAYNE LITIGATION
On March 27, 1996, a purported consumer class action entitled Payne, et.
al. v. Aztar Corporation, et. al., Case No. 00698592 (the "Payne Case"), was
filed in the state Superior Court in San Diego, California naming as defendants
the Company and several other entities whom plaintiffs allege are casino owners
or operators. Plaintiffs purport to bring the action on behalf of a class
consisting of all persons in California who have played video poker machines
owned or operated by defendants. Plaintiffs allege that defendants have engaged
in a course of fraudulent and misleading conduct intended to induce plaintiffs
to play video poker machines based on a false belief conveyed by defendants
concerning how such machines operate and that such conduct violates various
provisions of the California Business and Professions Code and the so-called
Consumer Legal Remedies Act. Plaintiffs seek unspecified compensatory and
punitive damages, disgorgement and other equitable remedies and attorney's fees
and other costs. Defendants removed the action to the United States District
Court for the Southern District of California in San Diego, Case No.
96-905-J(CGA), and filed various motions to dismiss and or transfer the action
to the United States District Court for the District of Nevada where the
Poulos/Ahearn Case and the Schreier Case are pending. Plaintiff's attorneys in
the Payne Case include attorneys who represent the plaintiffs in the
Poulos/Ahearn Case and the Schreier Case. Plaintiffs filed a motion to have the
case remanded to state court contending that the federal court lacks subject
matter jurisdiction over the case. That motion was granted and the case has been
returned to state court. The Company and the other defendants have filed motions
in the state court challenging the state court's jurisdiction over the case and
seeking its dismissal. A motion to stay the entire case until the related
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cases in Nevada are resolved has been filed. Plaintiffs have served defendants
with written discovery requests; however, a stipulation is in effect to stay
discovery until the motion to stay the entire case is heard. There is currently
no trial date. In March 1997, the state court ordered the plaintiffs to file an
amended complaint stating the specific manner by which the plaintiffs claim the
defendants violated California law.
HYLAND LITIGATION
An amended complaint in a purported class action lawsuit was filed on
August 23, 1995 in the United States District Court for the District of New
Jersey, Camden Division, against 79 named defendants, including the Company and
other casino operators. The complaint, filed on behalf of Thomas Hyland and
other persons similarly situated, alleges that the defendants have engaged in a
course of conduct involving conspiracy among casinos in the United States to
refuse to deal to skilled blackjack players who are capable of winning money at
the casinos blackjack tables in violation of various statutory provisions
including the Sherman Act, the Fair Credit Reporting Act and various state
antitrust and consumer fraud laws. The complaint also asserts pendant causes of
action under the tort and contract laws of states where it is alleged that
refusal to deal to skilled players is illegal. The complaint seeks recovery of
any compensatory damages determined to have been sustained as a result of the
alleged violations as well as exemplary damages, including treble damages for
alleged violations of the Sherman Act. The Company has submitted a motion to
dismiss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
LYLE BERMAN, age 55, has been the Chief Executive Officer and the Chairman
of the Board of Directors of the Company since October 1991. Mr. Berman is also
a director of G-III Apparel Group Ltd ("G-III"), Innovative Gaming Corporation
of America ("IGCA"), New Horizon Kids Quest, Inc. ("Kids Quest"), Stratosphere
Corporation ("Stratosphere") and Wilsons The Leather Experts Inc. ("Wilsons").
Mr. Berman is Chairman of the Board and Chief Executive Officer of Rainforest
Cafe, Inc. ("Rainforest"). Mr. Berman has been Chairman of the Board of
Stratosphere since July 1996. From July 1994 through October 1996, Mr. Berman
served as Stratosphere's Chief Executive Officer. Stratosphere filed for
reorganization under Chapter 11 of the Bankruptcy Code on January 27, 1997.
THOMAS J. BROSIG, age 47, has been President and a director of the Company
since September, 1996. Mr. Brosig was Executive Vice President of the Company
from August 1994 through September, 1996 and President of the Company from May
1993 through August 1994. Mr. Brosig also served as the Company's Chief
Operating Officer from October 1991 to May 1993 and as the Company's Chief
Financial Officer from its inception to January 1992. Mr. Brosig is a director
of G-III and Wilsons.
STANLEY M. TAUBE, age 60, has been a director and Executive Vice President
of the Company since its inception. S. M. Taube & Co., Inc. ("SMT"), which is
controlled by Mr. Taube, rendered consulting services from October 1991 through
November 1992 to the Company with respect to the development of new Indian
gaming opportunities. Mr. Taube is also a director of IGCA, Kids Quest and
Stratosphere.
TIMOTHY J. COPE, age 45, has been the Chief Financial Officer of the
Company since January 20, 1994 and an Executive Vice President since February
24, 1997. Mr. Cope was the Company's Vice President -- Finance from August 1993
through January 1994. From May 1986 through August 1992, Mr. Cope was the vice
president -- finance and administration of Bally's Grand, Reno and after the
sale of Bally's Grand, Reno to the Hilton Corporation in August 1992 served as
the vice president-finance of The Reno Hilton until August 1993. From January
1984 through May 1986, Mr. Cope was the vice president of finance of MGM Grand
Reno.
JOSEPH GALVIN, age 57, has been the Chief Administrative Officer of the
Company since November, 1996. From 1990 to November 1996, Mr. Galvin served as
Vice President of Security. From 1978 to 1990, Mr. Galvin was employed as a vice
president of Charmal Home Center/W.R. Grace.
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<PAGE> 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pages 35 and 37 of the Company's Annual Report to Shareholders for the year
ended December 29, 1996, are incorporated herein by reference.
The Company has never paid any cash dividends with respect to its Common
Stock, and the current policy of the Board of Directors is to retain any
earnings to provide for the growth of the Company. The Indenture between the
Company and Firstar Bank Minnesota, N.A., f/k/a American Bank National
Association, relating to the First Mortgage Notes restricts the payment of
dividends by the Company. Consequently, no cash dividends are expected to be
paid on the Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Pages 1 and 35 of the Company's Annual Report to Shareholders for the year
ended December 29, 1996, are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 11 through 16 of the Company's Annual Report to Shareholders for the
year ended December 29, 1996, are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Pages 17 through 36 of the Company's Annual Report to Shareholders for the
year ended December 29, 1996, are incorporated herein by reference.
"Financial Statement -- Schedules" -- Stratosphere Corporation and
Subsidiary
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning immediately following the caption "Election of
Directors" to, but not including, the caption "Compensation Committee Interlocks
and Insider Participation" in the Company's 1997 Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's year ended December 29, 1996 and forwarded to stockholders prior
to the Company's 1997 Annual Meeting of Shareholders (the "1997 Proxy
Statement"), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1997 Proxy Statement beginning immediately following
the caption "Executive Compensation" to, but not including, the caption
"Director Compensation," is incorporated herein by reference.
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<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1997 Proxy Statement beginning immediately following
the caption "Voting Securities and Principal Holders Thereof" to, but not
including, the caption "Election of Directors," is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 1997 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.
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<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements:
Data is incorporated by reference from the Annual Report to Shareholders
for the fiscal year ended December 29, 1996. With the exception of the
information specifically incorporated herein by reference, the Annual
Report to Shareholders for the fiscal year ended December 29, 1996 is not
to be deemed "filed" as part of the Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995.. 17*
Consolidated Statements of Earnings for the fiscal years ended December 29,
1996, December 31, 1995 and January 1, 1995.............................. 18*
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 29, 1996, December 31, 1995 and January 1, 1995................. 19*
Consolidated Statements of Cash Flows for the fiscal years ended December
29, 1996, December 31, 1995, and January 1, 1995......................... 20*
Notes to Consolidated Financial Statements................................. 21*
Report of Independent Public Accountants -- Arthur Andersen LLP........... 36*
Independent Auditors' Report -- KPMG Peat Marwick LLP...................... 34
STRATOSPHERE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995.. **
Consolidated Statements of Operations for the fiscal years ended December
29, 1996, December 31, 1995, and December 31, 1994,
Consolidated Statements of Stockholders' Equity for the period from
January 1, 1994 to December 29, 1996..................................... **
Consolidated Statements of Cash Flows for the fiscal years ended December
29, 1996, December 31, 1995 and December 31, 1994........................ **
Notes to Consolidated Financial Statements................................. **
Report of Independent Public Accountants -- Arthur Andersen LLP............ **
Independent Auditors' Report -- KPMG Peat Marwick LLP...................... **
</TABLE>
- -------------------------
* Refers to page of Annual Report to Shareholders for the year ended December
29, 1996, a copy of which is included as Exhibit 13 to this report.
** Date is incorporated by reference from Exhibit 99 to this report.
33
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Grand Casinos, Inc.:
We have audited the accompanying consolidated statements of earnings,
shareholders' equity, and cash flows of Grand Casinos, Inc. and subsidiaries for
the fiscal year ended January 1, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Grand Casinos, Inc. and
subsidiaries referred to above present fairly, in all material respects, the
results of their operations and their cash flows for the year ended January 1,
1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 8, 1995, except as to the second
paragraph of Note 15 as to which the
date is March 9, 1995
34
<PAGE> 35
(a)(3) Exhibits
2.1 Agreement and Plan of Merger dated as of August 31, 1995 by
and among Grand Casinos, Inc., Grand Gaming Corporation of
America and GCA Acquisition Subsidiary, Inc. (Incorporated
herein by reference to Annex A to the Company's Joint Proxy
Statement filed as part of the Company's Registration
Statement on Form S-4, as amended, File No. 33-97028)
2.2 Agreement and Plan of Merger dated as of August 31, 1995, by
and among Grand Casinos, Inc., Grand Gaming Corporation and
GCC Acquisition Subsidiary, Inc. (Incorporated herein by
reference to Annex B to the Company's Joint Proxy Statement
filed as part of the Company's Registration Statement on
Form S-4, as amended, File No. 33-97028)
3.1 Second Amended and Restated Articles of Incorporation of the
Company. (Incorporated herein by reference to Exhibit 3A to
the Company's Registration Statement on Form S-1, as
amended, File No. 33-42281.)
3.2 First Amended and Restated Bylaws of the Company.
(Incorporated herein by reference to Exhibit 3B to the
Company's Registration Statement on Form S-1, as amended,
File No. 33-42281.)
4.1 Indenture dated as of November 30, 1995 by and among Grand
Casinos, Inc., Grand Casinos Resorts, Inc., Grand Casinos of
Mississippi, Inc.-Gulfport, Grand Casinos of Mississippi,
Inc. -- Biloxi, Grand Casinos Biloxi Theater, Inc., GCI
Biloxi South Hotel Corporation, GCI Biloxi Hotel Acquisition
Corporation, GCI Gulfport South Hotel Corporation, GCI
Gulfport Hotel Acquisition Corporation, Mille Lacs Gaming
Corporation, Grand Casinos of Louisiana, Inc. --
Tunica-Biloxi, Grand Casinos of Louisiana, Inc. --
Coushatta, GCA Acquisition Subsidiary, Inc., BL Development
Corp. and American Bank National Association. (Incorporated
herein by reference to Exhibit 10.30 to the Company's Report
on Form 10-K for the fiscal year ended December 31, 1995)
4.2 First Amendment to Indenture dated as of May 10, 1996 by and
among Grand Casinos, Inc., Grand Casinos Resorts, Inc.,
Grand Casinos of Mississippi, Inc.-Gulfport, Grand Casinos
of Mississippi, Inc. -- Biloxi, Grand Casinos Biloxi
Theater, Inc., GCI Biloxi South Hotel Corporation, GCI
Biloxi Hotel Acquisition Corporation, GCI Gulfport South
Hotel Corporation, GCI Gulfport Hotel Acquisition
Corporation, Mille Lacs Gaming Corporation, Grand Casinos of
Louisiana, Inc. -- Tunica-Biloxi, Grand Casinos of
Louisiana, Inc. -- Coushatta, GCA Acquisition Subsidiary,
Inc., BL Development Corp. and American Bank National
Association.
10.1 Amended and Restated Management & Building Improvement
Agreement Between the Corporate Commission of the Mille Lacs
Band of Ojibwe Indians and Mille Lacs Gaming Corporation,
dated as of September 10, 1990 (Grand Casino Mille Lacs).
(Incorporated herein by reference to Exhibit 10D to the
Company's Registration Statement on Form S-1, as amended,
File No. 33-42281.)
10.2 Amended and Restated Management & Construction Agreement
Between the Corporate Commission of the Mille Lacs Band of
Ojibwe Indians and Mille Lacs Gaming Corporation -- Hinckley
operations, dated as of September 10, 1990 (Grand Casino
Hinckley). (Incorporated herein by reference to Exhibit 10H
to the Company's Registration Statement on Form S-1, as
amended, File No. 33-42281.)
10.3 Employment Separation Agreement dated September 9, 1996 by
and between Patrick R. Cruzen and the Company
10.4 Employment Agreement between Grand Casinos, Inc. and Lyle
Berman, dated July 31, 1991.* (Incorporated herein by
reference to Exhibit 10Q to the Company's Registration
Statement on Form S-1, as amended, File No. 33-42281.)
35
<PAGE> 36
10.5 Management and Consultant Incentive Compensation Pool
Agreement between Grand Casinos, Inc. and Lyle Berman, S. M.
Taube & Co., Inc. and David W. Anderson, dated July 31,
1991.* (Incorporated herein by reference to Exhibit 10S to
the Company's Registration Statement on Form S-1, as
amended, File No. 33-42281.)
10.6 1991 Stock Option and Compensation Plan.* (Incorporated
herein by reference to Exhibit 10X to the Company's
Registration Statement on Form S-1, as amended, File No.
33-42281.)
10.7 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Tunica-Biloxi Tribe of Louisiana and Grand
Casinos of Louisiana, Inc. -- Tunica-Biloxi, dated November
1, 1991. (Incorporated herein by reference to Exhibit 10BB
to the Company's Registration Statement on Form S-1, as
amended, File No. 33-46798.)
10.8 Amended and Restated Management & Construction Agreement,
Loan Agreement, Promissory Note, and Security Agreement
between the Coushatta Tribe of Louisiana and Grand Casinos
of Louisiana, Inc. -- Coushatta, dated February 25, 1992.
(Incorporated herein by reference to Exhibit 10CC to the
Company's Registration Statement on Form S-1, as amended,
File No. 33-42281.)
10.9 Lease Agreement between the Mississippi Department of
Economic and Community Development and the Mississippi State
Port Authority at Gulfport, as lessor, and Grand Casinos,
Inc., as lessee, dated as of May 20, 1992. (Incorporated
herein by reference to Exhibit 10VV to the Company's Report
on Form 10-K for the fiscal year ended August 2, 1992 (File
No. 0-19565).)
10.10 Ground Lease between Mavar, Inc., a Mississippi Corporation,
as lessor and Grand Casinos of Mississippi, Inc., a
Minnesota corporation, as lessee, dated as of June 23, 1992.
(Incorporated herein by reference to Exhibit 10XX to the
Company's Report on Form 10-K for the fiscal year ended
August 2, 1992 (File No. 0-19565).)
10.11 Amendment No. 1 to the 1991 Stock Option and Compensation
Plan.* (Incorporated herein by reference to Exhibit 10AAA to
the Company's Report on Form 10-K for the fiscal year ended
August 2, 1992 (File No. 0-19565).)
10.12 First Amendment to Management and Consultant Incentive
Compensation Pool Agreement, dated October 31, 1992.*
(Incorporated herein by reference to Exhibit 10CCC to the
Company's Report on Form 10-K for the fiscal year ended
August 2, 1992 (File No. 0-19565).)
10.13 Fifth Lease Amendment between the State of Mississippi
through its duly authorized agencies. The Mississippi
Department of Economic and Community Development and the
Mississippi State Port Authority at Gulfport and Grand
Casinos of Mississippi, Inc. dated July 8, 1996.
10.14 First Amendment to Employment Agreement between Grand
Casinos, Inc. and Lyle Berman, dated October 31, 1992.*
(Incorporated herein by reference to Exhibit 10EEE to the
Company's Report on Form 10-K for the fiscal year ended
August 2, 1992 (File No. 0-19565).)
10.15 Employment Agreement between Grand Casinos, Inc. and Stanley
M. Taube, dated October 31, 1992.* (Incorporated herein by
reference to Exhibit 10FFF to the Company's Report on Form
10-K for the fiscal year ended August 2, 1992 (File No.
0-19565).)
10.16 Termination of Management Consulting Agreement between Grand
Casinos, Inc. and S. M. Taube & Co., Inc. dated October 31,
1992.* (Incorporated herein by reference to Exhibit 10GGG to
the Company's Report on Form 10-K for the fiscal year ended
August 2, 1992 (File No. 0-19565).)
10.17 First Amendment to Ground Lease with Mavar, Inc. and Grand
Casinos, Inc., dated November 9, 1992. (Incorporated herein
by reference to Exhibit 10MMM to the Company's Report on
Form 10-Q for the quarter ended November 1, 1992 (File No.
0-19565).)
36
<PAGE> 37
10.18 Application for Standard Lease of Public Trust Tidelands,
dated December 7, 1992. (Incorporated herein by reference to
Exhibit 10NNN to the Company's Report on Form 10-Q for the
quarter ended November 1, 1992 (File No. 0-19565).)
10.19 Second Lease Amendment with consent to Assignment between
the State of Mississippi and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.9 to the
Company's Report on Form 10-Q for the quarter ended January
31, 1993 (File No. 0-19565).)
10.20 Second Amendment to Lease Agreement dated as of February 1,
1993 between Mavar, Inc. and Grand Casinos of Mississippi,
Inc. -- Biloxi. (Incorporated herein by reference to Exhibit
10.10 to the Company's Report on Form 10-Q for the quarter
ended January 31, 1993 (File No. 0-19565).)
10.21 Public Trust Tidelands lease dated January 28, 1993 by and
between the Secretary of State of the State of Mississippi,
on behalf of the State of Mississippi and Grand Casinos of
Mississippi, Inc. -- Biloxi. (Incorporated herein by
reference to Exhibit 10.11 to the Company's Report on Form
10-Q for the quarter ended January 31, 1993 (File No.
0-19565).)
10.22 Agreement among the Company, Bob Stupak, Bob Stupak
Enterprises, Inc. and Grand Casinos Resorts, Inc. dated
November 15, 1993 and First and Second Amendments thereto
dated December 22, 1993 and January 25, 1994. (Incorporated
herein by reference to Exhibit 10.46 to the Company's Report
on Form 10-K for the fiscal year ended January 1, 1995 (File
No. 0-19565).)
10.23 Letter Agreement dated as of June 1, 1994 between
Stratosphere Corporation, Grand Casinos, Inc., Grand Casinos
Resorts, Inc., Bob Stupak Enterprises, Inc. and Bob Stupak.
(Incorporated herein by reference to Exhibit 10.80 to the
Company's Report on Form 10-Q for the quarter ended July 3,
1994 (File No. 0-19565).)
10.24 Amendment to June 1, 1994 Letter Agreement dated November
16, 1994 between Stratosphere Corporation, Grand Casinos
Resorts, Inc., Grand Casinos, Inc., Bob Stupak Enterprises,
Inc. and Bob Stupak. (Incorporated herein by reference to
Exhibit 10.48 to the Company's Report on Form 10-K for the
fiscal year ended January 1, 1995 (File No. 0-19565).)
10.25 Management and Development Agreement dated July 1, 1994, by
and between Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.49 to the
Company's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.26 Memorandum of Agreement dated as of February 16, 1995 by and
among Stratosphere Corporation and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.50 to the
Company's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.27 Standby Equity Commitment dated March 9, 1995 by and between
Grand Casinos, Inc. and Stratosphere Corporation.
(Incorporated herein by reference to Exhibit 10.51 to the
Company's Report on Form 10-K for the fiscal year ended
January 1, 1995 (File No. 0-19565).)
10.28 Notes Completion Guarantee dated March 9, 1995 by and
between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.52 to the Company's Report on Form 10-K for the fiscal
year ended January 1, 1995 (File No. 0-19565).)
10.29 Completion Guarantor Subordination Agreement dated March 9,
1995 between Grand Casinos, Inc. and American Bank National
Association. (Incorporated herein by reference to Exhibit
10.53 to the Company's Report on Form 10-K for the fiscal
year ended January 1, 1995 (File No. 0-19565).)
10.30 Management Agreement (Mille Lacs Facility) dated October 1,
1996 by and between The Corporate Commission of the Mille
Lacs Band of Chippewa Indians and Mille Lacs Gaming
Corporation.
37
<PAGE> 38
10.31 First Amendment to Port Authority Ground Lease dated as of
December 14, 1992, between the Mississippi Department of
Economic and Community Development, the Mississippi State
Port Authority at Gulfport, and Grand Casinos, Inc.
(Incorporated herein by reference to Exhibit 10.31 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1995)
10.32 Third Amendment to Port Authority Ground Lease dated as of
February 9, 1994, between the Mississippi Department of
Economic and Community Development, the Mississippi State
Port Authority at Gulfport, and Grand Casinos of
Mississippi, Inc. -- Gulfport. (Incorporated herein by
reference to Exhibit 10.32 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1995)
10.33 Fourth Amendment to Port Authority Ground Lease dated as of
June 3, 1994, between the Mississippi Department of Economic
and Community Development, the Mississippi State Port
Authority at Gulfport, and Grand Casinos of Mississippi,
Inc. -- Gulfport. (Incorporated herein by reference to
Exhibit 10.33 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1995)
10.34 Fifth Amendment to Port Authority Ground Lease dated as of
November 30, 1995, between the Mississippi Department of
Economic and Community Development, the Mississippi State
Port Authority at Gulfport, and Grand Casinos of
Mississippi, Inc. -- Gulfport. (Incorporated herein by
reference to Exhibit 10.34 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1995)
10.35 Ground Sublease Agreement between Grand Casinos of
Mississippi, Inc. -- Gulfport and CHC/GCI Gulfport Limited
Partnership dated as of April 1, 1994. (Incorporated herein
by reference to Exhibit 10.35 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1995)
10.36 First Amendment to Ground Sublease Agreement dated as
February 3, 1995 by and between Grand Casinos of
Mississippi, Inc. -- Gulfport and CHC/GCI Gulfport Limited
Partnership. (Incorporated herein by reference to Exhibit
10.36 to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1995)
10.37 Ground Sublease Agreement between Grand Casinos of
Mississippi, Inc. -- Biloxi and CHC/GCI Gulfport Limited
Partnership dated as of September 1, 1994. (Incorporated
herein by reference to Exhibit 10.37 to the Company's Report
on Form 10-K for the fiscal year ended December 31, 1995)
10.38 First Amendment to Ground Sublease Agreement dated as of
February 3, 1995 by and between Grand Casinos of
Mississippi, Inc. -- Biloxi and CHC/GCI Biloxi Limited
Partnership. (Incorporated herein by reference to Exhibit
10.38 to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1995)
10.39 Public Trust Tidelands Lease dated as of June 20, 1994 by
and between the State of Mississippi and CHC/GCI Biloxi
Limited Partnership. (Incorporated herein by reference to
Exhibit 10.39 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1995)
10.40 First Amendment to Public Trust Tidelands Lease dated as of
November 30, 1995 by and between the State of Mississippi
and Grand Casinos Biloxi Theater, Inc. (Incorporated herein
by reference to Exhibit 10.40 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1995)
10.41 Memorandum of Lease dated as of January 20, 1995 by and
between the Board of Levy Commissioners for the
Yazoo-Mississippi Delta and BL Development Corp.
(Incorporated herein by reference to Exhibit 10.41 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1995)
38
<PAGE> 39
10.42 First Amendment to Lease dated as of November 30, 1995 by
and between the Board of Levee Commissioners for the
Yazoo-Mississippi Delta and BL Development Corp.
(Incorporated herein by reference to Exhibit 10.42 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1995)
10.43 Employment Agreement dated as of December 1, 1995, by and
between Grand Casinos, Inc., and Stanley M. Taube.
(Incorporated herein by reference to Exhibit 10.43 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1995)
10.44 Participation Agreement dated as of May 10, 1996 among BL
Development Corp., Grand Casinos, Inc., Hancock Bank. The
Persons Listed on Schedule II, Bank of Scotland, First
Interstate Bank of Nevada and Societe Generale, Credit
Lyonnais, Los Angeles Branch, and BA Leasing & Capital
Corporation (Incorporated herein by reference to Exhibit
10.1 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1996)
10.45 Lease Agreement and Deed of Trust dated as of May 10, 1996
between Hancock Bank and BL Development Corp (Incorporated
herein by reference to Exhibit 10.2 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1996)
10.46 Loan Agreement dated as of May 10, 1996 among Hancock Bank;
BA Leasing & Capital Corporation; Bank of Scotland, First
Interstate Bank of Nevada and Societe Generale; and Credit
Lyonnais, Los Angeles Branch (Incorporated herein by
reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended June 30, 1996)
10.47 Trust Agreement dated as of May 10, 1996 between BL
Development Corp., as Guarantor, and Hancock Bank, as
Trustee (Incorporated herein by reference to Exhibit 10.4 to
the Company's Report on Form 10-Q for the quarter ended June
30, 1996)
10.48 Security Agreement and Assignment of Rents and Leases dated
as of May 10, 1996 between Hancock Bank and BA Leasing &
Capital Corporation (Incorporated herein by reference to
Exhibit 10.5 to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996)
10.49 Construction Agency Agreement dated as of May 10, 1996
between Hancock Bank and BL Development Corp. (Incorporated
herein by reference to Exhibit 10.6 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1996)
10.50 Guaranty dated as of May 10, 1996 of Grand Casinos, Inc. and
its Subsidiaries in favor of The Beneficiaries Named
(Incorporated herein by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the quarter ended June 30,
1996)
10.51 Deed of Trust, Assignment of Rents and Leases and Security
Agreement dated as of May 10, 1996 by and among BL
Development Corp., Hancock Bank, James R. McIlwain and BA
Leasing & Capital Corporation (Resort Hotel) (Incorporated
herein by reference to Exhibit 10.8 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1996)
10.52 Deed of Trust, Assignment of Rents and Leases and Security
Agreement dated as of May 10, 1996 by and among BL
Development Corp., Hancock Bank, James R. McIlwain and BA
Leasing & Capital Corporation (Barge Equipment)
(Incorporated herein by reference to Exhibit 10.9 to the
Company's Report on Form 10-Q for the quarter ended June 30,
1996)
10.53 Third Preferred Mortgage by BL Development Corp. in favor of
First Security Bank of Utah, National Association, as
Trustee and Mortgagee for BA Leasing & Capital Corporation,
as Agent. (Incorporated herein by reference to Exhibit 10.10
to the Company's Report on Form 10-Q for the quarter ended
June 30, 1996)
10.54 Master Vessel Trust Agreement dated as of May 10, 1996
between BA Leasing & Capital Corporation, "Agent" and First
Security Bank of Utah, N.A., "Vessel Trustee" (Incorporated
herein by reference to Exhibit 10.11 to the Company's Report
on Form 10-Q for the quarter ended June 30, 1996)
39
<PAGE> 40
<TABLE>
<C> <S>
10.55 Ground Lease dated as of May 10, 1996 by and between BL
Development Corp. and Hancock Bank (Incorporated herein by
reference to Exhibit 10.12 to the Company's Report on Form 10-Q
for the quarter ended June 30, 1996)
10.56 Letter Agreement dated May 10, 1996 (Landlord Waiver and
Consent) (Incorporated herein by reference to Exhibit 10.13 to the
Company's Report on Form 10-Q for the quarter ended June 30, 1996)
10.57 Intercreditor Agreement dated as of May 10, 1996 among
American Bank National Association First Security Bank of Utah,
Grand Casinos, Inc., GCA Acquisition Subsidiary, Inc., and BA
Leasing & Capital Corporation, and acknowledged and accepted by
each of Grand Casinos Resorts, Inc., Grand Casinos of Mississippi,
Inc. -- Gulfport, Grand Casinos of Mississippi, Inc. -- Biloxi,
Grand Casinos Biloxi Theater, Inc., GCI Biloxi Hotel Acquisition
Corporation, GCI Gulfport Hotel Acquisition Corporation, Mille
Lacs Gaming Corporation, Grand Casinos of Louisiana, Inc. --
Tunica-Biloxi, Grand Casinos of Louisiana, Inc. -- Coushatta, GCA,
and BL Development Corp. (Incorporated herein by reference to
Exhibit 10.14 to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996)
10.58 Funding Agreement dated as of September 27, 1996 by and
among Grand Casinos, Inc. and Stratosphere Corporation
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended
September 30, 1996)
10.59 Letter Agreement dated as of September 27, 1996 by and among
Grand Casinos, Inc., Stratosphere Corporation and
Stratosphere Gaming Corp. (Incorporated herein by reference
to Exhibit 10.2 to the Company's Report on Form 10-Q for the
quarter ended September 30, 1996)
10.60 Restructuring Agreement Regarding Pre-Negotiated Plan of
Reorganization by and among Stratosphere Corporation, Stratosphere
Gaming Corp. and Grand Casinos, Inc. and Member of AD Hoc
Committee of holders of $203,000,000 of 14 1/4% First Mortgage
Notes Due 2002. (Incorporated herein by reference to Exhibit 99.2
to Stratosphere Corporation's Form 8-K dated January 6, 1997)
10.61 Fee Guidelines Agreement (Mille Lacs Facility) dated October
1, 1996 by and between The Corporate Commission of the Mille Lacs
Band of Ojibwe Indians and Mille Lacs Gaming Corporation.
10.62 Management Agreement (Hinckley Facility) dated as of October
1, 1996 by and between The Corporate Commission of the Mille Lacs
Band of Chippewa Indians and Mille Lacs Gaming Corporation.
10.63 Fee Guidelines Agreement (Hinckley Facility) effective as of
October 1, 1996 by and between The Corporate Commission of the
Mille Lacs Band of Ojibwe Indians and Mille Lacs Gaming
Corporation.
13 Annual Report to Shareholders for the fiscal year ended
December 29, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99 Consolidated Financial Statements of Stratosphere Corporation
</TABLE>
- -------------------------
* Management Compensatory Plan or Arrangement.
(b) Reports on Form 8-K. The Company did not file any Current Reports on
Form 8-K during the fourth quarter ended December 29, 1996.
40
<PAGE> 41
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRAND CASINOS, INC.
Registrant
By: /s/ THOMAS J. BROSIG
--------------------------------------
Name: Thomas J. Brosig
Title: President
Date: March 28, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on March 28, 1997.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ LYLE BERMAN Chief Executive Officer and Director
--------------------------------------------------- (Principal Executive Officer)
Lyle Berman
/s/ THOMAS J. BROSIG President and Director
---------------------------------------------------
Thomas J. Brosig
/s/ STANLEY M. TAUBE Executive Vice President and Director
---------------------------------------------------
Stanley M. Taube
/s/ MORRIS GOLDFARB Director
---------------------------------------------------
Morris Goldfarb
/s/ DAVID L. ROGERS Director
---------------------------------------------------
David L. Rogers
/s/ NEIL I. SELL Director
---------------------------------------------------
Neil I. Sell
/s/ JOEL N. WALLER Director
---------------------------------------------------
Joel N. Waller
Director
---------------------------------------------------
Ronald Kramer
/s/ TIMOTHY J. COPE Executive Vice President and
--------------------------------------------------- Chief Financial Officer
Timothy J. Cope (Principal Financial And Accounting Officer)
</TABLE>
41
<PAGE> 1
(DOCUMENT #122464)
EXHIBIT 4.2
FIRST AMENDMENT TO INDENTURE
THIS FIRST AMENDMENT TO INDENTURE (the "First Amendment") is dated as
of May 10, 1996, by and among GRAND CASINOS, INC., a Minnesota corporation (the
"Issuer"), GRAND CASINOS RESORTS, INC., GRAND CASINOS OF MISSISSIPPI, INC. -
GULFPORT, GRAND CASINOS OF MISSISSIPPI, INC. - BILOXI, GRAND CASINOS BILOXI
THEATER, INC., GCI BILOXI HOTEL ACQUISITION CORPORATION, GCI GULFPORT HOTEL
ACQUISITION CORPORATION, MILLE LACS GAMING CORPORATION, GRAND CASINOS OF
LOUISIANA, INC. - TUNICA - BILOXI, GRAND CASINOS OF LOUISIANA, INC. -
COUSHATTA, GCA ACQUISITION SUBSIDIARY, INC., and BL DEVELOPMENT CORP.
(collectively, the "Guarantors"), and AMERICAN BANK NATIONAL ASSOCIATION, a
national association, as trustee (the "Trustee").
RECITALS:
WHEREAS, the Issuer, the Guarantors and the Trustee previously entered
into that certain Indenture dated as of November 30, 1995 (the "Indenture"),
providing for the issuance of the Issuer's 10 1/8% First Mortgage Notes due
December 1, 2003 (the "Notes"); and
WHEREAS, the Issuer has requested certain amendments to the Indenture
to allow Issuer to obtain additional financing permitted pursuant to Section
4.9 of the Indenture; and
WHEREAS, pursuant to Section 9.01(a) of the Indenture, the Issuer, the
Guarantors and the Trustee may amend the Indenture without the consent of the
Holders of the Notes; and
WHEREAS, pursuant to Section 9.01(a)(i) of the Indenture, the parties
hereto have the power to amend the Indenture to "cure any ambiguity, defect or
inconsistency ...;" and
WHEREAS, pursuant to Section 9.01(a)(v) of the Indenture, the parties
hereto have the power to amend the Indenture to "make any change...that does
not adversely affect the legal rights hereunder of any such Holder of Notes";
and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, each party hereto agrees as
follows for the benefit of the others and for the equal and ratable benefit of
the Holders:
Section 1. Amendment of Section 1.01. The definition of the
term "Permitted Liens" as set forth in Section 1.01 of the Indenture is hereby
amended to add in subparagraph (ix) thereof relating to liens securing purchase
money or lease obligations the following additional provision immediately
following the worked "thereto", and preceding the ";" at the end of such
subparagraph (ix):
-1-
<PAGE> 2
", and provided further that additional deeds of trust and ship
mortgages may be granted against Note Collateral to other lenders to
secure such indebtedness, to the extent such other lenders require the
same to protect their interest in the purchase money or lease
collateral located or placed upon any Note Collateral against third
parties, and such additional deeds of trust and ship mortgages do not
adversely affect the rights of the Trustee in any Note Collateral; and
the Trustee agrees that in connection with the foregoing, it shall
execute and deliver any commercially customary intercreditor agreement
(including, without limitation, a release of any lien of the Holders
in the purchase money or lease property, to the extent practicable),
required by any such lender provided such agreement does not have an
adverse effect on the rights of the Holders in the Note Collateral"
Section 2. Representations and Warranties. The Issuer and the
Guarantors represent and warrant to the Trustee that this First Amendment
constitutes the respective legal, valid and binding obligations of each of said
parties, enforceable in accordance with its terms (subject as to enforcement of
remedies to any applicable bankruptcy, reorganization, moratorium or similar
laws or principles of equity affecting the enforcement of creditor's rights
generally).
Section 3. Entire Agreement; Ratification. This First Amendment
represents the entire agreement between the parties and supersedes any prior
agreements or understandings with respect to the subject matter hereof. Except
as modified or supplemented in connection herewith, the Indenture shall
continue in full force and effect in accordance with its original terms.
Section 4. Governing Law. This First Amendment shall be
governed by and construed in accordance with the laws of the State of New York
and the United States of America.
Section 5. Counterparts. This First Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument. In making proof hereof, it shall not be necessary to
produce or account for any counterpart other than the one signed by the party
against which enforcement is sought.
[THE REMAINDER OF THIS PAGE HAS BEEN
INTENTIONALLY LEFT BLANK]
-2-
<PAGE> 3
IN WITNESS WHEREOF, this First Amendment To Indenture is
executed as of the date first above written.
ISSUER:
GRAND CASINOS, INC.
BY: /s/ Timothy Cope
--------------------------------------
Name: Timothy Cope
-----------------------------------
Title: CFO
----------------------------
GUARANTORS
GRAND CASINOS RESORTS, INC.
BY: /s/ Timothy Cope
--------------------------------------
Name: Timothy Cope
----------------------------------
Title: CFO
--------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - GULFPORT
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
-------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - BILOXI
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
-------------------------
GRAND CASINOS BILOXI THEATER, INC.
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
-------------------------
<PAGE> 4
GCI BILOXI HOTEL ACQUISITION CORPORATION
BY: /s/ Timothy Cope
----------------------------------
Name: Timothy Cope
-------------------------------
Title: CFO
-----------------------
GCI GULFPORT HOTEL ACQUISITION CORPORATION
BY: /s/ Timothy Cope
----------------------------------
Name: Timothy Cope
-------------------------------
Title: CFO
-----------------------
MILLE LACS GAMING CORPORATION
BY: /s/ Timothy Cope
---------------------------------
Name: Timothy Cope
------------------------------
Title: CFO
----------------------
GRAND CASINOS OF LOUISIANA, INC. - TUNICA - BILOXI
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
-------------------------
GRAND CASINOS OF LOUISIANA, INC. - COUSHATTA
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
-------------------------
GCA ACQUISITION SUBSIDIARY, INC.
BY: /s/ Timothy Cope
------------------------------------
Name: Timothy Cope
---------------------------------
Title: CFO
---------------------------------
<PAGE> 5
BL DEVELOPMENT CORP.
BY: /s/ Timothy Cope
---------------------------------------
Name: Timothy Cope
------------------------------------
Title: CFO
----------------------------
TRUSTEE
AMERICAN BANK NATIONAL ASSOCIATION
BY: /s/ Frank P. Leslie III
-----------------------------------
Name: Frank P. Leslie III
Title: Vice President
BY: /s/ Sandra Johnson
-----------------------------------
Name: SANDRA JOHNSON
-------------------------------
Title: Vice President
-------------------------
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT SEPARATION AGREEMENT
THIS AGREEMENT is made effective September 9, 1996 (the "Effective Date") by
and between Patrick R. Cruzen ("Cruzen"), and Grand Casinos, Inc. ("Grand").
WHEREAS, Cruzen is an employee, President and director of Grand; and
WHEREAS, Cruzen desires to resign from his position as employee, President and
director of Grand pursuant to the terms and conditions stated in this
Agreement; and
WHEREAS; Grand desires to accept such resignation;
NOW THEREFORE, in consideration of the foregoing, and the promises, agreements
and releases stated below, Grand and Cruzen hereby agree as follows:
1. Resignation. Cruzen hereby resigns as (i) an employee of Grand, (ii) as
President and director of Grand, and (iii) as director and officer of any and
all subsidiaries and affiliates of Grand, all effective as of the Effective
Date.
2. Continued Salary and Benefits. Grand shall continue to provide and pay to
Cruzen all salary and benefits to which Cruzen is entitled as an employee of
Grand to and including September 9, 1996. Such payment and provision shall be
at the rates and with such coverage as is in effect on the Effective Date.
3. Insurance. Cruzen and Grand acknowledge that Cruzen has the right under
applicable federal and state laws to, at Cruzen's expense, continue the life,
dental and medical insurance coverage provided as of the Effective Date to
Cruzen and Cruzen's spouse and dependents as a benefit related to Cruzen's
employment by Grand. Grand shall make the payments for such life, dental and
medical insurance for the period from the Effective Date through
1
<PAGE> 2
December 31, 1996. Beginning on January 1, 1997, Cruzen shall become
responsible for making such payments.
Grand shall from January 1, 1997 until the date (the "Insurance Payment
Termination Date") which is the earlier of (i) December 31, 1997, or (ii) the
date on which Cruzen and his spouse and dependents no longer qualify for
insurance continuation pursuant to the Consolidated Omnibus Budget
Reconciliation Act ("COBRA"), pay to Cruzen for each month prior to such date,
the amount of $378.03 as reimbursement for a portion of the cost of such
insurance coverage for such month. Grand's payments for the period from January
1, 1997 to the Insurance Payment Termination Date shall be made
contemporaneously with the monthly payments to be made by Grand pursuant to
Section 5 below.
Grand shall have no obligation to provide or pay for any disability insurance
coverage for Cruzen after September 9, 1996.
4. Incentive Compensation. Grand shall pay to Cruzen an amount equal to 75% of
the portion of 1996 incentive compensation attributable to (i) financial
results, and (ii) guest service results which Cruzen would have received under
Grand's applicable 1996 incentive compensation program had Cruzen remained
continuously employed by Grand as an employee through the end of Grand's 1996
fiscal year. Payment of such portion of incentive compensation, if any, shall
be made to Cruzen within 5 business days after the date, if any, on which Vice
Presidents of Grand receive payment of their incentive compensation under such
incentive compensation program.
5. Severance Pay. Grand shall pay to Cruzen monthly severance pay as follows:
(i) on January 2, 1997, the amount of $86,905.52, which amount
equals $120,000 minus (a) the amount of $32,884.63 as salary paid by
Grand to Cruzen for the period from September 10, 1996 to October 4,
1996, and (b) the aggregate amount of $209.85 which amount equals
the aggregate sum paid by Grand
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for the insurance coverages described in Section 3 above which
exceeded or will exceed $378.03 per month for the period from
September 10, 1996 to December 31, 1996; and
(ii) consecutive monthly installments in the amount of $30,000 for
each calendar month during the period from February 1, 1997 to and
including December 31, 1997 (the "Severance Period"). Payments for
the months of February 1997 through December 1997 shall be made on
the first business day of each such month.
The payments to be made by Grand to Cruzen under this Section 5 shall not be
reduced by reason of any other income earned or received by Cruzen during the
Severance Period, but shall be subject to withholding and deductions required
by law.
6. Confidentiality; No Recruitment. Except to the extent provided by law,
Cruzen shall keep confidential and shall not, without Grand's prior written
consent, disclose to any third-party any information regarding Grand and its
affiliates, subsidiaries, business, methods of operation, employees, projects,
plans and prospects which information has not been released to the public by
Grand. If Cruzen believes such a disclosure is required by law, Cruzen shall,
promptly after discovering the requirement for disclosure, give Grand written
notice of both the disclosure requirement and the information which Cruzen
believes must be disclosed.
Cruzen shall not, during the Severance Period, solicit or recruit, or
participate in the solicitation or recruitment of, any employee of Grand for
employment by Cruzen or any other party.
7. Release. In consideration of the payments and other benefits to be provided
to Cruzen under this Agreement, Cruzen hereby releases and discharges Grand
from any and all claims arising from Cruzen's employment by Grand and/or
Cruzen's separation from such employment, excepting claims arising under or
reserved in this Agreement, including the amendments
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<PAGE> 4
to stock option agreements and indemnification stated in Section 11
below. Cruzen acknowledges that Grand's agreements under this Agreement
constitute full and fair consideration for Cruzen's release of the claims, if
any, described in the preceding sentence.
The claims which Cruzen is releasing in this Section 7, subject to the
exceptions stated in the preceding paragraph, include but are not limited to
the following:
(a) All claims for alleged discrimination against Cruzen under
any federal, state or local law, including but not limited to the
federal Age Discrimination in Employment Act (the "ADEA") and the
Minnesota Human Rights Act (the "MHRA");
(b) All claims for breach of contract, wrongful termination,
defamation and/or infliction of emotional distress;
(c) All claims for any other alleged unlawful employment practice
arising out of or relating to Cruzen's employment by Grand or
Cruzen's separation from such employment; and
(d) All claims for additional pay, benefits or any other form of
remuneration, including but not limited to holiday pay, vacation
pay, sick pay and/or other paid time off.
As used in the preceding two paragraphs, the term "Grand" shall include not
only Grand Casinos, Inc., but also all of its past and present affiliates,
subsidiaries, officers, directors, employees, insurers and agents, and all of
their respective successors and assigns. As used in the preceding two
paragraphs, the term "Cruzen" shall mean not only Patrick R. Cruzen, but also
each of his heirs, administrators, representatives and agents, and anyone else
who has or obtains rights through Patrick R. Cruzen.
Nothing in this Agreement shall be construed as an admission by Grand that
Grand has any liability for any of the claims described in this Section 7.
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<PAGE> 5
In consideration of the promises contained in this Agreement, Grand hereby
releases and discharges Cruzen from any and all claims, whether known or
unknown, asserted or unasserted, arising during the term of Cruzen's employment
with Grand, excepting claims based on any fraudulent activity or
misappropriation of Grand assets committed by Cruzen.
As used in the preceding paragraph, the term "Grand" shall include not only
Grand Casinos, Inc., but also all of its past and present affiliates and
subsidiaries and all of their respective successors and assigns. As used in
the preceding paragraph, the term "Cruzen" shall mean not only Patrick R.
Cruzen, but also each of his heirs, administrators, representatives and agents,
and anyone else who has or obtains rights through Patrick R. Cruzen.
8. Disparagement. Grand shall not disparage, defame or denigrate Cruzen, and
Cruzen shall not disparage, defame or denigrate Grand or its officers,
employees or operations. Nothing in the Section 8 shall limit or restrict
Cruzen's or Grand's ability to truthfully testify in or cooperate with any
governmental investigation or proceeding.
9. Reference. If any party seeks a reference from Grand with respect to
Cruzen, Grand shall submit to such party a letter of reference in the form
attached to this Agreement as Exhibit A. Grand shall not provide to any party
any oral reference regarding Cruzen without Cruzen's prior consent.
10. Rights to Counsel, Consider, Revoke or Rescind. Cruzen has retained an
attorney to review and provide advise regarding this Agreement. Cruzen
acknowledges that he has 21 days after the date on which he receives this
Agreement to consider his release of rights and claims of age discrimination
under ADEA, and he has the right to revoke the release of any rights or claims
of age discrimination under ADEA within 7 days after the date on which he signs
this Agreement. Cruzen acknowledges that this Agreement shall not become
effective or enforceable until such 7-day revocation period has expired.
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<PAGE> 6
Cruzen hereby acknowledges that he has the right to rescind his release of
rights and claims of discrimination under MHRA within 15 days after the date on
which he signs this Agreement. To be effective, such a rescission must be made
in writing and delivered to Grand in person or by mail within the 15-day
rescission period. Cruzen's notice of rescission must be (i) postmarked within
such 15-day rescission period; (ii) properly addressed to Thomas J. Brosig,
President, Grand Casinos, Inc., 130 Cheshire Lane, Minnetonka, Minnesota 55305;
and (iii) sent by certified mail, return receipt requested.
If Cruzen exercises his rights to revoke and/or rescind any of the releases set
forth in Section 7 above, in the manner described above or in any manner
pursuant to applicable law, this Agreement shall without further action be null
and void and of no further force and effect.
11. Indemnification. Grand shall continue to indemnify Cruzen to the fullest
extent permitted by the Minnesota Business Corporation Act as of the date
hereof for any and all third-party actions, claims, demands and law suits made
against Cruzen (whether before, on or after the date hereof and whether based
on Cruzen being an employee, officer, director or agent of Grand or any
subsidiary thereof) based on acts or omissions of Cruzen which occurred during
the period during which Cruzen was employed by Grand as an employee.
12. Proceedings Involving Grand. In the event that the Cruzen is requested or
required to respond to investigative or discovery requests or to provide
testimony or information in any legal proceeding or matter involving Grand,
Cruzen shall, prior to responding or providing testimony or information, give
written notice to Grand of any such request or requirement as soon as
reasonably practical after Cruzen receives such request or becomes aware of
such requirement. Cruzen shall, at Grand's expense, make himself available at
reasonable times for interviews, depositions and testimony in connection with
legal proceedings involving Grand and its subsidiaries and affiliates.
13. Complete Agreement. This Agreement is the complete agreement between
Cruzen and Grand regarding the matters described herein. This
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Agreement shall not be amended or modified in any manner except by
a written document signed by each of Grand and Cruzen.
14. Amendments to Stock Option Agreements. Grand and Cruzen previously
entered into (i) an Option Agreement dated as of June 22, 1994 as amended by
First Amendment to Option Agreement dated effective June 24, 1994 (the "First
Option Agreement"), (ii) an Option Agreement (the "Second Option Agreement")
dated as of October 4, 1994, and (iii) an Option Agreement (the "Third Option
Agreement") dated as of May 6, 1996, pursuant to which Grand granted Cruzen
certain options to purchase shares of common stock of Grand on the respective
terms and conditions stated in each of the First Option Agreement, Second
Option Agreement and Third Agreement (individually each an "Option Agreement").
Each Option Agreement states a schedule pursuant to which the stock options
granted therein will vest. Such agreements provide that Cruzen must be an
employee of Grand on each scheduled vesting date for the vesting scheduled for
such date to become effective.
As of the Effective Date, the following options (adjusted to reflect the 3 for
2 stock split implemented by Grand in late 1995) have vested:
(a) 105,000 shares under the First Option Agreement;
(b) 30,000 shares under the Second Option Agreement; and
(c) 0 shares under the Third Option Agreement.
Grand hereby agrees that an additional 30,000 shares (on a post 3 for 2 stock
split basis) shall be vested under the Second Option Agreement as of the
Effective Date. Grand further agrees that all of the shares vested under the
First Option Agreement and the Second Option Agreement as of the Effective Date
shall, notwithstanding any provision to the contrary in either the First Option
Agreement or the Second Option Agreement, be exercisable at any time on or
before September 30, 1998. Any such options which are not fully
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<PAGE> 8
exercised by Cruzen on or prior to the close of Grand's business on
September 30, 1998 shall expire and terminate without further action by any
party.
This Section 15 shall be an amendment to each of the First Option Agreement and
the Second Option Agreement to the extent (and only to the extent) stated in
this Section 15.
IN WITNESS WHEREOF, Grand and Cruzen have signed this Agreement as of the
Effective Date.
Grand Casinos, Inc.
By: s/ Lyle Berman s/ Patrick R. Cruzen
---------------------- ----------------------
Name: Lyle Berman Patrick R. Cruzen
--------------
Title: CEO
---------------
8
<PAGE> 1
EXHIBIT 10.13
STATE OF MISSISSIPPI
COUNTY OF HARRISON
FIFTH LEASE AMENDMENT
This Fifth Lease Amendment (the "Amendment") entered into between the
State of Mississippi appearing herein by and through its duly authorized
agencies. The MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT and
the MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT, herein collectively referred
to as LESSOR and GRAND CASINOS OF MISSISSIPPI, INC. - GULFPORT, hereinafter
referred to as LESSEE.
WHEREAS, on May 20, 1992 LESSOR and Grand Casinos, Inc. ("Grand")
entered into that certain Lease Agreement ("Original Lease Agreement"); and
WHEREAS, on December 14, 1992, LESSOR and Grand entered into that
certain First Lease Amendment; and on February 2, 1993 LESSOR, Grand and LESSEE
entered into that certain Second Lease Agreement with Consent to Assignment;
and on February 9, 1994 entered into that certain Third Lease Amendment; and on
June 3, 1994 entered into that certain Fourth Lease Amendment (the Original
Lease as amended by the First, Second, Third and Fourth Amendments is
hereinafter referred to as the "Lease Agreement") (all capitalized terms
utilized herein and not separately defined herein shall have the meanings
ascribed to them in the Lease); and
WHEREAS, LESSOR and LESSEE are desirous of again amending said Lease
in certain particulars.
<PAGE> 2
NOW, THEREFORE for and in consideration of the mutual covenants and
stipulations contained in the Lease and Amendments thereto, the parties do
mutually contract and agree as follows:
1. ARTICLE I - LEASED PREMISES
The Parties agree that Article I Leased Premises is amended as
follows:
Delete: Parcel 6, Theater/Entertainment Complex.
Insert: Parcel 6, Exhibit Hall/Convention Support Complex.
The remaining provisions of Article I remain unchanged and
shall remain in full force and effect.
2. ARTICLE II - USE OF PREMISES
The first paragraph of Article II, [Use of Premises] remains
unchanged and shall remain in full force and effect. The second paragraph as
amended in the Second Lease Amendment remains unchanged and shall remain in
full force and effect. The third paragraph inserted pursuant to the Third
Lease Amendment shall be amended as follows:
LESSEE shall use Parcel 6 for non-gaming activities and
thereon construct and begin operations, pursuant to the terms
and conditions of the Lease Agreement, an Exhibit
Hall/Convention Support Complex.
The remaining paragraphs in Article II remain unchanged and
shall remain in full force and effect.
3. ARTICLE III - LEASEHOLD AND RELATED PAYMENTS
The first paragraph and subparagraph (1) of Article III
Leasehold and Related Payments remain unchanged and shall remain in full force
and effect. Subparagraphs (2) and (3) are amended to read as follows:
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<PAGE> 3
(2) (a)(i) The annual Rental for gaming operations shall be
$800,000.00 ("Rental") plus five percent (5%) of the gross
annual gaming revenues on the Vessels as defined in the
Mississippi Gaming Control Act over $25,000,000.00
("Percentage Rental").
(ii) The parties recognize that, pursuant to the
Third Lease Amendment, LESSEE paid to LESSOR $1.7
Million as Advanced Rental on Parcel 6 for the
fifty-one month period February 1, 1994 through April
30, 1998. The parties further recognize that, for
the twenty-seven month period from February 1, 1994
through April 30, 1996, LESSEE has accrued rental on
Parcel 6 and LESSOR has credited to the account of
LESSEE the amount of $900,000.00, resulting in a
remaining Unapplied Advanced Rental of $800,000.00
for the twenty-four month period May 1, 1996 through
April 30, 1998 ("Unapplied Advanced Rental").
(iii) For the period JANUARY 1, 1996 THROUGH
DECEMBER 31, 1996: If Percentage Rental shall total
$5.8 Million or less, the Unapplied Advanced Rental
shall be decreased by $400,000.00 and applied to the
account of LESSEE; if Percentage Rental shall total
between $5.8 Million and $6.2 Million, the Unapplied
Advanced Rental shall be decreased by an amount equal
to the difference between the Percentage Rental and
$6.2 Million and applied to the account of LESSEE; if
Percentage Rental shall total $6.2 Million or
greater, the unapplied Advanced Rental shall not
decrease and shall remain available for application
to the account of LESSEE pursuant to (iv) and (v),
infra.
(iv) For the period JANUARY 1, 1997 THROUGH DECEMBER
31, 1997: If Percentage Rental shall total $5.8
Million or less, the Unapplied Advanced Rental shall
be decreased by $400,000.00 and applied to the
account of LESSEE; if Percentage Rental shall total
between $5.8 Million and $6.2 Million, the Unapplied
Advanced Rental shall be decreased by an amount equal
to the difference between the Percentage Rental and
$6.2 Million and applied to the account of LESSEE; if
Percentage Rental shall total $6.2 Million or
greater, the Unapplied Advanced Rental shall not
decrease and shall remain available for application
to the account of LESSEE pursuant to (v), infra.
(v) For the period JANUARY 1, 1998 THROUGH DECEMBER
31, 1998 AND FOR EACH SUCCEEDING TWELVE
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<PAGE> 4
MONTH PERIOD THEREAFTER: If Percentage Rental shall
total $5.8 Million or less, LESSEE shall pay to
LESSOR an additional $400,000.00; if Percentage
Rental shall total between $5.8 Million and $6.2
Million, LESSEE shall pay to LESSOR an additional
amount equal to the difference between the Percentage
Rental and $6.2 Million Dollars. In the event the
Unapplied Advanced Rental is not decreased to zero
dollars by December 31, 1997 pursuant (iii) and (iv),
supra, the Unapplied Advanced Rental shall be
decreased by $33,333.00 or so much of said amount as
may be available as Unapplied Advanced Rental and
credited to the account of LESSEE for each month that
LESSEE is required under this Lease Agreement to pay
Percentage Rental. If for any month LESSEE is
required under this Lease Agreement to pay Percentage
Rental of less than $33,333.00, the Unapplied
Advanced Rental shall be decreased and the account of
LESSEE credited no more than the amount of Percentage
Rental due from LESSEE. At such time as Unapplied
Advanced Rental is reduced to zero dollars, no
further deceases nor credits shall be applied.
(b) In addition to the Rental and Percentage Rental set forth
above, LESSEE shall also pay monthly to LESSOR three percent
(3%) of the gross monthly revenues on all other activities
conducted by LESSEE, and/or its assignees or sublessees or any
other persons on the Leased Premises, including activities
conducted on Parcel 6, or on the vessels ("Additional
Percentage Rental"), except on rental revenues generated in
the operation of the Ice House. In-house transfers which are
presented for payment through internally generated
transactions shall be exempt from the 3% gross monthly fees.
(c) Notwithstanding any provision in the Lease Agreement
apparently to the contrary "gross monthly rentals" with
respect to the Hotel shall not include (a) uncollected or
uncollectible credit accounts, (b) cash refunds, credits or
exchanges if the price of the goods, services, use or
occupancy related thereto was originally included in gross
monthly revenues, (c) any sums collected for any sales,
excise, use or other tax, (d) insurance proceeds, (e) any
condemnation award or proceeds from the sale in lieu of
condemnation, (f) any sums received pursuant to the
cancellation of this Lease Agreement pursuant to Article XIV
hereof, (g) the rental of any tenant, lessee or concessionaire
of Hotel Partnership or its successors or assigns,(h) proceeds
from the sale of fixtures, furnishings, equipment or machinery
after use thereof (i)
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the amount of any discount on sales to employees, guests or
affiliates, and (j) merchandise, services or use or occupancy
of the Hotel Premises transferred or permitted without
compensation to employees, customers, affiliates, charities or
for promotional purposes, provided however, said
"complimentary transactions" shall not exceed five percent
(5%) of gross revenues in any calendar year.
(d) The Rental shall be paid by LESSEE, in advance, in equal
monthly installments of $66,667.00, each on the first day of
every month during the lease year. For each month, a
calculation of the Percentage Rental, as defined herein, and
the Additional Percentage Rental, as defined herein, will be
made and the additional rental paid on or before the 20th day
of the next month. For such calculation, LESSEE is to submit
on or before the 20th day of each month a copy of the monthly
revenue reports submitted to the State Tax Commission showing
gross gaming revenues as defined by Mississippi Gaming Control
Act of 1990, and a report of all other gross monthly revenues
from all other activities conducted on the Vessels and the
Leased Premises, along with a calculation of the additional
rental due, if any. LESSEE shall provide to LESSOR reasonable
access at reasonable times and places to all financial books
and records related to the operations contemplated under this
Lease regardless of the location of such books and records.
Upon reasonable advance notice, LESSEE shall provide
reasonable access to all financial books and records of
LESSEE's entire operations. LESSEE's entire operations include
all activities conducted on the Vessels and the Leased
Premises by any person or corporation and the other activities
of LESSEE or its affiliated persons or corporations wherever
located. Affiliated shall mean a person or corporation who
owns ten percent (10%) or more of the common stock of LESSEE
or a corporation in which LESSEE owns ten percent (10%) or
more of the common stock, or any person or corporation that
can exert control over LESSEE or that LESSEE can exert control
over or any person or corporation closely connected or
associated with LESSEE or dependent upon or subordinate to
LESSEE. LESSEE shall furnish within three (3) months after
the end of LESSEE's fiscal year, a certified audit of all
activities conducted on the Vessels and the Leased Premises
during that year. LESSOR will accept an annual audit by an
independent Certified Public Accountant auditor at LESSEE's
expenses. If LESSOR has good reason to question the audit,
then the LESSOR shall have the right to audit the books. If
there is any material discrepancy in the financial information
reported in the initial audit, then the cost of such audit
will be borne by LESSEE.
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<PAGE> 6
(3) LESSEE shall complete construction and begin operation of the
Exhibit Hall/Convention Support Complex no later than May 1, 1998.
Notwithstanding anything contained herein to the contrary, in the
event that LESSEE shall be delayed or hindered in or prevented from
completing the Exhibit Hall/Convention Support Complex by May 1, 1998
by reason of strikes, lockouts, material, riots, insurrection, war,
Act of God, or other reasons of a like nature beyond the reasonable
control of LESSEE, then such construction period shall be extended for
a period equivalent to the period of such delay
4. ARTICLE XI - IMPROVEMENTS BY LESSEE
The following shall be inserted immediately after paragraph
(1) (D) of Article XI:
(E) Parcel 6:
(i) Before commencement of construction of the
Exhibit Hall/Convention Support Complex, LESSEE shall obtain LESSOR's written
approval for commencement of construction pursuant to (2), infra.
(ii) At least twenty-five (25) days prior to
commencement of construction, LESSEE shall conduct and provide to LESSOR a
Traffic Circulation study and Plan which shall include traffic counts and
projections for traffic volumes at the intersection of U.S. Highway 90 and
30th Avenue and along the 30th Avenue Extension. LESSOR shall approve or
disapprove the Plan within ten (10) days after LESSOR's receipt of the Plan.
The Plans shall propose specific traffic mitigation measures to reduce impacts
on Port related traffic, including trucks to and from West Pier and vehicles to
and from the Port of Gulfport's Commercial Small Craft Harbor. All approved
mitigation measures shall be completed and implemented prior to commencement of
operation of the Exhibit Hall/Convention support Complex. By January 1 of each
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<PAGE> 7
year, LESSEE shall submit to LESSOR updated and revised traffic volumes and
projections.
5. All references to Theater/Entertainment Complex or
Entertainment/Theater Complex throughout the Lease Agreement and Exhibits shall
now be considered as references to Exhibit Hall/Convention Support Complex.
All other terms and conditions in the Lease Agreement which have not
been amended herein remain unchanged and shall remain in full force and effect.
WITNESS OUR SIGNATURES this the 8th day of July , 1996.
LESSOR:
MISSISSIPPI DEPARTMENT OF ECONOMIC
ATTEST: AND COMMUNITY DEVELOPMENT
BY: /s/ James B. Heidel
- ----------------------------- ------------------------------------
JAMES B. HEIDEL
EXECUTIVE DIRECTOR
MISSISSIPPI STATE PORT AUTHORITY
ATTEST: AT GULFPORT
/s/ Sylvia D. Garriga BY: /s/ Dalton McGuire
- ----------------------------- ------------------------------------
DALTON MCGUIRE, PRESIDENT
LESSEE:
GRAND CASINOS OF MISSISSIPPI,
ATTEST: INC. - GULFPORT
/s/ Pamela J. Zahn BY: /s/ Thomas J. Brosig
- ----------------------------- ------------------------------------
ITS: President
-----------------------------------
7
<PAGE> 1
EXHIBIT 10.30
MANAGEMENT AGREEMENT
(Mille Lacs Facility)
THIS MANAGEMENT AGREEMENT is entered into on the Mille Lacs Indian Reservation,
located within the exterior boundaries of the State of Minnesota, as of October
15, 1996, by and between The Corporate Commission of the Mille Lacs Band of
Chippewa Indians (the "Corporate Commission"), and Mille Lacs Gaming
Corporation, a Minnesota corporation ("Manager"). Notwithstanding the execution
of this Agreement by the Corporate Commission and Manager, this Agreement shall
not be effective until the Effective Date (as defined in Section 2.5 below).
Words and phrases in this Agreement which are capitalized are defined in
Article II below.
In consideration of the following recitals, and the promises and agreements
stated below, the Corporate Commission and Manager hereby agree as follows:
ARTICLE I
RECITALS
1.1 Tribal Recognition. The Mille Lacs Band of Chippewa Indians (the "Band")
is recognized by the United States Secretary of the Interior as (i) eligible
for the special programs and services provided by the United States to Indians
because of their status as Indians, and (ii) having powers of self-government.
1.2 The Gaming Site. The property (the "Gaming Site") described in Exhibit A
attached hereto constitutes land over which the Band exercises governmental
power and which is held in trust by the United States for the benefit of the
Band. The Band has sovereign powers over the Gaming Site pursuant to the
Band's powers of self-government, the Indian Reorganization Act of 1934, the
Revised Constitution and By-laws of the Minnesota Chippewa Tribe as ratified on
November 23, 1963 and approved by the United States Secretary of the Interior
on March 3, 1964, and the statutes and
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<PAGE> 2
ordinances of the Band. Pursuant to such powers, the Band has entered into a
Business Lease Agreement with the Corporate Commission, as amended, dated
November 26, 1991 and filed of record in the office of the Pine County
Minnesota Recorder as of December 2, 1991 as microfilm number 324855, by which
the Band leased the Gaming Site to the Corporate Commission.
1.3 Corporate Commission Powers. Pursuant to the Band's powers of
self-government, the Band enacted Band Statute 1022-MLC Chapter 16, creating
the Corporate Commission as an independent entity having the powers to approve
the construction of business facilities on behalf of the Band, and to enter
into and perform under contracts and/or agreements pertaining to such
facilities.
1.4 Existing Facility. Pursuant to such powers, the Corporate Commission
entered into those certain Amended and Restated Management and Building
Agreements (the "1990 Management Agreement") with Manager. The 1990 Management
Agreement stated the terms and conditions pursuant to which (i) the Facility
was constructed on the Gaming Site; and (ii) the Corporate Commission retained
Manager to manage the Facility. Manager has been managing and is now managing
the Facility under authority granted in the 1990 Management Agreement.
1.5 Applicable Law. The Corporate Commission entered into and is performing
under the 1990 Management Agreement pursuant to approval of the 1990 Management
Agreement by the United States Bureau of Indian Affairs. After the 1990
Management Agreement became effective, the National Indian Gaming Commission
(the "NIGC") adopted regulations pursuant to the Indian Gaming Regulatory Act
of 1988 (Title 25, United States Code, Sections 2701 et. seq.), as a result of
which responsibility for approval of management agreements for Indian gaming
facilities was transferred from the Bureau of Indian Affairs to NIGC. The
Indian Gaming Regulatory Act and the regulations adopted by the NIGC pursuant
thereto, as such act and regulations may be amended from time-to-time, are
collectively referred to in this Agreement as "IGRA".
1.6 Reason for Agreement. The Corporate Commission and Manager are entering
into this Agreement for the purpose of complying with IGRA, and to obtain the
approval of this Agreement by the NIGC as contemplated by IGRA.
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<PAGE> 3
1.7 Economic Development. The Corporate Commission has determined that the
continued operation of the Enterprise under this Agreement will improve the
economic condition of the Band and its members, increase Band revenues, enhance
the Band's economic self-sufficiency, and enable the Band to better serve the
social, economic, educational and health needs of its members.
1.8 Technical Expertise and Training. The Corporate Commission desires to
continue to receive (i) the services of a qualified manager of the Enterprise
which has expertise in the management and operation of the Enterprise, and (ii)
training and instruction for the Band and its members in the operation of the
Enterprise.
1.9 Manager Experience and Expertise. Manager has experience and will
continue to provide to the Band expertise in the management and operation of
the Enterprise, and will continue to train and instruct the Band and its
members in the operation of the Enterprise.
1.10 Manager Rights. The Corporate Commission desires that Manager continue
to have, and Manager desires to continue to have, the exclusive right and
obligation to manage the Enterprise during the term of this Agreement in
conformance with and subject to the provisions of this Agreement.
1.11 Gaming Control Ordinance. The Band has adopted a Gaming Control
Ordinance (the "Gaming Control Ordinance") which complies with IGRA, and has
been approved by the NIGC. All Gaming will be conducted in accordance with the
Gaming Control Ordinance.
1.12 Applicable Law. This Agreement is entered into pursuant to IGRA and
other federal law which pervasively regulates Indian gaming and the relations
between the parties hereto.
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<PAGE> 4
ARTICLE II
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
2.1 Affiliate. "Affiliate" shall mean, with respect to a specified person or
entity, any other person or entity that directly or indirectly through one or
more intermediaries controls, is controlled by or is under common control with
the specified person or entity. For the purpose of this definition, "control"
means the ability to directly or indirectly, by voting securities, partnership
interests, contract or otherwise, direct or cause the direction of the policies
or management of the specified person or entity.
2.2 Chief Financial Officer. "Chief Financial Officer" shall mean the chief
financial officer designated by the Corporate Commission pursuant to Section
5.4 below.
2.3 Corporate Commission. "Corporate Commission" shall mean The Corporate
Commission of the Mille Lacs Band of Chippewa Indians, as identified in the
first paragraph of this Agreement, and its permitted successors and assigns.
2.4 Commission Representative. "Commission Representative" shall mean the
representative of the Corporate Commission designated by the Corporate
Commission pursuant to Section 3.8 below.
2.5 Effective Date. "Effective Date" shall mean the first date after this
Agreement has been executed by the Corporate Commission and Manager on which
this Agreement has been approved in writing by the chair of the NIGC (or his or
her designee) pursuant to IGRA.
2.6 Enterprise. "Enterprise" shall mean the commercial enterprise of the
Corporate Commission authorized to conduct Gaming and any other lawful activity
at the Facility. The parties acknowledge that the Enterprise is not a legal
entity separate from the Corporate Commission.
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2.7 Facility. "Facility" shall mean the structure constructed on the Gaming
Site in which Gaming and nongaming activities are conducted, and all other
structures, landscaping, amenities, utilities and parking areas on the Gaming
Site, together with such additions, expansions, replacements, deletions and
modifications thereto as are implemented during the term of this Agreement.
2.8 Fiscal Month. "Fiscal Month" shall mean a fiscal month for the Enterprise
as designated by the Management Committee pursuant to Section 5.14 below.
2.9 Gaming. "Gaming" shall mean activities defined as "Class II and III
Gaming" under IGRA which may lawfully be conducted at the Gaming Site.
2.10 Gaming Control Ordinance. "Gaming Control Ordinance" is defined in
Section 1.11 above.
2.11 Gaming Management Fee. "Gaming Management Fee" is defined in Section 7.1
below and is the management fee to be paid to Manager for managing Gaming.
2.12 Gaming-Related Operating Expense. "Gaming-Related Operating Expense"
shall mean an Operating Expense, as determined in accordance with generally
accepted accounting principles, incurred by the Enterprise in conducting
Gaming.
2.13 Gaming Site. "Gaming Site" shall mean the property described in Exhibit A
attached hereto as stated in Section 1.2 above.
2.14 General Manager. "General Manager" shall mean the general manager
designated by the Corporate Commission pursuant to Section 5.3 below.
2.15 Gross Gaming Revenues. "Gross Gaming Revenues" shall mean all revenues of
the Enterprise attributable to Gaming, as determined in accordance with
generally accepted accounting principles.
2.16 Gross Nongaming Revenues. "Gross Nongaming Revenues" shall mean Gross
Revenues minus Gross Gaming Revenues.
2.17 Gross Revenues. "Gross Revenues" shall mean all revenues of the
Enterprise.
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2.18 IGRA. "IGRA" is defined in Section 1.5 above.
2.19 Management Committee. "Management Committee" shall mean the committee of
two persons described in Section 3.8 below, consisting of the Manager
Representative and the Commission Representative.
2.20 Manager. "Manager" shall mean Mille Lacs Gaming Corporation, as
identified in the first paragraph of this Agreement, and its permitted
successors and assigns.
2.21 Manager Representative. "Manager Representative" shall mean the
representative of the Manager designated by the Manager pursuant to Section 3.8
below.
2.22 Net Gaming Revenues. "Net Gaming Revenues" shall mean the Gross Gaming
Revenues, less:
(i) amounts paid as or for prizes ; and
(ii) Gaming-Related Operating Expenses (excluding the Gaming
Management Fee).
2.23 Net Revenues. "Net Revenues" shall mean Gross Revenues, less Operating
Expenses.
2.24 NIGC. "NIGC" is defined in Section 1.5 above, and is the National Indian
Gaming Commission and any successor thereto.
2.25 Nongaming Management Fee. "Nongaming Management Fee" is defined in
Section 7.1 below and is the management fee to be paid to Manager for managing
activities of the Enterprise other than Gaming.
2.26 Operating Expense. "Operating Expense" shall mean any expense of the
Enterprise in managing and conducting Gaming and nongaming activities, as
determined in accordance with generally accepted accounting principles.
"Operating Expense" shall also include expenses, if any, authorized in advance
by the Management Committee (with each member of the Management Committee
acting in his or her sole discretion) to educate or
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inform the public or any segment of the public about Indian gaming or
the Facility.
2.27 1990 Management Agreement. "1990 Management Agreement" is defined in
Section 1.4 above.
ARTICLE III
RETENTION OF MANAGER; LICENSING; MANAGEMENT COMMITTEE
3.1 Manager Retained. The Corporate Commission hereby retains and engages
Manager to perform, during the term and in accordance with all of the
provisions of this Agreement, the management and other functions described in
this Agreement, and Manager hereby accepts such retention and engagement.
3.2 Term of Agreement. This Agreement shall become effective on the Effective
Date, and shall remain in effect until the earlier of (i) April 2, 1998, (ii)
the date on which this Agreement is terminated pursuant to Article XIV below,
or (iii) the date on which the Corporate Commission purchases Manager's rights
and obligations pursuant to Section 18.15 below.
3.3 Exclusivity as Applied to Corporate Commission. During the term of this
Agreement, the Corporate Commission and its Affiliates shall not, without the
prior written consent of Manager (which consent shall not be unreasonably
withheld), establish, conduct or participate in any Gaming, or enter into
any agreement with any other party to establish, conduct or participate in
Gaming, other than under this Agreement, within a 50 mile radius of the Gaming
Site, except for the Grand Casino Hinckley facility which is located in
Hinckley, Minnesota and is the subject of a separate agreement between the
Corporate Commission and Manager.
3.4 Exclusivity as Applied to Manager. During the term of this Agreement,
Manager and its Affiliates shall not, without the prior written consent of the
Corporate Commission (which consent shall not be unreasonably withheld),
establish, manage, conduct or participate in any
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Gaming, other than under this Agreement, (i) within a 50 mile radius of the
Gaming Site, or (ii) in the State of Minnesota and north of a line
located 20 miles south of the 45th meridian north latitude, except for the
Grand Casino Hinckley facility which is located in Hinckley, Minnesota and is
the subject of a separate agreement between the Corporate Commission and
Manager.
3.5 Licensing. Manager acknowledges that Manager and Manager's (i) directors,
(ii) executive officers engaged in the management and operation of Gaming, and
(iii) shareholders holding at least 10% of the equity interest in Manager, will
be required to be licensed by the Corporate Commission under the Gaming Control
Ordinance. To the extent the required licenses have not already been applied
for and/or issued, Manager shall apply for such license and cause such
directors, executive officers and shareholders to apply for such licenses. If a
given applicant complies with the licensing standards stated in the Gaming
Control Ordinance, such applicant's application shall be granted, and shall not
thereafter be suspended, revoked or rescinded unless such applicant fails to
comply with such standards.
Manager acknowledges that the licensing application process with respect to
Manager and such directors, executive officers and shareholders may include
background investigations conducted by the Federal Bureau of Investigation or
other law enforcement agencies selected by the Corporate Commission. The
Corporate Commission shall cause any such investigation to be conducted in
accordance with the provisions of the Gaming Control Ordinance and IGRA.
Manager shall cause such directors, executive officers and shareholders to
disclose the information requested by such investigating entities, and to
cooperate with such investigations.
3.6 Compliance with Gaming Control Ordinance. Manager shall at all times
comply with the provisions and requirements of the Gaming Control Ordinance and
any license issued thereunder. The Corporate Commission and its Affiliates
shall not take any action which prevents Manager from complying, or interferes
with Manager's ability to comply, with the Gaming Control Ordinance.
3.7 Amendment of Gaming Control Ordinance. Any amendment to the Gaming Control
Ordinance made during the term of this Agreement will be made solely to ensure
that Gaming is conducted in a manner which adequately protects the public
health and safety, the environment and the integrity of Gaming. Except to the
extent required otherwise by applicable
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federal law or any Tribal-State Compact between the State of Minnesota and the
Band, no amendment to the Gaming Control Ordinance or any other
ordinance which prejudices or adversely affects Manager's rights and benefits
under this Agreement and/or the Ancillary Agreements shall apply to or be
enforceable against Manager.
3.8 Management Committee. During the term of this Agreement, the Corporate
Commission shall at all times have designated its Commission Representative and
Manager shall at all times have designated its Manager Representative.
The Corporate Commission's designation shall be by resolution adopted by the
Corporate Commission, a copy of which the Corporate Commission shall provide to
Manager. Manager's designation shall be by resolution adopted by the Manager's
Board of Directors, a copy of which Manager shall provide to the Corporate
Commission. The Corporate Commission and Manager shall each have the right to
from time-to-time change its designation by appropriate resolution, a copy of
which resolution shall be provided to the other party prior to the effective
date of the new designation.
The Commission Representative shall have the power and authority to act on
behalf of the Corporate Commission in the manner described in this Agreement.
The Manager Representative shall have the power and authority to act on behalf
of the Manager in the manner described in this Agreement.
The Commission Representative and Manager Representative so designated shall be
the two-person Management Committee contemplated by this Agreement, and the
Management Committee shall have and perform the rights and duties described in
this Agreement.
Any action or decision of the Management Committee shall require a unanimous
action or decision by the two members of the Management Committee. If such
members are unable to agree on a given action or decision, such action or
decision shall, unless agreement on such action or decision may pursuant to
this Agreement be withheld in the sole discretion of either or both of the
members of the Management Committee, be submitted to arbitration as provided in
Article XIII below.
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ARTICLE IV
WORKING CAPITAL
4.1 Ongoing Working Capital. To minimize the necessity for ongoing working
capital for the Enterprise, each of Manager and the Corporate Commission may
from time-to-time recommend to the Management Committee such reserves as it
deems appropriate. The Management Committee shall give reasonable
consideration to all such recommendations, and shall establish such reserves as
are reasonably required for the proper operation of the Enterprise.
To the extent that the Management Committee determines that ongoing working
capital in excess of the reserves so established should be obtained, the
Corporate Commission shall be responsible for providing such ongoing working
capital in such manner as the Corporate Commission, in its sole discretion,
deems appropriate.
ARTICLE V
MANAGEMENT OF ENTERPRISE
5.1 General Responsibility. During the term of this Agreement, Manager shall
be responsible for the day-to-day management of the Enterprise, and for
overseeing the ongoing maintenance and repair of the Facility. Manager is
hereby granted such power and authority on behalf of the Corporate Commission
as is necessary or appropriate to perform Manager's obligations under this
Article V, subject to the express limitations stated in this Agreement. The
various descriptions of Manager's powers and authority stated in this Article V
are not intended to limit or restrict other powers and authority which are
necessary or appropriate for Manager to perform its obligations under this
Agreement.
5.2 Specific Responsibilities. Manager's general responsibility to manage the
Enterprise shall include (but not be limited to) the following:
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(a) Operation. Manager shall manage the day-to-day operation and
administration of the Enterprise, including (but not limited to) all
Gaming.
(b) Maintenance. Manager shall arrange for and manage the
maintenance and repair of the Facility, including all cleaning,
maintenance, repair, redecorating and grounds care reasonably
required to maintain the Facility in a first-class condition. All
costs and expenses incurred in maintaining and repairing the
Facility shall be Operating Expenses.
(c) Improvements. Manager shall manage such improvements,
alterations and additions to the Facility as are approved pursuant
to Article XVI below.
(d) Hours of Operation. Manager shall cause Gaming to be
conducted at the Facility during such hours as are from time-to-time
established by the Management Committee; provided, however, that
Manager shall have the right to temporarily close or suspend any
operations of the Enterprise, including Gaming, when deemed
appropriate by Manager to respond to conditions such as weather,
limited availability of utilities, emergency or any other condition
which reasonably warrants such closure or suspension.
(e) Employees. Manager shall, on behalf of the Corporate
Commission, manage the hiring, termination, training and promotion
of employees of the Corporate Commission assigned to the Enterprise
in accordance with Sections 5.6, 5.7 and 5.8 below. All wages,
salaries and benefits paid or provided to such employees, and all
costs and expenses incurred in such hiring, firing, training and
promoting shall be Operating Expenses.
(f) Books and Records. Manager shall manage the maintenance of
the books and records of the Enterprise in accordance with Section
5.14 below. All costs and expenses incurred in maintaining such
books and records shall be Operating Expenses.
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(g) Financial Reports. Manager shall cause to be prepared
financial statements and reports of the Enterprise in accordance
with Section 5.15 below. All costs and expenses incurred in
preparing such statements and reports shall be Operating Expenses.
(h) Security. Manager shall, on behalf of the Corporate
Commission, manage the hiring or retention, training and supervision
of such security personnel as are reasonably required to provide for
the safety of customers, employees, property and funds of the
Enterprise. Security personnel shall be hired as employees of the
Corporate Commission assigned to the Enterprise and who report,
directly or indirectly, to the General Manager. Each such employee
shall be bonded in such amount and under such terms as are from
time-to-time reasonably required by the Management Committee. All
costs and expenses incurred in providing such security shall be
Operating Expenses.
(i) Fire Protection; Public Safety Services. Manager shall, on
behalf of the Corporate Commission, arrange for a contract or
contracts with one or more governmental entities to provide to the
Facility fire protection services and other public safety services
reasonably deemed necessary by the Management Committee. Such
contract or contracts shall be approved by the Management Committee
and shall provide for the fire protection and other public safety
services reasonably required for the safety of customers, employees
and property of the Enterprise. All costs and expenses incurred in
providing such fire protection and other public safety services
shall be Operating Expenses.
(j) Advertising. The budgets and revisions thereof to be
prepared by Manager and submitted to the Management Committee
pursuant to Section 5.11 below shall provide for advertising and
marketing expenses of the Enterprise.
Manager shall manage the placement of advertising on behalf of the
Enterprise, which placement shall be implemented by employees of
the Corporate Commission assigned to the Enterprise. All costs
and expenses incurred in preparing and placing such advertising
shall be Operating Expenses.
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(k) Accounts Payable. Manager shall manage and administer
the payment of bills and expenses of the Enterprise pursuant
to Section 5.13 below.
(l) Employment Practices. Manager shall establish and administer
written employment practices for the employees of the Corporate
Commission assigned to the Enterprise; provided, however, that such
practices shall be consistent with the provisions of Sections 5.6,
5.8 and 5.9 below.
(m) Insurance. Manager shall, on behalf of the Corporate
Commission, arrange for insurance coverage for the Enterprise, in
such amounts and with such coverages as are designated by the
Management Committee pursuant to Article X below. All costs and
expenses incurred in obtaining and maintaining such insurance shall
be Operating Expenses.
(n) IRS Requirements. In performing its obligations under this
Agreement, Manager shall, on behalf of the Corporate Commission,
comply with rules and regulations of the United States Internal
Revenue Service applicable to the Enterprise.
(o) National Environmental Policy Act. Manager shall provide to
the Corporate Commission such information as is in the possession or
under the control of Manager and requested in writing by the
Corporate Commission to be provided to the NIGC under IGRA and/or
the National Environmental Policy Act and the regulations adopted
pursuant thereto. The Corporate Commission shall be responsible for
providing such information to NIGC. Manager shall make reasonable
efforts to cooperate with the Corporate Commission in responding to
inquiries or requests for information from NIGC regarding the
environmental effects of Enterprise activities.
(p) Manager/Customer Disputes. Manager shall implement and
administer the Customer Dispute Policy stated in the regulations
establishing a customer dispute policy, which regulations are
adopted by the Corporate Commission pursuant to the Gaming
Ordinance.
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(q) Nongaming Activities. Manager shall implement and manage
such nongaming activities at the Facility as the Management
Committee may from time-to-time reasonably require.
5.3 General Manager. Manager shall, from time-to-time during the term of this
Agreement, recommend to the Corporate Commission for approval a general manager
(the "General Manager") of the Enterprise. Upon receipt of Manager's
recommendation, the Corporate Commission shall, unless there is a reasonable
basis for the Corporate Commission to reject Manager's recommendation, accept
Manager's recommendation and approve the General Manager designated by Manager.
If there is a reasonable basis for the Corporate Commission to reject such a
recommendation by Manager, and the Corporate Commission rejects such
recommendation, the Corporate Commission shall notify Manager of such rejection
and the basis for such rejection. Manager shall then submit additional
recommendations until the Corporate Commission approves a General Manager
recommended by Manager.
Manager shall from time-to-time during the term of this Agreement recommend in
the manner described above a successor to any General Manager who is
discharged, resigns or otherwise does not perform the responsibilities of the
General Manager.
The General Manager shall be an employee of the Corporate Commission and shall,
unless otherwise determined by the Management Committee, be assigned to the
management and operation of Enterprise on a full-time basis. All compensation
provided to the General Manager, including wages, salary, bonuses and benefits,
shall be an Operating Expense.
The General Manager shall be bonded in such amount and under such terms as are
from time-to-time reasonably required by the Management Committee.
5.4 Chief Financial Officer. Manager shall, from time-to-time during the term
of this Agreement, recommend to the Corporate Commission for approval a chief
financial officer (the "Chief Financial Officer") for the Enterprise. Upon
receipt of the Manager's recommendation, the Corporate Commission shall, unless
there is a reasonable basis for the Corporate Commission to reject the
Manager's recommendation, accept the Manager's
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recommendation and approve the Chief Financial Officer recommended by Manager.
If there is a reasonable basis for the Corporate Commission to reject such a
recommendation by the Manager and the Corporate Commission rejects such
recommendation, the Corporate Commission shall notify Manager of such rejection
and the basis for such rejection. Manager shall then submit additional
recommendations until the Corporate Commission approves a Chief Financial
Officer designated by Manager.
The Chief Financial Officer shall be an employee of the Corporate Commission,
shall report to and be supervised by the General Manager. The Chief Financial
Officer shall be assigned to the Enterprise on a full-time basis (unless
determined otherwise by the Management Committee), and shall be responsible for
the accounting and auditing of all Enterprise receipts and disbursements and
for the management of Enterprise funds. All compensation paid to the Chief
Financial Officer, including wages, salary, bonuses and benefits, shall be an
Operating Expense.
5.5 Training Personnel. Manager shall, on behalf of the Corporate Commission,
arrange for training personnel to implement training programs for new employees
of the Enterprise. Such training personnel shall be employees of the Corporate
Commission assigned to the Enterprise and report, directly or indirectly
through various supervisors, to the General Manager. All wages, salaries and
benefits paid to such personnel shall be Operating Expenses.
5.6 Enterprise Employees; Indian Preference. Manager shall, on behalf of the
Corporate Commission, manage the hiring, termination, training, promotion and
supervision of employees of the Enterprise. Such employees shall be employees
of the Corporate Commission assigned to the Enterprise and shall report,
directly or indirectly through various supervisors, to the General Manager.
To maximize the benefits of the Enterprise to the Corporate Commission, Manager
shall, in accordance with such preference policies and procedures as are from
time-to-time adopted by the Management Committee, manage the implementation of
preference in recruiting, hiring, training and promotion of all Corporate
Commission employees assigned to the Enterprise, including management
employees, to qualified Band members. Such preference
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policies and procedures shall include a provision requiring written notice to
the Corporate Commission of each employment opportunity before applications
for that opportunity are accepted. Unless otherwise required by such
preference policies and procedures, the extent no qualified Band member is
available to fill a given position, preference shall be given to qualified
members of any other Indian tribe, and then qualified spouses of Band members.
To implement the preference policies adopted by the Management Committee,
Manager shall (unless otherwise directed by the Management Committee):
(i) specify the preference described in this Section 5.6 in
advertising for Enterprise employment;
(ii) use reasonable efforts to place Enterprise employment ads in
publications which circulate among members of the Band and members
of other Indian tribes; and
(iii) provide employment training programs for Band members,
members of other Indian tribes and spouses of Band members.
For the purposes of this Section 5.6, Manager shall have the right, in its sole
discretion, to determine whether a given candidate is qualified.
5.7 Employee Background Investigations; Bonding. Manager shall, for each
applicant for employment at the Enterprise for whom a background investigation
is required by the Gaming Control Ordinance, cause to be conducted a background
investigation of such applicant pursuant to the Gaming Control Ordinance. Such
investigation shall comply with the Gaming Control Ordinance, IGRA and any
other applicable local, state or federal law or regulation.
The cost and expenses incurred in conducting such an investigation shall be
Operating Expenses.
No applicant for which such investigation discloses any prior criminal record
or association which poses a threat to the effective regulation of Gaming, or
whose employment at the Enterprise is prohibited by the Gaming Control
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Ordinance, IGRA or any applicable local, state or federal law, shall be hired
for employment at the Enterprise.
The Management Committee shall from time-to-time determine which employees at
the Enterprise are to be bonded, and the amounts and terms of such bonds.
5.8 Personnel Policy. Manager shall prepare and submit to the Management
Committee for approval written policies and procedures for the employees of the
Corporate Commission assigned to the Enterprise. Such written policies and
procedures shall include:
(i) job classifications and descriptions;
(ii) compensation programs;
(iii) reporting relationships; and
(iv) a grievance procedure for the resolution of employee
grievances and any other dispute between any employee and Manager
and/or the Corporate Commission.
Manager may from time-to-time prepare and submit to the Management Committee
for approval such written revisions and/or updates of such policies and
procedures as Manager deems appropriate.
5.9 Compensation Limited. No director or officer of Manager, or shareholder
holding more than five percent of the common shares of Manager, shall receive
any wages, salaries or other compensation from the Enterprise.
5.10 Enterprise Contracts; Indian Preference. Manager shall prepare and
submit to the Management Committee for approval written policies and procedures
for procurement of goods and services for the Enterprise. Such policies and
procedures shall give preference to qualified Band members, qualified spouses
of Band members and qualified entities controlled by one or more Band members
or one or more spouses of Band members. Manager may from time-to-time prepare
and submit to the Management Committee for approval such written revisions or
updates of such policies and procedures as Manager deems appropriate.
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On behalf of the Corporate Commission and subject to the provisions of Section
5.20 below, Manager shall arrange for and manage contracts and agreements for
such goods and services as Manager determines are appropriate for the operation
of the Enterprise.
Manager shall, upon approval of a given proposed improvement, alteration or
addition to the Facility pursuant to Article XVI below, arrange for contracts
and agreements on behalf of the Corporate Commission for such improvement,
alteration or addition. To maximize the benefits of the Enterprise to the
Corporate Commission and Band, Manager shall give preference in awarding
contracts and agreements for such improvements, alterations and additions to
qualified Band members, qualified spouses of Band members and qualified
entities controlled by one or more Band members or one or more spouses of Band
members.
For the purposes of this Section 5.10, "qualified" shall mean a Band member, a
spouse of a Band member or an entity certified by the Corporate Commission to
be controlled by one or more Band members or one or more spouses of Band
members who or which, in Manager's sole discretion:
(i) is able to provide quality goods or services at competitive
prices;
(ii) has experience in providing such goods or services or
completing similar improvements, alterations or additions; and
(iii) with respect to improvements, alterations or additions, can
comply with reasonable bonding requirements established by Manager.
5.11 Budgets. Manager shall prepare and submit to the Management Committee
for approval each fiscal year of the Enterprise such annual budget as the
Manager deems appropriate, which budget shall provide for Operating Expenses
and capital expenditures. Manager may from time-to-time prepare and submit to
the Management Committee for approval such revisions to such budget as Manager
deems appropriate. The budget to be approved by the Management Committee
pursuant to this Section 5.11 shall include such classifications and detail as
the Management Committee from time-to-time deems appropriate.
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Manager and the Corporate Commission acknowledge that the financial performance
of the Enterprise will be affected by unpredictable factors such as changes in
the gaming market and the existence and efforts of competitors. Manager shall
monitor the financial performance of the Enterprise and use its best efforts to
manage such financial performance consistent with both the most recent approved
budget and such unpredictable factors.
Manager shall have the authority to make expenditures or incur obligations on
behalf of the Enterprise to prevent, respond to or minimize the damage or
liability resulting from any emergency or any unanticipated circumstance which
may threaten the safety of customers, employees or property of the Enterprise,
whether or not such expenditures or obligations are included in or contemplated
by the approved budget.
5.12 Enterprise Funds Management. Manager shall select, and submit to the
Management Committee for approval, systems for tracking and monitoring all
Enterprise monies consistent with applicable provisions of regulations
promulgated by the NIGC and the Gaming Control Ordinance. Manager may from
time-to-time submit to the Management Committee for approval such revisions to
such systems as Manager deems appropriate.
Following approval of such systems by the Management Committee, Manager shall
install and maintain such systems.
The Commission Representative and each member of the Corporate Commission shall
have the right to at any time (i) inspect such systems and observe the
operation thereof; and (ii) be present to observe the counting of Enterprise
monies; provided, however, that the Commission Representative and each such
member shall be accompanied by the Manager Representative or his or her
designee.
5.13 Bank Accounts; Funds. The Management Committee shall, on behalf of the
Corporate Commission, designate depositories for Enterprise monies. The
Management Committee shall establish such depository accounts at designated
depositories as the Management Committee deems appropriate for the deposit,
holding and disbursement of Enterprise monies. The Management Committee may
from time-to-time establish a petty cash fund and such contingency and other
reserve funds as the Management Committee deems appropriate.
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Manager shall administer the deposit, holding and disbursement of Enterprise
monies using the accounts and funds established by the Management Committee.
Manager's administration shall be in accordance with the following:
(a) Deposits. Manager shall collect all Enterprise monies and
shall, at such intervals as are from time-to-time established by the
Management Committee, deposit the same into the account(s)
designated by the Management Committee for such purpose.
(b) Counting. All monies received by the Enterprise shall be
counted at (i) the close of each business day on which the
Enterprise closes, or (ii) at least once every 24 hours for each
period of time during which the Enterprise does not close.
(c) Security. The Management Committee shall from time-to-time
either (i) designate a bonded courier service to transport
designated monies to the Enterprise depositories, or (ii) designate
another secure means of transporting such monies to such
depositories. Manager shall implement such designation. All costs
of such transportation shall be Operating Expenses.
(d) Disbursements. Manager shall make disbursements of
Enterprise monies from the account(s) designated by the Management
Committee for disbursements.
Except for the payment of cash prizes to customers, Manager shall
not make any cash disbursement from any account, and all such
disbursements shall be by check drawn on the appropriate account.
(e) IRS Reports. Manager shall as requested by the Chief
Financial Officer assist the Chief Financial Officer in timely
filing on behalf of the Enterprise any reports of gaming winnings
and other matters required by the United States Internal Revenue
Service.
5.14 Books and Records. Manager shall prepare and maintain accurate books and
records for the Enterprise. Such books and records shall be
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maintained at the Facility or at such other location designated by the
Management Committee.
Manager shall from time-to-time recommend to the Management Committee for
approval (which approval shall not be unreasonably withheld) accounting
practices and procedures for the Enterprise consistent with generally accepted
accounting principles. Such practices and procedures shall include procedures
for the allocation of Operating Expenses between Gaming-Related Operating
Expenses and other expenses, and a designation of the fiscal months of the
Enterprise (each a "Fiscal Month").
The Commission Representative and each member of the Corporate Commission shall
have the right, during the Enterprise's normal office hours, to inspect,
examine and copy all such books and records; provided, however, that the
Manager Representative or his or her designee shall have the right to be
present at any such inspection, examination or copying. The Corporate
Commission's inspection, examination and copying rights may also be exercised
by any agent, employee, attorney or accountant designated in writing by the
Commission Representative.
5.15 Financial Statements. Manager shall cause to be prepared and provided to
the Management Committee and the Corporate Commission monthly and annual
financial statements of all Enterprise revenues and disbursements. Such
statements shall be prepared in accordance with generally accepted accounting
principles.
5.16 Independent Audits. The Corporate Commission shall select and engage an
independent certified public accountant, reasonably acceptable to Manager, to
provide an annual audit of the financial statements of the Enterprise and such
other audits as may from time-to-time be required by the Management Committee.
Such audit shall be conducted in accordance with generally accepted auditing
standards. All costs incurred by the Corporate Commission in obtaining such
audit shall be Operating Expenses.
The Corporate Commission shall be responsible for providing copies of such
audits to such local, state, and federal governmental entities as require such
audits from the Corporate Commission or in connection with the Enterprise. The
Corporate Commission shall cause a copy of such audit to be provided to
Manager, and Manager shall have the right to disclose such audit under state
and federal securities laws.
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5.17 Alcoholic Beverages. Manager shall permit alcoholic beverages to be
served at the Gaming Site and Facility only in compliance with such guidelines
as are from time-to-time established by the Management Committee, applicable
law and the Band Assembly of the Band; provided, however, that each member of
the Management Committee shall have the right to withhold approval of any such
guideline in such member's sole discretion.
5.18 Tobacco Products. Manager shall permit tobacco products to be sold at
the Gaming Site and Facility only in compliance with applicable law and any
applicable agreement between the Corporate Commission or Band or any agency
thereof and any other governmental entity having jurisdiction over such sales.
Gross Revenues shall include (i) all revenues received from the sale of tobacco
products by the Enterprise, and (ii) all tax rebates received from the State of
Minnesota with respect to tobacco products purchased by the Enterprise;
provided, however, that the first $9,000 of such tax rebates received during
each fiscal quarter of the Enterprise shall be excluded from the aggregate sum
of (a) the Gross Revenues for such quarter under this Agreement, and (b) the
"Gross Revenues" for such quarter under that certain Management Agreement -
Hinckley Facility of even date herewith between the Corporate Commission and
Manager and pertaining to that certain facility commonly known as Grand Casino
Hinckley.
5.19 Unlawful Activity. Manager shall not knowingly conduct or knowingly
allow to be conducted at the Facility any unlawful activity, including any
unlawful use of controlled substances.
5.20 Limited Agency. Manager shall have the right to enter into contracts and
agreements in the name and on behalf of the Corporate Commission in the
following (and only the following) circumstances:
(i) the contract or agreement pertains only to the provision of
goods and/or services to the Enterprise;
(ii) the contract or agreement either has a term of 12 months or
less, or may be terminated for any or no reason upon not more than
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30 days' notice of termination if the contract or agreement has a
term in excess of 12 months; and
(iii) the contract or agreement provides for total payments of
less than $25,000.
ARTICLE VI
TAXES AND LIENS
6.1 Band Taxes. During the term of this Agreement, except for taxes levied
pursuant to that certain written tax agreement between the Band and the
Minnesota Department of Revenue which became effective on ________, 1996, the
Band shall not impose any tax, fee or other charge on or against (i) Manager,
the Enterprise or the Facility; (ii) Gaming; (iii) the provision of goods or
services to customers of the Enterprise; (iv) the labor of or compensation paid
to employees of Manager or the Corporate Commission performing work at the
Enterprise; (v) goods or services purchased by or on behalf of, or otherwise
provided to, the Enterprise; or (vi) any property (including real property,
furnishings, equipment, supplies and inventory) held or used by Manager or the
Corporate Commission in connection with the Enterprise, which tax, fee or
charge was not already in existence on September 10, 1990.
In addition, the Band has waived and shall continue during the term of this
Agreement to waive the following taxes, fees or charges with respect to the
categories described in clauses (i) through (vi) of the preceding paragraph:
(a) The 5% commercial transaction tax with regard to Gaming and
the 4% commercial transaction tax on vending machines (1085 MLC-31,
Section 20);
(b) The tribal employment rights training assessment (1085
MLC-36, Section 55.01); and
(c) All Band tobacco taxes (1085 MLC-30).
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6.2 No Liens. Nothing in this Agreement shall be deemed to subject the Gaming
Site or the Facility to any lien or encumbrance.
Neither party hereto shall, without the prior written consent of the other
party hereto (and the prior written consent of the United States of America if
required by law or title restriction), grant to any third party any lien
against, right in or encumbrance against the Gaming Site or the Facility.
ARTICLE VII
MANAGER COMPENSATION;
GUARANTEED MONTHLY PAYMENTS
7.1 Management Fees.
(a) Gaming Management Fee. As compensation for Manager's
management of Gaming under this Agreement, the Enterprise shall pay
to Manager a gaming management fee (the "Gaming Management Fee")
for each Fiscal Month equal to thirty percent (30%) of the Net
Gaming Revenues received by the Enterprise during such Fiscal Month.
(b) Nongaming Management Fee. Manager's management obligations
under this Agreement include the management of activities and
operations other than Gaming. The nongaming activities and
operations to be managed by Manager shall be determined by the
Management Committee from time-to-time, and shall initially include
the management of restaurant, retail, entertainment and lodging
facilities located at the Facility.
The parties hereto acknowledge that the economic uses of Gaming
activities conducted at the Facility will, in part, be
attributable to such nongaming activities, and that such nongaming
activities will substantially increase the number of customers
for, and the amounts customers spend on, Gaming activities.
Accordingly, such nongaming activities are essential to the
Enterprise as a means of increasing Gross Gaming Revenues.
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The parties anticipate that nongaming activities will be conducted
in a manner which is designed to increase Gross Gaming Revenues,
but may not maximize Gross Nongaming Revenues. Accordingly, the
parties desire to establish a mechanism by which the nongaming
management fee (the "Nongaming Management Fee") to be paid to
Manager as compensation for Manager's management of such nongaming
activities and operations may be periodically evaluated and
adjusted pursuant to criteria agreed to by the Corporate
Commission and Manager. The Nongaming Management Fee for each
Fiscal Month is therefore initially agreed to be 8.3% of Gross
Nongaming Revenues received by the Enterprise during such Fiscal
Month.
The Management Committee shall, pursuant to criteria agreed to
from time-to-time in writing by the Corporate Commission and
Manager, evaluate the Nongaming Management Fee monthly during the
term of this Agreement and shall implement any adjustment to the
Nongaming Management Fee required by such criteria.
7.2 Guaranteed Monthly Payment to Tribe.
(a) Amount. For each Fiscal Month during the term of this Agreement, Manager
shall pay to the Corporate Commission a guaranteed monthly payment equal to the
amount by which the Net Revenues for such Fiscal Month (or portion thereof)
actually distributed to the Corporate Commission pursuant to Section
7.3(b)(iii) below are less than $25,000; provided, however, that if the
Effective Date is other than the first day of a Fiscal Month, the guaranteed
monthly payment for the Fiscal Month of the Effective Date shall be prorated.
(b) Timing. Such payment shall be paid by Manager to the Corporate Commission
either (i) in advance pursuant to the following paragraph, or (ii) if not so
paid in advance, with the distribution to the Corporate Commission for such
Fiscal Month made by Manager pursuant to Section 7.3(b)(iii) below, and shall
be an advance against future monthly distributions to the Corporate Commission
made pursuant to Section 7.3 below. Such advances shall be repaid by the
Corporate Commission from future Net Revenues in the manner described in
Section 7.3(b)(vi) below.
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(c) Excess Revenue Applied. To the extent that the Net Revenues for a given
Fiscal Month distributed to the Corporate Commission exceed $25,000, the excess
shall be considered an advance payment of all or part of the guaranteed monthly
payment or payments for the Fiscal Month or Fiscal Months during the then
current fiscal year of the Enterprise for which payment of the guaranteed
monthly payment has not been made. Such excess shall be allocated to such
advance payments until the Corporate Commission has received the guaranteed
monthly payment for each Fiscal Month of such fiscal year. Any such excess
which is thereafter distributed to the Corporate Commission during such fiscal
year shall not be considered an advance payment of any guaranteed monthly
payment.
7.3 Distribution of Revenues.
(a) Report. Within 15 days after the end of each Fiscal Month during which
Gaming is conducted, Manager shall calculate and report in writing to the
Commission Representative the Gross Revenues, Operating Expenses, Gross Gaming
Revenues, Gross Nongaming Revenues, Gaming-Related Operating Expenses, Net
Gaming Revenues, Gaming Management Fee and Nongaming Management Fee for such
Fiscal Month.
(b) Priority. The Gross Revenues for such Fiscal Month shall be applied and
distributed by Manager in the following order, with such revenues to be applied
to or distributed for each category until all amounts due and payable under
that category are fully paid:
(i) First, to pay unpaid Operating Expenses other than the Gaming
Management Fee, the Nongaming Management Fee, and Operating Expenses
described in clauses 7.3(b)(ii) and (iv) below;
(ii) Second, to third-party lenders as payment of interest,
principal and other amounts then due and payable under third-party
loans to the Enterprise;
(iii) Third to the Corporate Commission as payment for any portion
of the guaranteed monthly payment for such Fiscal Month pursuant to
Section 7.2(a) above not previously prepaid pursuant to such Section
7.2(a);
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(iv) Fourth, to Manager as repayment of any unpaid advance of a
guaranteed monthly payment previously made by Manager pursuant to
Sections 7.2(a) and (b) above (in the order advanced);
(v) Fifth, to Manager as payment of any Gaming Management Fee
earned but not then paid (in the order incurred);
(vi) Sixth, to Manager as payment of any Nongaming Management Fee
earned but not then paid (in the order incurred);
(vii) Seventh, to such reserves as have been established by the
Management Committee in such amounts as have been determined by
such committee;
(viii) Eighth, for such other items and in such amounts as the Management
Committee may from time-to-time reasonably require; and
(ix) Ninth, the remainder to the Corporate Commission as a
distribution of net profits of the Enterprise.
To the extent that the funds available for distribution for a given Fiscal
Month are not sufficient to make any of the distributions required by the items
listed in clauses (i) through (vii) above, distribution for or payment of such
items (together with any additional interest, fees or other charges required as
a result of the failure to make a distribution for or payment of such item)
shall be made from future distributions when funds are available for
distribution in accordance with the priority stated above.
Nothing in this Agreement is intended to or shall be deemed to be inconsistent
with or otherwise affect the Corporate Commission's and the Manager's deposit
obligations under that certain Master Trust Agreement dated October 1, 1996
between the Corporate Commission and First Trust National Association.
Distributions to be made pursuant to Section 7.03(b)(ii) above shall (i) to the
extent required by such Master Trust Indenture, be made in the manner required
by the Master Trust Indenture, and (ii) to the extent not governed by such
Master Trust Indenture, be made in such order as Manager in its reasonable
discretion determines.
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Except to the extent prohibited by contractual obligations of the Corporate
Commission pertaining to the Enterprise, the Management Committee may from
time-to-time amend the priority stated above , but only upon agreement of both
members of the Management Committee (which agreement may be withheld in the
sole discretion of either member).
ARTICLE VIII
LITIGATION
8.1 Defense. If the Manager and/or the Corporate Commission and/or the Band
is sued or named a party to any action brought by a third-party as a result of
or in connection with this Agreement or any activity or operations conducted or
to be conducted under this Agreement, the defense of or response to such suit
or action shall be as follows:
(a) Manager. Manager shall have the right to defend or respond
to any claim in such a suit or action made against Manager by
counsel selected by Manager. The cost of such defense or response
shall be an Operating Expense.
(b) The Corporate Commission. The Corporate Commission shall
have the right to defend or respond to any claim in such a suit or
action made against the Corporate Commission (including any action
or suit which attempts to name the Enterprise as a party even
though the Enterprise is not a separate legal entity) by counsel
selected by the Corporate Commission. The cost of such defense or
response shall be an Operating Expense.
The Corporate Commission shall have the absolute right, based on
the Corporate Commission's sovereign immunity from suit, to
decline to participate in the defense of or response to any such
claim.
(c) The Band. The Band shall have the right to defend or respond
to any claim in such a suit or action made against the Band by
counsel selected by the Band. The cost of such defense or response
shall be an Operating Expense.
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The Band shall have the absolute right, based on the Band's
sovereign immunity from suit, to decline to participate in the
defense of or response to any such claim.
8.2 No Waiver of Sovereign Immunity. Nothing in this Article VIII shall be
deemed or construed to be a waiver of the either the Corporate Commission's or
the Band's sovereign immunity to suit by any third-party.
ARTICLE IX
PERFORMANCE; APPROVALS
9.1 Manager's Best Efforts. Manager shall use its best efforts to perform and
fulfill Manager's obligations under this Agreement in the manner required by
this Agreement.
9.2 Compliance. Manager shall, in performing its obligations under this
Agreement, comply with applicable laws, ordinances and regulations adopted by
the Band; provided, however, that:
(a) Neither the Band nor the Corporate Commission shall adopt or
enforce against Manager any law, ordinance or regulation which
materially and adversely affects Manager's economic benefits, or
Manager's remedies, under this Agreement;
(b) Neither the Band nor the Corporate Commission shall adopt or
enforce against Manager any law, ordinance or regulation which
violates IGRA or the Indian Civil Rights Act (Title 25, United
States Code, Sections 1301 through 1303); and
(c) Neither the Band nor the Corporate Commission shall amend any
land use or zoning law, regulation or ordinance in a manner which
materially and adversely affects the use of the Gaming Site or the
Facility for the purposes contemplated by this Agreement.
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9.3 Non-interference in Tribe Affairs. Manager shall not interfere with the
internal affairs of the Corporate Commission or the Band, or any subdivision,
department or agency of the Band. For the purposes of this Section 9.3,
"interfere" shall mean any attempt by Manager to influence a decision of the
governing body or any officer of the Corporate Commission or the Band, or to
influence any Band election, by doing any of the following in connection with
such decision or election:
(i) offering any cash incentive;
(ii) making any written or oral threat against any person or
thing; or
(iii) any similar act;
provided, however, that neither Manager's assertion of its rights under this
Agreement nor any recommendation, suggestion or assertion of opinion made by
Manager regarding the Enterprise shall be "interference" for the purpose of
this Section 9.3.
If the Band believes that Manager has violated the provisions of this Section
9.3 by engaging in prohibited interference, the Band shall give the Manager
written notice describing the incident which the Band claims constitutes
prohibited interference and identifying the person or persons claimed to have
acted on Manager's behalf in engaging in such interference. Manager shall have
the right to cure any breach of this Agreement claimed to be prohibited
interference by terminating the involvement of such person or persons with the
Enterprise.
9.4 Approvals and Consents. If this Agreement requires or contemplates an
approval or consent by a party hereto, that party shall not unreasonably
withhold or delay such approval or consent unless a specific provision of this
agreement states that such approval or consent may be withheld in such party's
sole discretion.
Each approval or consent required or contemplated by this Agreement shall be
evidenced by the following:
(a) Manager. If the approval or consent is by Manager, by
written approval signed by the Manager Representative;
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(b) Management Committee. If the approval or consent is by the
Management Committee, by written approval signed by the Commission
Representative and the Manager Representative;
(c) Commission Representative. If the approval or consent is by
the Commission Representative, by written approval signed by the
Commission Representative; and
(d) Corporate Commission. If the approval or consent is by the
Corporate Commission, by written resolution of the Corporate
Commission signed by the Commissioner of the Corporate Commission
and attested to by the Secretary or Assistant Secretary of the
Corporate Commission.
ARTICLE X
INSURANCE
10.1 Manager to Obtain. Manager shall, during the term of this Agreement,
obtain and maintain in effect on behalf of the Corporate Commission and Manager
the following insurance coverages:
(a) Casualty. Casualty insurance for the Facility providing
coverage against fire, wind, theft, vandalism, malicious mischief,
sprinkler leakage and such other casualties, and with such limits,
as the Management Committee from time-to-time reasonably requires;
(b) Liability. Commercial liability insurance against claims for
injury, death and property damage occurring on, in or about the
Gaming Site, Facility or Ancillary Facilities, or in connection with
the Enterprise or any operation thereof, with such limits as the
Management Committee from time-to-time reasonably requires;
(c) Worker's Compensation. Worker's compensation insurance to
the extent deemed appropriate by the Management Committee;
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(d) Business Interruption Insurance. Business interruption
and/or continuing expense insurance providing such coverage as the
Management Committee from time-to-time reasonably requires; and
(e) Other. Such other insurance coverages as the Management
Committee from time-to-time reasonably requires.
10.2 Nature of Coverages. The Management Committee shall from time-to-time
determine the appropriate limits, deductibles and endorsements for the
coverages to be obtained pursuant to Section 10.1 above.
10.3 No Jurisdiction. Nothing in this Article X shall be deemed a waiver of
the sovereign immunity of either the Corporate Commission or the Band or
construed to subject the Corporate Commission or employees of the Corporate
Commission (including Corporate Commission employees assigned to the
Enterprise) to any jurisdiction of the State of Minnesota or any political
subdivision of such state, which jurisdiction does not exist independent of
this Agreement.
10.4 Policy Requirements. Each policy of insurance obtained pursuant to this
Article X shall be issued by an entity reasonably acceptable to the Management
Committee. The Corporate Commission shall be named as insured and Manager and
any parent of Manager shall be named as additional insureds in all such
policies. Manager shall be a loss payee (as Manager's interest appears) with
respect to the coverages described in Sections 10.1 (a), (c) and (d) above.
10.5 Enterprise Expenses. The premiums and other charges to obtain and
maintain insurance coverage pursuant to this Article X shall be Operating
Expenses.
10.6 Business Interruption Proceeds. Proceeds actually received from or under
the business interruption insurance obtained and maintained by Manager pursuant
to Section 10.1 above shall be deemed revenues and receipts of the Enterprise
for the purposes of this Agreement.
ARTICLE XI
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REPRESENTATIONS AND WARRANTIES
11.1 Manager's Representations and Warranties. Manager hereby represents and
warrants to the Corporate Commission, as of the date of execution of this
Agreement by Manager, as follows:
(i) Manager has the full authority to execute, enter into and
perform its obligations under this Agreement, and the persons who
execute this Agreement on behalf of Manager are duly authorized
signatories of Manager;
(ii) the persons or entities which individually own or hold at
least 10% of the common equity of Manager are as follows:
Name Federal Identification Percent of Common Equity
- ---- Number Owned
---------------------------- ----------------------------
Grand Casinos, Inc. 41-1689535 100%
(iii) the board of directors of Manager consists of the following
persons:
Name
----
Lyle Berman
Stanley M. Taube
Thomas B. Brosig
(iv) no director, officer or person or entity owing 5% or more of
the common equity of Manager has been convicted of or pleaded nolo
contendre to any felony or gaming offense.
Manager shall notify the Corporate Commission in writing of any future material
change to the representations and warranties stated in this Section 11.1. Such
notice shall be given by Manager within 30 days after the later of (i) the date
of such change, or (ii) the date on which Manager becomes aware of such change.
Each such notice shall be a representation and warranty by Manager, as of the
date of such notice, of the change described therein.
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The Corporate Commission shall be responsible for providing notice of any such
change to the NIGC in compliance with IGRA and any regulations adopted pursuant
to IGRA.
11.2 Corporate Commission's Representations and Warranties. The Corporate
Commission hereby represents and warrants to Manager, as of the date of
execution of this Agreement by the Corporate Commission, the Corporate
Commission has the full authority to execute, enter into and (subject to
approval by the NIGC) perform its obligations under this Agreement, and the
persons who execute this Agreement on behalf of the Corporate Commission are
duly authorized signatories of the Corporate Commission.
ARTICLE XII
CESSATION OF ENTERPRISE
12.1 By Law. If, during the term of this Agreement, Gaming cannot be lawfully
conducted at the Gaming Site by reason of the application of any legislation or
court or administrative agency order or decree adopted or issued by a
governmental entity having the authority to do so, Manager shall, within 60
days after such legislation, order or decree becomes effective, elect to:
(i) retain Manager's interest in this Agreement and suspend
Gaming operations until such date, if any, during the term of this
Agreement on which Gaming at the Gaming Site becomes lawful;
(ii) retain Manager's interest in this Agreement, suspend Gaming
operations until such date, if any, during the term of this
Agreement on which Gaming at the Gaming Site becomes lawful, and
with the prior approval of the Corporate Commission, which approval
shall not be unreasonably withheld, use the Facility for any other
lawful purpose pursuant to a use agreement containing terms
reasonably acceptable to Manager and the Corporate Commission; or
(iii) terminate Gaming operations and terminate this Agreement.
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Manager shall give the Corporate Commission written notice of Manager's
election within such 60-day period.
(a) Election to Suspend Gaming. If Manager elects to retain its interest in
this Agreement under clause (i) or (ii) above, Manager shall have the right
(but not the obligation) to commence Gaming operations within 60 days after the
date on which Gaming becomes lawful. Manager may exercise such right by giving
the Corporate Commission written notice of such exercise within 30 days after
the date on which Gaming becomes lawful.
Any reasonable payment to any third party made during the period during which
Gaming is unlawful to preserve or eliminate any leasehold or purchase contract
rights of the Enterprise shall be paid by the Enterprise (or reimbursed by the
Enterprise if paid by Manager) after Gaming is recommenced.
(b) Election to Terminate Agreement. If Manager elects to terminate this
Agreement under this Section 12.1, the provisions of Section 14.5 below shall
apply.
12.2 By Casualty. If, during the term of this Agreement, the Facility is
damaged by casualty or other occurrence to the extent, as reasonably determined
by Manager, that Gaming cannot be conducted at the Gaming Site, Manager shall,
within 60 days after such casualty or occurrence, elect to:
(i) retain Manager's interest in this Agreement pending repair or
reconstruction, suspend Gaming operations pending the repair or
reconstruction of the Facility, and arrange for such repair or
reconstruction in the manner described in this Section 12.2; or
(ii) terminate Gaming operations and terminate this Agreement.
Manager shall give the Corporate Commission written notice of Manager's
election within such 60-day period.
(a) Election to Suspend Gaming. If Manager elects to retain its interest in
this Agreement under clause (i) above, Manager shall promptly verify the amount
of insurance proceeds available to pay the cost of repair or reconstruction.
Manager is hereby granted the authority to submit, adjust and
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settle, on behalf of the Corporate Commission, all insurance claims
associated with the casualty or occurrence; provided, however, that Manager
shall obtain the Commission Representative's prior written consent (which
consent shall not be unreasonably withheld) to any settlement. Manager shall
provide copies of all settlement documents to the Commission Representative.
All insurance proceeds received as a result of such settlement shall be applied
to the cost of such repair or reconstruction, and any surplus after paying all
such costs shall be revenues of the Enterprise.
Any repair or reconstruction shall be performed by a contractor selected by the
Management Committee, and shall be completed in accordance with such plans and
specifications or other documents describing the work to be performed as are
approved by the Management Committee.
If the Manager determines, or if the parties hereto otherwise discover, that
available insurance proceeds and Enterprise monies are not sufficient to pay
the costs of the repair or reconstruction, Manager shall:
(i) arrange, on behalf of the Corporate Commission, for
third-party financing of the amount required to pay such costs on
commercially reasonable terms and conditions; or
(ii) loan the amount required to pay such costs to the Corporate
Commission on commercially reasonable terms and conditions; or
(iii) terminate this Agreement.
Manager shall have the right to elect, in its sole discretion, which of the
foregoing actions the Manager will take. The Corporate Commission hereby
agrees to accept, and shall execute and deliver all documents required or
appropriate to evidence and implement, any such third-party or Manager
financing on terms and conditions which are commercially reasonable. If such
financing is provided by a third-party or Manager, such documents shall include
such waiver of the Corporate Commission's sovereign immunity to suit as is
reasonably required by the third-party lender or Manager.
(b) Election to Terminate Agreement. If Manager elects to terminate this
Agreement under this Section 12.2, the provisions of Section 14.5 below shall
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apply. If Manager elects to terminate this Agreement under this Section 12.2
before any insurance claim associated with the casualty or occurrence is
settled, the Corporate Commission shall adjust and settle such claim.
12.3 Guaranteed Payment, Term Suspended. If Gaming operations are suspended
pursuant to Section 12.1 or Section 12.2 above, Manager's obligation to make
guaranteed monthly payments to the Corporate Commission pursuant to Section 7.3
above shall be suspended so long as Gaming operations are suspended.
If Manager has not elected to terminate this Agreement and Gaming operations
are suspended pursuant to Section 12.1 or Section 12.2 above, the term of this
Agreement (or any renewal thereof if the suspension occurs during such renewal)
shall be extended by a period equal to the period of such suspension.
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ARTICLE XIII
ARBITRATION
13.1 Arbitration Required. Any claim, controversy or dispute arising out of
or relating to this Agreement, or any alleged default hereunder or breach of
any provisions hereof, except decisions by a party hereto or a member of the
Management Committee which this Agreement specifically states that such party
or member may make in its sole discretion, shall be submitted to binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in effect at the time of submission. Judgment on any
arbitration award may be entered in any court having jurisdiction over the
parties pursuant to Article XV below.
13.2 Place of Arbitration. Unless the parties hereto otherwise agree in
writing prior to the submission of such claim, controversy or dispute to
arbitration, arbitration proceedings under this Article XIII shall be held in
the State of Minnesota.
13.3 Selection of Arbitrators. Either party may, at any time prior to the
selection of an arbitrator or arbitrators, require that the arbitrator or
arbitrators selected be an attorney or attorneys licensed to practice law in
the State of Minnesota or in the United States District Court for the District
of Minnesota.
Unless the parties hereto otherwise agree in writing, any matter to be
arbitrated shall be submitted to a panel of three arbitrators. If such a panel
is to be selected, one arbitrator shall be designated by the Corporate
Commission, one arbitrator shall be designated by Manager and the third
arbitrator shall be designated by the two arbitrators designated by the parties
hereto.
13.4 Award. The arbitration award shall be in writing signed by each of the
arbitrators, and shall state the basis for the award.
13.5 Enforcement. Except to the extent such enforcement will be inconsistent
with a specific provision of this Agreement, arbitration awards made pursuant
to this Article XIII shall be enforceable under Title 9 of the
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United States Code and any applicable state law governing the enforcement of
arbitration awards.
13.6 Appeal. In addition to any basis for appeal of an arbitration award
stated in Title 9 of the United States Code or any applicable state law
governing the enforcement of arbitration awards, either party hereto may appeal
an arbitration award on the basis that the arbitrator or arbitrators
incorrectly decided a question of law in making the award.
13.7 Injunctive Relief. Either party hereto shall have the right to seek and
obtain a court order from a court having jurisdiction over the parties
requiring that the circumstances specified in the order be maintained pending
completion of the arbitration proceeding.
ARTICLE XIV
DEFAULTS; TERMINATION
14.1 Termination by Mutual Agreement. This Agreement may be terminated at any
time by written agreement executed on behalf of each of the parties hereto and
stating the terms and conditions pursuant to which this Agreement is to be
terminated.
14.2 Manager's Termination Following Cessation of Gaming. Manager shall have
the right to terminate this Agreement pursuant to and in the manner provided in
Article XII above.
14.3 Manager Default: If:
(i) Manager fails to make any payment to the Corporate Commission
within 5 days after such payment is due and payable, and such
failure is not cured within 10 days after the Corporate Commission
gives Manager written notice of such failure; or
(ii) Manager defaults in any material way in the performance of
any other obligation of Manager under this Agreement or breaches in
any material way any representation or warranty made by
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Manager in this Agreement, and such default or breach is not cured
within 60 days after the Corporate Commission gives Manager
written notice of such default or breach (provided that if such
default or breach cannot be cured within such 60-day period and
Manager commences a cure within such 60-day period and diligently
pursues such cure, then if such default or breach is not cured
within 90 days);
then the Corporate Commission shall have the rights to (i) terminate this
Agreement by giving Manager written notice of termination, or (ii) seek relief
through arbitration under Article XIII above. Manager shall not be in default,
or breach any of Manager's obligations, under this Agreement by reason of any
act or omission by any employee of the Corporate Commission at the Enterprise
unless (i) Manager specifically instructed such employee to perform such act or
omission, or (ii) Manager had actual knowledge of a similar act or omission by
such employee prior to the act or omission claimed to have caused such default
or breach and Manager failed to request the supervisor of such employee to take
disciplinary action with respect to such prior act or omission.
14.4 Corporate Commission Default. If the Corporate Commission defaults in
any material way in the performance of any obligation of the Corporate
Commission under this Agreement, and such default is not cured within 60 days
after Manager gives the Corporate Commission written notice describing such
default (provided that if such default cannot be cured within such 60-day
period and the Corporate Commission commences a cure within such 60-day period
and diligently pursues such cure, then if such default is not cured within 90
days), then Manager shall have the rights to (i) terminate this Agreement by
giving the Corporate Commission written notice of termination, or (ii) seek
relief through arbitration under Article XIII above.
14.5 Effects of Termination. Following any termination of this Agreement, in
addition to and notwithstanding any other right or remedy available to either
party to this Agreement:
(i) each party hereto shall be entitled to retain any amounts
distributed or paid under this Agreement to such party prior to the
termination date; and
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(iii) amounts to be distributed or paid under this Agreement which
accrued through the date of termination shall be distributed or paid
in accordance with the provisions of this Agreement.
ARTICLE XV
LIMITED WAIVER OF SOVEREIGN IMMUNITY
15.1 Limited Waiver. To induce Manager to enter into this Agreement, the
Corporate Commission hereby waives the Corporate Commission's sovereign
immunity to suit to the extent (and only to the extent) stated in this Article
XV.
The Corporate Commission hereby waives its sovereign immunity from suit, and
hereby consents to be sued or named a party, in any action brought or pursued
in the United States District Court for the District of Minnesota, the United
States Court of Appeals and the United States Supreme Court; provided, however,
that such waiver shall apply only to actions arising under or related to this
Agreement. Manager hereby agrees and submits to the jurisdiction of the United
States District Court for the District of Minnesota, the United States Court of
Appeals and the United States Supreme Court, hereby waives any objection to the
jurisdiction of such courts and hereby agrees not to object to or contest the
jurisdiction of such courts. Each of Manager and the Corporate Commission
hereby agrees to forcefully assert and argue that such courts have jurisdiction
in such actions. If Manager challenges the jurisdiction of such courts in any
action, such challenge shall render the limited waiver of sovereign immunity
stated in the Article XV ineffective with respect to the action in which such
challenge occurs.
If the United States District Court for the District of Minnesota is determined
not to have jurisdiction over an action arising under or related to this
Agreement, then the Corporate Commission's waiver of sovereign immunity from
suit, and the Corporate Commission's consent to be sued or named a party, in an
action arising under or related to this Agreement shall also apply to any such
action brought in the state court system of the State of Minnesota.
The Corporate Commission also waives the Corporate Commission's sovereign
immunity to suit, and agrees that the Corporate Commission may
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be sued or named a party, in any action arising under or related to this
Agreement brought in the Court of Central Jurisdiction of the Mille Lacs Band
of Chippewa Indians.
The limited waiver stated in this Article XV shall be effective only for the
following:
(a) Order for Arbitration. Any action seeking to compel
arbitration under Article XIII above.
(b) Monetary Damages. Any action seeking to enforce an
arbitration award of money damages made pursuant to Article XIII
above; provided, however, that any collection action or execution
shall be only against (i) undistributed or future assets of the
Enterprise (other than the Facility), and (ii) if the arbitration
award includes a determination that the Corporate Commission or the
Band prejudiced Manager's rights under this Agreement, or caused in
a material way the lack of business success of the Enterprise,
future proceeds of any other gaming operations conducted by or on
behalf of the Corporate Commission or Band. In no instance shall
any such collection action or execution be against any asset of the
Corporate Commission or Band other than those assets described in
the preceding sentence.
(c) Consent/Approval. Any action seeking to enforce an
arbitration award made pursuant to Article XIII above, which award
requires that the Corporate Commission and/or the Commission
Representative consent to or approve an action, request or
recommendation, and includes a determination that the Corporate
Commission and/or the Commission Representative unreasonably
withheld such consent or approval contrary to the provisions of this
Agreement.
(d) Injunctive Relief; Specific Performance. Any action seeking
to enforce an arbitration award made pursuant to Article XIII above,
which award requires that the Corporate Commission and/or the
Commission Representative take or refrain from taking any action
(other than the payment of monetary damages) under this Agreement.
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ARTICLE XVI
FUTURE IMPROVEMENTS
16.1 Improvements. Manager may from time-to-time recommend to the Management
Committee capital improvements to the Facility. Any such recommendation shall
include Manager's recommendation for financing the cost of such improvement
from existing cash flow, existing or future reserves, third-party financing, or
funds to be provided by the Corporate Commission.
The Management Committee shall determine whether any capital improvement is to
be made, the nature and cost of such improvement, and the method of paying for
or financing such improvement. Manager shall not have any obligation to
provide financing for any such improvement.
The plans for such improvement shall be prepared and approved, and the
construction of such improvement shall be completed, in such manner as the
Management Committee deems appropriate.
ARTICLE XVII
NOTICES
17.1 Form and Addresses. All notices, demands, requests or other
communications from one party to the other required or permitted under this
Agreement shall be in writing and, until otherwise specified in a written
notice given in the manner specified in this Section 17.1, shall be sent to the
following addresses:
(a) if to the Corporate Commission:
Mille Lacs Band of Chippewa Indians Corporate Commission
HCR 67, Box 194
Onamia, Minnesota 56359
Attention: Commissioner of Corporate Affairs
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(b) if to Manager:
Mille Lacs Gaming Corporation
13705 First Avenue North
Minneapolis, MN 55441-5451
Fax (612) 449-9353
Attention: Chairman of the Board
with a copy to:
Grand Casinos, Inc.
13705 First Avenue North
Minneapolis, MN 55441-5451
Fax (612) 449-9353
Attention: General Counsel
17.2 Manner of Giving. Each such communication shall be given (i) by
registered or certified mail of the United States Postal Service, return
receipt requested, postage prepaid, (ii) by overnight delivery service
guaranteeing next business day delivery, or (iii) via telecopier or facsimile
transmission to the facsimile number listed above; provided, however, that if
such communication is given by telecopier or facsimile transmission, an
original counterpart of such communication shall concurrently be sent in the
manner specified in clause (ii) above.
17.3 Deemed Given. Each such communication given under Section 17.1 above
shall be deemed to have been given (i) seven (7) days following the deposit of
such communication in the United States mail if mailed; (ii) on the date of
delivery if delivered by overnight delivery service; or (iii) on the day of the
transmission of such communication if sent by telecopier or facsimile
transmission.
ARTICLE XVIII
MISCELLANEOUS
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18.1 Captions. The captions in this Agreement are inserted for convenience of
reference only; they are not part of this Agreement and shall not affect its
interpretation.
18.2 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective permitted successors
and permitted assigns.
Neither party hereto shall assign or encumber its interest in this Agreement
without the prior written consent of the other party, which consent shall not
be unreasonably withheld; provided that no such assignment shall release the
Corporate Commission or Manager from its respective obligations under this
Agreement.
If IGRA or any regulation adopted thereto requires approval by the NIGC or any
official thereof of an assignment of Manager's interest, no assignment by
Manager under this Section 18.2 shall become effective until the required
approval is obtained.
18.3 Entire Agreement; Modifications. This Agreement contains the entire
understanding of the parties regarding their subject matter, and shall, as of
the Effective Date, supersede all prior negotiations, understandings and
agreements of the parties with respect thereto.
The express terms of this Agreement shall control and supersede any course of
performance and/or customary practice inconsistent with such terms. Any
subsequent agreement between the parties hereto shall not change or modify this
Agreement unless in writing and signed by the party against whom enforcement of
such change or modification is sought.
18.4 Provisions Separable. The provisions of this Agreement are independent
of and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by the invalidity or unenforceability of any
other provision.
18.5 No Waiver. No failure or delay by either party to this Agreement to
exercise any right, remedy, power or privilege under this Agreement shall be a
waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege preclude any other or further exercise of the same or of any
other right, remedy, power or privilege with respect to any occurrence.
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No waiver shall be effective unless it is in writing and signed by the
party asserted to have granted such waiver.
18.6 No Joint Venture. Manager shall be an independent contractor and agent
engaged by the Corporate Commission to perform the duties and obligations
described in this Agreement. Accordingly, nothing in this Agreement shall be
deemed or construed to create a joint venture between the Corporate Commission
and Manager.
18.7 No Conveyance. Nothing in this Agreement shall be deemed or construed to
transfer or convey to Manager any lien on or interest in the Gaming Site or
Facility, or to transfer or convey to Manager any proprietary interest in the
Enterprise.
18.8 Time of Essence. Time is of the essence in the performance by the
parties hereto of their respective obligations under this Agreement.
18.9 Execution. Four original copies of this Agreement are being executed on
behalf of each of the parties hereto. Each such party is retaining two
original copies of this Agreement. Each of the four original copies of this
Agreement shall be equally valid.
18.10 Corporate Commission's Obligations Limited. Nothing in this Agreement
shall obligate the Corporate Commission to encumber or make any payment from
assets of the Corporate Commission or Band other than (i) revenues and receipts
and personal property of the Enterprise; and (ii) the revenues and receipts of
any other gaming operation conducted by the Corporate Commission or Band.
18.11 Further Assurances. Each party hereto shall from time-to-time, at the
reasonable request of the other party (i) execute and deliver or cause to be
executed and delivered such additional documents and papers, and (ii) take or
cause to be taken such additional actions as may be reasonably required to
effectively evidence and implement the transactions described in and
contemplated by this Agreement.
18.12 Interpretation. No provision of this Agreement shall be interpreted for
or against either party because that party or that party's legal representative
or counsel drafted such provision.
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18.13 Attorneys' Fees. The prevailing party in any arbitration proceeding
under Article XIII above or any action under Article XV above shall recover
from the other party the prevailing party's reasonable attorneys' fees and all
costs and expenses incurred by the prevailing party in such proceeding or
action.
18.14 Corporate Commission's Use of Facility. The Corporate Commission shall
have the right to use the Facility, at the sole cost of the Corporate
Commission, for a reasonable number and reasonable periods of times to hold
community and any other events; provided, however, that the Corporate
Commission's exercise of such right shall be only following reasonable notice
to Manager and in a manner which does not materially interfere with the
operation and business of the Enterprise.
18.15 Buyout Option. The Corporate Commission shall have the option to
purchase all of Manager's rights and obligations under this Agreement. The
Corporate Commission may exercise such option by giving Manager at least 90
days written notice of such exercise, accompanied by payment of the purchase
price for such rights and obligations (as described in the following paragraph)
in immediately available funds.
The purchase price for such rights and obligations shall be an amount equal to
the amount which Manager would have received under the 1990 Management
Agreement, excluding any amounts due under Section 27 of the 1990 Management
Agreement, as adjusted to reflect the accounting practices and procedures
stated in Exhibit B attached hereto for the period from the date of closing of
such purchase to April 2, 1998 if:
(i) the 1990 Management Agreement as adjusted to reflect the
accounting practices and procedures stated in Exhibit B attached
hereto remained in full force and effect through April 2, 1998; and
(ii) the daily profit for the period from the date of the
Corporate Commission's purchase through April 2, 1998 is assumed to
be 1/365 of the aggregate net profits of the Enterprise (calculated
as provided in the 1990 Management Agreement as adjusted to reflect
the accounting practices and procedures stated in Exhibit B attached
hereto) for the twelve months preceding the first day of the month
during which the Corporate Commission gives
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written notice the Corporate Commission's exercise of its
option.
In addition, the Corporate Commission shall pay to Manager the amount described
in Section 18.16 below.
18.16 Recapture of Certain Amounts. Within 30 days after the termination of
this Agreement, the Corporate Commission shall pay to Manager (i) all Gaming
Management Fees and Nongaming Management Fees earned but not then paid, and
(ii) forty percent (40%) of the then fair market value of all purchases of
video slot machines, but not including any bill acceptors attached to such slot
machines, by or on behalf of the Enterprise during the term of this Agreement
and during the term of the 1990 Management Agreement, which purchases were
accounted for as Operating Expenses under this Agreement or the 1990 Management
Agreement.
For the purposes of this Section 18.16, the term "fair market value" shall mean
the fair market value as agreed to be the parties hereto or by arbitration
pursuant to Article XIII above.
ARTICLE XIX
TERMINATION OF PRIOR AGREEMENT
19.1 Management Agreement. The 1990 Management Agreement as adjusted to
reflect the accounting practices and procedures stated in Exhibit B attached
hereto shall remain in full force and effect, and shall not be amended,
modified or affected by this Agreement, until such time as the Effective Date
occurs. The 1990 Management Agreement as adjusted to reflect the accounting
practices and procedures stated in Exhibit B attached hereto shall apply to all
events and incidents which occur, all claims which arise, and all revenues and
expenses of the Enterprise received or incurred prior to the Effective Date.
Upon the occurrence of the Effective Date and this Agreement becoming
effective, the 1990 Management Agreement shall without further action be
terminated as of the Effective Date. If, however, the Effective Date does not
occur, the 1990 Management Agreement as adjusted to reflect the accounting
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practices and procedures stated in Exhibit B attached hereto shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement
as of the date stated in the introduction hereof.
The Corporate Commission of the
Mille Lacs Band of Chippewa Indians
By /s/ Paul Mans
------------------------------
Name Paul Mans
----------------------------
Title Interim Commissioner of
Corporate Affairs
---------------------------
MANAGER
Mille Lacs Gaming Corporation,
a Minnesota corporation
By /s/ Lyle Berman
------------------------------
Name Lyle Berman
----------------------------
Title Chief Executive Officer
---------------------------
The foregoing Management Agreement is hereby ratified and approved by the
Mille Lacs Band of Chippewa Indians (the "Band"), and, to induce Mille Lacs
Gaming Corporation to enter into such Agreement, the Band hereby agrees to be
bound by the provisions of Sections 3.3, 3.6, 3.7, 5.17, 6.1 and 9.3 of such
Management Agreement as such provisions pertain to the Band.
Mille Lacs Band of Chippewa Indians
By /s/ Marge Anderson
------------------------------
Name Marge Anderson
----------------------------
Title Chief Executive
---------------------------
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Exhibits omitted
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EXHIBIT 10.61
FEE GUIDELINES AGREEMENT
(MILLE LACS FACILITY)
This Agreement is made effective October 1, 1996, by and between The Corporate
Commission of the Mille Lacs Band of Ojibwe Indians (the "Corporate
Commission"), and Mille Lacs Gaming Corporation, a Minnesota corporation
("Manager").
WHEREAS, the Corporate Commission and Manager are the parties to that certain
Management Agreement - Mille Lacs Facility dated as of October 1, 1996 (the
"Mille Lacs Management Agreement"); and
WHEREAS, the Mille Lacs Management Agreement states the terms and conditions
pursuant to which Manager will, from and after the Effective Date, manage
gaming and nongaming activities at the facility owned by the Corporate
Commission and known as Grand Casino Mille Lacs; and
WHEREAS, Section 7.1 of the Mille Lacs Management Agreement provides that the
Corporate Commission and Manager are to agree to criteria to be used in
periodically evaluating and adjusting the Nongaming Management Fee; and
WHEREAS, the Corporate Commission and Manager desire to evidence their
agreement to the criteria stated below;
NOW, THEREFORE, the Corporate Commission and the Manager hereby agree as
follows:
1. Definitions. Capitalized terms used in this Agreement but which are not
defined in this Agreement shall either have the meanings ascribed to them in
the Mille Lacs Management Agreement or in Section 4 below.
2. Criteria. The Nongaming Management Fee to be established by the Management
Committee pursuant to Section 7.1 of the Mille Lacs Management Agreement shall
be established for each Fiscal Month during the term of the Mille Lacs
Management Agreement prior to making the distributions and payments for such
Fiscal Month to be made pursuant to Article VII of the Mille Lacs Management
Agreement. The Nongaming Management Fee for such Fiscal Month shall be the
percentage (the "Nongaming Management Fee Percentage") of the Gross Nongaming
Revenues received by the Enterprise during such Fiscal Month as
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will produce a Nongaming Management Fee for such Fiscal Month which, when added
to or subtracted from the Gaming Management Fee to be paid for such Fiscal
Month, will equal the aggregate amount which would have been distributed for
such Fiscal Month under the 1990 Mille Lacs Management Agreement, as modified
by the Accounting Practices and Procedures (the "Accounting Practices")
described in Section 3 below, as the Original Mille Lacs Fee (had the 1990
Mille Lacs Management Agreement remained in effect). Each of the parties
hereto acknowledges that the Nongaming Management Fee for a given fiscal month
may, depending on the results of the calculation of such Nongaming Management
Fee, be either positive or negative.
The Nongaming Management Fee Percentage for a given Fiscal Month shall be
calculated as follows:
(a) First, the Original Mille Lacs Fee for such Fiscal Month
which would have been paid under the 1990 Mille Lacs Management
Agreement (as modified by the Accounting Practices) shall be
calculated;
(b) Second, the Gaming Management Fee under the Mille Lacs
Management Agreement shall be calculated;
(c) Third, the result of calculation (b) above shall be
subtracted from the result of calculation (a) above;
(d) Fourth, the result of calculation (c) above shall be divided
by the Nongaming Revenue for such Fiscal Month;
(e) Fifth, the result of calculation (d) above (expressed as a
decimal number) shall be converted into a percentage.
The percentage resulting from the conversion to which subparagraph (e) above
refers shall be the Nongaming Management Fee Percentage for such Fiscal Month.
3. Accounting Practices and Procedures. In determining the Original Mille Lacs
Fee and the amount which would have been distributed under the 1990 Mille Lacs
Management Agreement, "net profits" to be allocated between the Corporate
Commission and Manager shall mean income before income taxes determined
pursuant to generally accepted accounting principles, adjusted as follows:
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Additions:
(i) Add depreciation expense as recorded under generally accepted
accounting principles; and
(ii) Add insurance expense as recorded under generally accepted
accounting principles.
Subtractions:
(i) Subtract principal which would have been paid pursuant to
that certain Real Estate Construction and Term Note (the "1992
Note"), in the original principal amount of $5,500,000, dated
February 19, 1992 and given by the Corporate Commission to Peoples
Bank of Commerce had such 1992 Note been paid in accordance with its
(their) original amortization schedule;
(ii) Subtract principal paid pursuant to that certain Indenture of
Trust (the "1994 Indenture") between the Corporate Commission and
Colorado National Bank relating to the Corporate Commission of the
Mille Lacs Band of Chippewa Indians - Revenue Bonds - Series 1994;
(iii) Subtract principal paid under notes, and principal
reductions under asset leases accounted for as capital lease
obligations pursuant to generally accepted accounting principles,
which notes and leases pertain to Enterprise assets;
(iv) Subtract such capital expenditure reserves for the Enterprise
established by the Management Committee under the 1990 Mille Lacs
Management Agreement; and
(iv) Subtract such other costs and expenses of the Enterprise, if
any, as were designated by such Management Committee for such
subtraction.
4. Capitalized Terms. Capitalized terms and phrases which are not defined in
the preceding portions of this Agreement or in the Mille Lacs Management
Agreement shall have the following meanings:
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(a) 1990 Mille Lacs Management Agreement. "1990 Mille Lacs
Management Agreement" shall mean that certain Amended and Restated
Management and Construction Agreements between the Corporate
Commission and Manager dated as of September 10, 1990.
(b) Original Mille Lacs Fee. "Original Mille Lacs Fee" shall
mean the sum of all amounts which Manager would be entitled to
receive under the 1990 Mille Lacs Management Agreement (as adjusted
by the Accounting Practices) but excluding (i) all amounts payable
under Sections 11.4 and 27 of the 1990 Mille Lacs Management
Agreement, and (ii) all amounts payable under Section 11.1 of the
1990 Mille Lacs Management Agreement which are attributable to bill
acceptors attached to video slot machines, for the period from
October 1, 1996 to April 3, 1998 assuming the 1990 Mille Lacs
Management Agreement remained in full force and effect through April
3, 1998.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
effective date stated above.
Corporate Commission of the
Mille Lacs Band of Ojibwe Indians
By s/ Paul Mans
-----------------------------
Name Paul Mans
-------------------------
Title Interim Commssioner of
Corporate Affairs
------------------------
Mille Lacs Gaming Corporation
By /s/ Thomas Brosig
-----------------------------
Name Thomas Brosig
-------------------------
Title President
------------------------
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EXHIBIT 10.62
MANAGEMENT AGREEMENT
(Hinckley Facility)
THIS MANAGEMENT AGREEMENT is entered into on the Mille Lacs Indian Reservation,
located within the exterior boundaries of the State of Minnesota, as of October
__, 1996, by and between The Corporate Commission of the Mille Lacs Band of
Chippewa Indians (the "Corporate Commission"), and Mille Lacs Gaming
Corporation, a Minnesota corporation ("Manager"). Notwithstanding the execution
of this Agreement by the Corporate Commission and Manager, this Agreement shall
not be effective until the Effective Date (as defined in Section 2.7 below).
Words and phrases in this Agreement which are capitalized are defined in
Article II below.
In consideration of the following recitals, and the promises and agreements
stated below, the Corporate Commission and Manager hereby agree as follows:
ARTICLE I
RECITALS
1.1 Tribal Recognition. The Mille Lacs Band of Chippewa Indians (the "Band")
is recognized by the United States Secretary of the Interior as (i) eligible
for the special programs and services provided by the United States to Indians
because of their status as Indians, and (ii) having powers of self-government.
1.2 The Gaming Site. The property (the "Gaming Site") described in Exhibit A
attached hereto constitutes land over which the Band exercises governmental
power and which is held in trust by the United States for the benefit of the
Band. The Band has sovereign powers over the Gaming Site pursuant to the
Band's powers of self-government, the Indian Reorganization Act of 1934, the
Revised Constitution and By-laws of the Minnesota Chippewa Tribe as ratified on
November 23, 1963 and approved by the United States Secretary of the Interior
on March 3, 1964, and the statutes and
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ordinances of the Band. Pursuant to such powers, the Band has entered into a
Business Lease Agreement with the Corporate Commission, as amended, dated
November 26, 1991 and filed of record in the office of the Pine County Minnesota
Recorder as of December 2, 1991 as microfilm number 324855, by which the Band
leased the Gaming Site to the Corporate Commission.
1.3 Corporate Commission Powers. Pursuant to the Band's powers of
self-government, the Band enacted Band Statute 1022-MLC Chapter 16, creating
the Corporate Commission as an independent entity having the powers to approve
the construction of business facilities on behalf of the Band, and to enter
into and perform under contracts and/or agreements pertaining to such
facilities.
1.4 Existing Facility. Pursuant to such powers, the Corporate Commission
entered into those certain Amended and Restated Management and Construction
Agreements (the "1990 Management Agreement") with Manager. The 1990 Management
Agreement stated the terms and conditions pursuant to which (i) the Facility
was constructed on the Gaming Site and the Ancillary Facilities were
constructed on land adjacent to the Gaming Site; and (ii) the Corporate
Commission retained Manager to manage the Facility. Manager has been managing
and is now managing the Facility under authority granted in the 1990 Management
Agreement.
1.5 Applicable Law. The Corporate Commission entered into and is performing
under the 1990 Management Agreement pursuant to approval of the 1990 Management
Agreement by the United States Bureau of Indian Affairs. After the 1990
Management Agreement became effective, the National Indian Gaming Commission
(the "NIGC") adopted regulations pursuant to the Indian Gaming Regulatory Act
of 1988 (Title 25, United States Code, Sections 2701 et. seq.), as a result of
which responsibility for approval of management agreements for Indian gaming
facilities was transferred from the Bureau of Indian Affairs to NIGC. The
Indian Gaming Regulatory Act and the regulations adopted by the NIGC pursuant
thereto, as such act and regulations may be amended from time-to-time, are
collectively referred to in this Agreement as "IGRA".
1.6 Reason for Agreement. The Corporate Commission and Manager are entering
into this Agreement for the purpose of complying with IGRA, and to obtain the
approval of this Agreement by the NIGC as contemplated by IGRA.
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1.7 Economic Development. The Corporate Commission has determined that the
continued operation of the Enterprise under this Agreement will improve the
economic condition of the Band and its members, increase Band revenues, enhance
the Band's economic self-sufficiency, and enable the Band to better serve the
social, economic, educational and health needs of its members.
1.8 Technical Expertise and Training. The Corporate Commission desires to
continue to receive (i) the services of a qualified manager of the Enterprise
which has expertise in the management and operation of the Enterprise, and (ii)
training and instruction for the Band and its members in the operation of the
Enterprise.
1.9 Manager Experience and Expertise. Manager has experience and will
continue to provide to the Band expertise in the management and operation of
the Enterprise, and will continue to train and instruct the Band and its
members in the operation of the Enterprise.
1.10 Ancillary Agreements. In connection with the financing and development
of the Facility, the Corporate Commission and Manager entered into that certain
Amended and Restated Loan Agreement (the "Loan Agreement") dated as of
September 10, 1990, and that certain Restated and Amended Security Agreement
(the "Security Agreement") dated as of September 10, 1990. The Corporate
Commission executed and delivered to Manager that certain Amended and Restated
Adjustable Rate Promissory Note (the "Note") evidencing the loan contemplated
by the Loan Agreement.
In connection with the subsequent development of certain Ancillary Facilities,
Manager made additional loans to the Corporate Commission as described in (i)
that certain Promissory Note - Hinckley RV Park (the "RV Park Note") dated as
of July 1, 1992, and (ii) that certain Promissory Note - Hinckley Restaurant
(the "Restaurant Note") dated July 1, 1992.
This Agreement will become effective only upon the occurrence of the events
described in the definition of "Effective Date" in Section 2.7 below. Pursuant
to Section 19.2 below, the Corporate Commission and Manager have agreed that,
upon such occurrence and if any of the Note, the Restaurant Note or the RV Park
Note has not then been paid in full, the Corporate Commission and Manager will
enter into, execute and deliver (i) a Second Amended and
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Restated Loan Agreement (the "Restated Loan Agreement") in the form
attached hereto as Exhibit B, which will amend and restate the Loan Agreement
in a manner consistent with this Agreement; and (ii) a Second Amended and
Restated Security Agreement (the "Restated Security Agreement") in the form
attached hereto as Exhibit C, which will amend and restate the Security
Agreement in a manner consistent with this Agreement.
Pursuant to such Section 19.2, the Corporate Commission will, upon such
occurrence, execute and deliver to Manager (i) if the Note has not been paid in
full, a Second Amended and Restated Adjustable Rate Promissory Note (the
"Restated Note") in the form attached hereto as Exhibit D, which will amend and
restate the Note in a manner consistent with this Agreement; (ii) if the
Restaurant Note has not been paid in full, a Restated Promissory Note -
Hinckley Restaurant (the "Restated Restaurant Note") in the form attached
hereto as Exhibit E, which will amend and restate the Restaurant Note in a
manner consistent with this Agreement; and (iii) if the RV Park Note has not
been paid in full, a Restated Promissory Note - Hinckley RV Park (the "Restated
RV Park Note") in the form attached hereto as Exhibit F, which will amend and
restate the RV Park Note in a manner consistent with this Agreement.
Such of the Restated Loan Agreement, Restated Security Agreement, Restated
Note, Restated RV Park Note and Restated Restaurant Note as are required under
Section 19.2 below to be executed and delivered are collectively referred to
herein as the "Ancillary Agreements." Each of the Ancillary Agreements is an
essential and mutually dependent consideration for this Agreement. Nothing in
this Agreement is intended to or shall be construed to amend or modify any of
the Ancillary Documents.
1.11 Manager Rights. The Corporate Commission desires that Manager continue
to have, and Manager desires to continue to have, the exclusive right and
obligation to manage the Enterprise during the term of this Agreement in
conformance with and subject to the provisions of this Agreement.
1.12 Gaming Control Ordinance. The Band has adopted a Gaming Control
Ordinance (the "Gaming Control Ordinance") which complies with IGRA, and has
been approved by the NIGC. All Gaming will be conducted in accordance with the
Gaming Control Ordinance.
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1.13 Applicable Law. This Agreement is entered into pursuant to IGRA and
other federal law which pervasively regulates Indian gaming and the relations
between the parties hereto.
ARTICLE II
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
2.1 Affiliate. "Affiliate" shall mean, with respect to a specified person or
entity, any other person or entity that directly or indirectly through one or
more intermediaries controls, is controlled by or is under common control with
the specified person or entity. For the purpose of this definition, "control"
means the ability to directly or indirectly, by voting securities, partnership
interests, contract or otherwise, direct or cause the direction of the policies
or management of the specified person or entity.
2.2 Ancillary Agreements. "Ancillary Agreements" is defined in Section 1.10
above.
2.3 Ancillary Facilities. "Ancillary Facilities" shall mean the structures or
portions thereof, landscaping, amenities, utilities and parking areas, if any,
which are not located on the Gaming Site but are connected to or used in
connection with the Facility and described in Exhibit G attached hereto,
together with such additions, expansions, replacements, deletions and
modifications thereto as are implemented during the term of this Agreement.
2.4 Chief Financial Officer. "Chief Financial Officer" shall mean the chief
financial officer designated by the Corporate Commission pursuant to Section
5.4 below.
2.5 Corporate Commission. "Corporate Commission" shall mean The Corporate
Commission of the Mille Lacs Band of Chippewa Indians, as identified in the
first paragraph of this Agreement, and its permitted successors and assigns.
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2.6 Commission Representative. "Commission Representative" shall mean the
representative of the Corporate Commission designated by the Corporate
Commission pursuant to Section 3.8 below.
2.7 Effective Date. "Effective Date" shall mean the first date after this
Agreement has been executed by the Corporate Commission and Manager on which
this Agreement has been approved in writing by the chair of the NIGC (or his or
her designee) pursuant to IGRA.
2.8 Enterprise. "Enterprise" shall mean the commercial enterprise of the
Corporate Commission authorized to conduct Gaming and any other lawful activity
at the Facility and Ancillary Facilities. The parties acknowledge that the
Enterprise is not a legal entity separate from the Corporate Commission.
2.9 Facility. "Facility" shall mean the structure constructed on the Gaming
Site in which Gaming and nongaming activities are conducted, and all other
structures, landscaping, amenities, utilities and parking areas on the Gaming
Site, together with such additions, expansions, replacements, deletions and
modifications thereto as are implemented during the term of this Agreement.
2.10 Fiscal Month. "Fiscal Month" shall mean a fiscal month for the Enterprise
as designated by the Management Committee pursuant to Section 5.14 below.
2.11 Gaming. "Gaming" shall mean activities defined as "Class II and III
Gaming" under IGRA which may lawfully be conducted at the Gaming Site.
2.12 Gaming Control Ordinance. "Gaming Control Ordinance" is defined in
Section 1.12 above.
2.13 Gaming Management Fee. "Gaming Management Fee" is defined in Section 7.1
below and is the management fee to be paid to Manager for managing Gaming.
2.14 Gaming-Related Operating Expense. "Gaming-Related Operating Expense"
shall mean an Operating Expense, as determined in accordance with generally
accepted accounting principles, incurred by the Enterprise in conducting
Gaming.
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2.15 Gaming Site. "Gaming Site" shall mean the property described in Exhibit A
attached hereto as stated in Section 1.2 above.
2.16 General Manager. "General Manager" shall mean the general manager
designated by the Corporate Commission pursuant to Section 5.3 below.
2.17 Gross Gaming Revenues. "Gross Gaming Revenues" shall mean all revenues of
the Enterprise attributable to Gaming, as determined in accordance with
generally accepted accounting principles.
2.18 Gross Nongaming Revenues. "Gross Nongaming Revenues" shall mean Gross
Revenues minus Gross Gaming Revenues.
2.19 Gross Revenues. "Gross Revenues" shall mean all revenues of the
Enterprise.
2.20 IGRA. "IGRA" is defined in Section 1.5 above.
2.21 Loan Agreement. "Loan Agreement" is defined in Section 1.10 above.
2.22 Management Committee. "Management Committee" shall mean the committee of
two persons described in Section 3.8 below, consisting of the Manager
Representative and the Commission Representative.
2.23 Manager. "Manager" shall mean Mille Lacs Gaming Corporation, as
identified in the first paragraph of this Agreement, and its permitted
successors and assigns.
2.24 Manager Representative. "Manager Representative" shall mean the
representative of the Manager designated by the Manager pursuant to Section 3.8
below.
2.25 Net Gaming Revenues. "Net Gaming Revenues" shall mean the Gross Gaming
Revenues, less:
(i) amounts paid as or for prizes ; and
(ii) Gaming-Related Operating Expenses (excluding the Gaming
Management Fee).
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2.26 Net Revenues. "Net Revenues" shall mean Gross Revenues, less Operating
Expenses.
2.27 NIGC. "NIGC" is defined in Section 1.5 above, and is the National Indian
Gaming Commission and any successor thereto.
2.28 Nongaming Management Fee. "Nongaming Management Fee" is defined in
Section 7.1 below and is the management fee to be paid to Manager for managing
activities of the Enterprise other than Gaming.
2.29 Note. "Note" is defined in Section 1.10 above.
2.30 Operating Expense. "Operating Expense" shall mean any expense of the
Enterprise in managing and conducting Gaming and nongaming activities
(including any tax levied against the Ancillary Facilities), as determined in
accordance with generally accepted accounting principles. "Operating Expense"
shall also include expenses, if any, authorized in advance by the Management
Committee (with each member of the Management Committee acting in his or her
sole discretion) to educate or inform the public or any segment of the public
about Indian gaming or the Facility.
2.31 Restated Loan Agreement. "Restated Loan Agreement" is defined in Section
1.10 above, and shall be the Restated Loan Agreement, if any, entered into,
executed and delivered by the Corporate Commission and Manager under Section
19.2 below.
2.32 Restated Security Agreement. "Restated Security Agreement" is defined in
Section 1.10 above, and shall be the Restated Security Agreement, if any,
executed and delivered by the Corporate Commission and Manager under Section
19.2 below.
2.33 Restated Note. "Restated Note" is defined in Section 1.10 above, and
shall be the Restated Note, if any, executed and delivered by the Corporate
Commission under Section 19.2 below.
2.34 Restated Restaurant Note. "Restated Restaurant Note" is defined in
Section 1.10 above, and shall be the Restated Restaurant Note, if any, executed
and delivered by the Corporate Commission under Section 19.2 below.
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2.35 Restated RV Park Note. "Restated RV Park Note" is defined in Section 1.10
above, and shall be the Restated RV Park Note, if any, executed and delivered
by the Corporate Commission under Section 19.2 below.
2.36 RV Park Note. "RV Park Note" is defined in Section 1.10 above.
2.37 Restaurant Note. "Restaurant Note" is defined in Section 1.10 above.
2.38 Security Agreement. "Security Agreement" is defined in Section 1.10
above.
2.39 1990 Management Agreement. "1990 Management Agreement" is defined in
Section 1.4 above.
ARTICLE III
RETENTION OF MANAGER; LICENSING; MANAGEMENT
COMMITTEE
3.1 Manager Retained. The Corporate Commission hereby retains and engages
Manager to perform, during the term and in accordance with all of the provisions
of this Agreement, the management and other functions described in this
Agreement, and Manager hereby accepts such retention and engagement.
3.2 Term of Agreement. This Agreement shall become effective on the Effective
Date, and shall remain in effect until the earlier of (i) May 15, 1999, (ii)
the date on which this Agreement is terminated pursuant to Article XIV below,
or (iii) the date on which the Corporate Commission purchases Manager's rights
and obligations pursuant to Section 18.15 below.
3.3 Exclusivity as Applied to Corporate Commission. During the term of this
Agreement, the Corporate Commission and its Affiliates shall not, without the
prior written consent of Manager (which consent shall not be unreasonably
withheld), establish, conduct or participate in any Gaming, or enter into any
agreement with any other party to establish, conduct or participate in Gaming,
other than under this Agreement, within a 50 mile
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radius of the Gaming Site, except for the Grand Casino Mille Lacs facility which
is located in Onamia, Minnesota and is the subject of a separate agreement
between the Corporate Commission and Manager.
3.4 Exclusivity as Applied to Manager. During the term of this Agreement,
Manager and its Affiliates shall not, without the prior written consent of the
Corporate Commission (which consent shall not be unreasonably withheld),
establish, manage, conduct or participate in any Gaming, other than under this
Agreement, (i) within a 50 mile radius of the Gaming Site, or (ii) in the State
of Minnesota and north of a line located 20 miles south of the 45th meridian
north latitude, except for the Grand Casino Mille Lacs facility which is
located in Onamia, Minnesota and is the subject of a separate agreement between
the Corporate Commission and Manager.
3.5 Licensing. Manager acknowledges that Manager and Manager's (i) directors,
(ii) executive officers engaged in the management and operation of Gaming, and
(iii) shareholders holding at least 10% of the equity interest in Manager, will
be required to be licensed by the Corporate Commission under the Gaming Control
Ordinance. To the extent the required licenses have not already been applied
for and/or issued, Manager shall apply for such license and cause such
directors, executive officers and shareholders to apply for such licenses. If a
given applicant complies with the licensing standards stated in the Gaming
Control Ordinance, such applicant's application shall be granted, and shall not
thereafter be suspended, revoked or rescinded unless such applicant fails to
comply with such standards.
Manager acknowledges that the licensing application process with respect to
Manager and such directors, executive officers and shareholders may include
background investigations conducted by the Federal Bureau of Investigation or
other law enforcement agencies selected by the Corporate Commission. The
Corporate Commission shall cause any such investigation to be conducted in
accordance with the provisions of the Gaming Control Ordinance and IGRA.
Manager shall cause such directors, executive officers and shareholders to
disclose the information requested by such investigating entities, and to
cooperate with such investigations.
3.6 Compliance with Gaming Control Ordinance. Manager shall at all times
comply with the provisions and requirements of the Gaming Control Ordinance and
any license issued thereunder. The Corporate Commission and its Affiliates
shall not take any action which prevents Manager from
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complying, or interferes with Manager's ability to comply, with the Gaming
Control Ordinance.
3.7 Amendment of Gaming Control Ordinance. Any amendment to the Gaming Control
Ordinance made during the term of this Agreement will be made solely to ensure
that Gaming is conducted in a manner which adequately protects the public
health and safety, the environment and the integrity of Gaming. Except to the
extent required otherwise by applicable federal law or any Tribal-State Compact
between the State of Minnesota and the Band, no amendment to the Gaming Control
Ordinance or any other ordinance which prejudices or adversely affects
Manager's rights and benefits under this Agreement and/or the Ancillary
Agreements shall apply to or be enforceable against Manager.
3.8 Management Committee. During the term of this Agreement, the Corporate
Commission shall at all times have designated its Commission Representative and
Manager shall at all times have designated its Manager Representative.
The Corporate Commission's designation shall be by resolution adopted by the
Corporate Commission, a copy of which the Corporate Commission shall provide to
Manager. Manager's designation shall be by resolution adopted by the Manager's
Board of Directors, a copy of which Manager shall provide to the Corporate
Commission. The Corporate Commission and Manager shall each have the right to
from time-to-time change its designation by appropriate resolution, a copy of
which resolution shall be provided to the other party prior to the effective
date of the new designation.
The Commission Representative shall have the power and authority to act on
behalf of the Corporate Commission in the manner described in this Agreement.
The Manager Representative shall have the power and authority to act on behalf
of the Manager in the manner described in this Agreement.
The Commission Representative and Manager Representative so designated shall be
the two-person Management Committee contemplated by this Agreement, and the
Management Committee shall have and perform the rights and duties described in
this Agreement.
Any action or decision of the Management Committee shall require a unanimous
action or decision by the two members of the Management
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Committee. If such members are unable to agree on a given action or decision,
such action or decision shall, unless agreement on such action or decision may
pursuant to this Agreement be withheld in the sole discretion of either or both
of the members of the Management Committee, be submitted to arbitration as
provided in Article XIII below.
ARTICLE IV
WORKING CAPITAL
4.1 Ongoing Working Capital. To minimize the necessity for ongoing working
capital for the Enterprise, each of Manager and the Corporate Commission may
from time-to-time recommend to the Management Committee such reserves as it
deems appropriate. The Management Committee shall give reasonable
consideration to all such recommendations, and shall establish such reserves as
are reasonably required for the proper operation of the Enterprise.
To the extent that the Management Committee determines that ongoing working
capital in excess of the reserves so established should be obtained, the
Corporate Commission shall be responsible for providing such ongoing working
capital in such manner as the Corporate Commission, in its sole discretion,
deems appropriate.
ARTICLE V
MANAGEMENT OF ENTERPRISE
5.1 General Responsibility. During the term of this Agreement, Manager shall
be responsible for the day-to-day management of the Enterprise, and for
overseeing the ongoing maintenance and repair of the Facility. Manager is
hereby granted such power and authority on behalf of the Corporate Commission
as is necessary or appropriate to perform Manager's obligations under this
Article V, subject to the express limitations stated in this Agreement. The
various descriptions of Manager's powers and authority stated in this Article V
are not intended to limit or restrict other powers and
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authority which are necessary or appropriate for Manager to perform its
obligations under this Agreement.
5.2 Specific Responsibilities. Manager's general responsibility to manage the
Enterprise shall include (but not be limited to) the following:
(a) Operation. Manager shall manage the day-to-day operation and
administration of the Enterprise, including (but not limited to) all
Gaming.
(b) Maintenance. Manager shall arrange for and manage the
maintenance and repair of the Facility and Ancillary Facilities,
including all cleaning, maintenance, repair, redecorating and
grounds care reasonably required to maintain the Facility and
Ancillary Facilities in a first-class condition. All costs and
expenses incurred in maintaining and repairing the Facility and
Ancillary Facilities shall be Operating Expenses.
(c) Improvements. Manager shall manage such improvements,
alterations and additions to the Facility and Ancillary Facilities
as are approved pursuant to Article XVI below.
(d) Hours of Operation. Manager shall cause Gaming to be
conducted at the Facility during such hours as are from time-to-time
established by the Management Committee; provided, however, that
Manager shall have the right to temporarily close or suspend any
operations of the Enterprise, including Gaming, when deemed
appropriate by Manager to respond to conditions such as weather,
limited availability of utilities, emergency or any other condition
which reasonably warrants such closure or suspension.
(e) Employees. Manager shall, on behalf of the Corporate
Commission, manage the hiring, termination, training and promotion
of employees of the Corporate Commission assigned to the Enterprise
in accordance with Sections 5.6, 5.7 and 5.8 below. All wages,
salaries and benefits paid or provided to such employees, and all
costs and expenses incurred in such hiring, firing, training and
promoting shall be Operating Expenses.
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(f) Books and Records. Manager shall manage the maintenance of
the books and records of the Enterprise in accordance with Section
5.14 below. All costs and expenses incurred in maintaining such
books and records shall be Operating Expenses.
(g) Financial Reports. Manager shall cause to be prepared
financial statements and reports of the Enterprise in accordance
with Section 5.15 below. All costs and expenses incurred in
preparing such statements and reports shall be Operating Expenses.
(h) Security. Manager shall, on behalf of the Corporate Commission,
manage the hiring or retention, training and supervision of such
security personnel as are reasonably required to provide for the
safety of customers, employees, property and funds of the Enterprise.
Security personnel shall be hired as employees of the Corporate
Commission assigned to the Enterprise and who report, directly or
indirectly, to the General Manager. Each such employee shall be
bonded in such amount and under such terms as are from time-to-time
reasonably required by the Management Committee. All costs and
expenses incurred in providing such security shall be Operating
Expenses.
(i) Fire Protection; Public Safety Services. Manager shall, on
behalf of the Corporate Commission, arrange for a contract or
contracts with one or more governmental entities to provide to the
Facility and Ancillary Facilities fire protection services and other
public safety services reasonably deemed necessary by the Management
Committee. Such contract or contracts shall be approved by the
Management Committee and shall provide for the fire protection and
other public safety services reasonably required for the safety of
customers, employees and property of the Enterprise. All costs and
expenses incurred in providing such fire protection and other public
safety services shall be Operating Expenses.
(j) Advertising. The budgets and revisions thereof to be
prepared by Manager and submitted to the Management Committee
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pursuant to Section 5.11 below shall provide for advertising and
marketing expenses of the Enterprise.
Manager shall manage the placement of advertising on behalf of the
Enterprise, which placement shall be implemented by employees of the
Corporate Commission assigned to the Enterprise. All costs and
expenses incurred in preparing and placing such advertising shall be
Operating Expenses.
(k) Accounts Payable. Manager shall manage and administer the payment of
bills and expenses of the Enterprise pursuant to Section 5.13 below.
(l) Employment Practices. Manager shall establish and administer
written employment practices for the employees of the Corporate
Commission assigned to the Enterprise; provided, however, that such
practices shall be consistent with the provisions of Sections 5.6,
5.8 and 5.9 below.
(m) Insurance. Manager shall, on behalf of the Corporate Commission,
arrange for insurance coverage for the Enterprise, in such amounts
and with such coverages as are designated by the Management Committee
pursuant to Article X below. All costs and expenses incurred in
obtaining and maintaining such insurance shall be Operating Expenses.
(n) IRS Requirements. In performing its obligations under this
Agreement, Manager shall, on behalf of the Corporate Commission,
comply with rules and regulations of the United States Internal
Revenue Service applicable to the Enterprise.
(o) National Environmental Policy Act. Manager shall provide to
the Corporate Commission such information as is in the possession or
under the control of Manager and requested in writing by the
Corporate Commission to be provided to the NIGC under IGRA and/or
the National Environmental Policy Act and the regulations adopted
pursuant thereto. The Corporate Commission shall be responsible for
providing such information to NIGC. Manager shall make reasonable
efforts to cooperate with the Corporate Commission in responding to
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inquiries or requests for information from NIGC regarding the
environmental effects of Enterprise activities.
(p) Manager/Customer Disputes. Manager shall implement and
administer the Customer Dispute Policy stated in the regulations
establishing a customer dispute policy, which regulations are
adopted by the Corporate Commission pursuant to the Gaming
Ordinance.
(q) Nongaming Activities. Manager shall implement and manage
such nongaming activities at the Facility and Ancillary Facilities
as the Management Committee may from time-to-time reasonably
require.
5.3 General Manager. Manager shall, from time-to-time during the term of this
Agreement, recommend to the Corporate Commission for approval a general manager
(the "General Manager") of the Enterprise. Upon receipt of Manager's
recommendation, the Corporate Commission shall, unless there is a reasonable
basis for the Corporate Commission to reject Manager's recommendation, accept
Manager's recommendation and approve the General Manager designated by Manager.
If there is a reasonable basis for the Corporate Commission to reject such a
recommendation by Manager, and the Corporate Commission rejects such
recommendation, the Corporate Commission shall notify Manager of such rejection
and the basis for such rejection. Manager shall then submit additional
recommendations until the Corporate Commission approves a General Manager
recommended by Manager.
Manager shall from time-to-time during the term of this Agreement recommend in
the manner described above a successor to any General Manager who is
discharged, resigns or otherwise does not perform the responsibilities of the
General Manager.
The General Manager shall be an employee of the Corporate Commission and shall,
unless otherwise determined by the Management Committee, be assigned to the
management and operation of Enterprise on a full-time basis. All compensation
provided to the General Manager, including wages, salary, bonuses and benefits,
shall be an Operating Expense.
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The General Manager shall be bonded in such amount and under such terms as are
from time-to-time reasonably required by the Management Committee.
5.4 Chief Financial Officer. Manager shall, from time-to-time during the term
of this Agreement, recommend to the Corporate Commission for approval a chief
financial officer (the "Chief Financial Officer") for the Enterprise. Upon
receipt of the Manager's recommendation, the Corporate Commission shall, unless
there is a reasonable basis for the Corporate Commission to reject the
Manager's recommendation, accept the Manager's recommendation and approve the
Chief Financial Officer recommended by Manager.
If there is a reasonable basis for the Corporate Commission to reject such a
recommendation by the Manager and the Corporate Commission rejects such
recommendation, the Corporate Commission shall notify Manager of such rejection
and the basis for such rejection. Manager shall then submit additional
recommendations until the Corporate Commission approves a Chief Financial
Officer designated by Manager.
The Chief Financial Officer shall be an employee of the Corporate Commission,
shall report to and be supervised by the General Manager. The Chief Financial
Officer shall be assigned to the Enterprise on a full-time basis (unless
determined otherwise by the Management Committee), and shall be responsible for
the accounting and auditing of all Enterprise receipts and disbursements and
for the management of Enterprise funds. All compensation paid to the Chief
Financial Officer, including wages, salary, bonuses and benefits, shall be an
Operating Expense.
5.5 Training Personnel. Manager shall, on behalf of the Corporate Commission,
arrange for training personnel to implement training programs for new employees
of the Enterprise. Such training personnel shall be employees of the Corporate
Commission assigned to the Enterprise and report, directly or indirectly
through various supervisors, to the General Manager. All wages, salaries and
benefits paid to such personnel shall be Operating Expenses.
5.6 Enterprise Employees; Indian Preference. Manager shall, on behalf of the
Corporate Commission, manage the hiring, termination, training, promotion and
supervision of employees of the Enterprise. Such employees shall be employees
of the Corporate Commission assigned to the Enterprise
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and shall report, directly or indirectly through various supervisors, to the
General Manager.
To maximize the benefits of the Enterprise to the Corporate Commission, Manager
shall, in accordance with such preference policies and procedures as are from
time-to-time adopted by the Management Committee, manage the implementation of
preference in recruiting, hiring, training and promotion of all Corporate
Commission employees assigned to the Enterprise, including management
employees, to qualified Band members. Such preference policies and procedures
shall include a provision requiring written notice to the Corporate Commission
of each employment opportunity before applications for that opportunity are
accepted. Unless otherwise required by such preference policies and
procedures, to the extent no qualified Band member is available to fill a given
position, preference shall first be given to qualified members of any other
Indian tribe, and then to qualified spouses of Band members.
To implement the preference policies adopted by the Management Committee,
Manager shall (unless otherwise directed by the Management Committee):
(i) specify the preference described in this Section 5.6 in
advertising for Enterprise employment;
(ii) use reasonable efforts to place Enterprise employment ads in
publications which circulate among members of the Band and members
of other Indian tribes; and
(iii) provide employment training programs for Band members,
members of other Indian tribes and spouses of Band members.
For the purposes of this Section 5.6, Manager shall have the right, in its sole
discretion, to determine whether a given candidate is qualified.
5.7 Employee Background Investigations; Bonding. Manager shall, for each
applicant for employment at the Enterprise for whom a background investigation
is required by the Gaming Control Ordinance, cause to be conducted a background
investigation of such applicant before such applicant is hired. Such
investigation shall comply with the Gaming Control
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Ordinance, IGRA and any other applicable local, state or federal law or
regulation.
The cost and expenses incurred in conducting such an investigation shall be
Operating Expenses.
No applicant for which such investigation discloses any prior criminal record
or association which poses a threat to the effective regulation of Gaming, or
whose employment at the Enterprise is prohibited by the Gaming Control
Ordinance, IGRA or any applicable local, state or federal law, shall be hired
for employment at the Enterprise.
The Management Committee shall from time-to-time determine which employees at
the Enterprise are to be bonded, and the amounts and terms of such bonds.
5.8 Personnel Policy. Manager shall prepare and submit to the Management
Committee for approval written policies and procedures for the employees of the
Corporate Commission assigned to the Enterprise. Such written policies and
procedures shall include:
(i) job classifications and descriptions;
(ii) compensation programs;
(iii) reporting relationships; and
(iv) a grievance procedure for the resolution of employee
grievances and any other dispute between any employee and Manager
and/or the Corporate Commission.
Manager may from time-to-time prepare and submit to the Management Committee
for approval such written revisions and/or updates of such policies and
procedures as Manager deems appropriate.
5.9 Compensation Limited. No director or officer of Manager, or shareholder
holding more than five percent of the common shares of Manager, shall receive
any wages, salaries or other compensation from the Enterprise.
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5.10 Enterprise Contracts; Indian Preference. Manager shall prepare and
submit to the Management Committee for approval written policies and procedures
for procurement of goods and services for the Enterprise. Such policies and
procedures shall give preference to qualified Band members, qualified spouses
of Band members and qualified entities controlled by one or more Band members
or one or more spouses of Band members. Manager may from time-to-time prepare
and submit to the Management Committee for approval such written revisions or
updates of such policies and procedures as Manager deems appropriate.
On behalf of the Corporate Commission and subject to the provisions of Section
5.20 below, Manager shall arrange for and manage contracts and agreements for
such goods and services as Manager determines are appropriate for the operation
of the Enterprise.
Manager shall, upon approval of a given proposed improvement, alteration or
addition to the Facility and Ancillary Facilities pursuant to Article XVI
below, arrange for contracts and agreements on behalf of the Corporate
Commission for such improvement, alteration or addition. To maximize the
benefits of the Enterprise to the Corporate Commission and Band, Manager shall
give preference in awarding contracts and agreements for such improvements,
alterations and additions to qualified Band members, qualified spouses of Band
members and qualified entities controlled by one or more Band members or one or
more spouses of Band members.
For the purposes of this Section 5.10, "qualified" shall mean a Band member, a
spouse of a Band member or an entity certified by the Corporate Commission to
be controlled by one or more Band members or one or more spouses of Band
members who or which, in Manager's sole discretion:
(i) is able to provide quality goods or services at competitive
prices;
(ii) has experience in providing such goods or services or
completing similar improvements, alterations or additions; and
(iii) with respect to improvements, alterations or additions, can
comply with reasonable bonding requirements established by Manager.
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5.11 Budgets. Manager shall prepare and submit to the Management Committee
for approval each fiscal year of the Enterprise such annual budget as the
Manager deems appropriate, which budget shall provide for Operating Expenses
and capital expenditures. Manager may from time-to-time prepare and submit to
the Management Committee for approval such revisions to such budget as Manager
deems appropriate. The budget to be approved by the Management Committee
pursuant to this Section 5.11 shall include such classifications and detail as
the Management Committee from time-to-time deems appropriate.
Manager and the Corporate Commission acknowledge that the financial performance
of the Enterprise will be affected by unpredictable factors such as changes in
the gaming market and the existence and efforts of competitors. Manager shall
monitor the financial performance of the Enterprise and use its best efforts to
manage such financial performance consistent with both the most recent approved
budget and such unpredictable factors.
Manager shall have the authority to make expenditures or incur obligations on
behalf of the Enterprise to prevent, respond to or minimize the damage or
liability resulting from any emergency or any unanticipated circumstance which
may threaten the safety of customers, employees or property of the Enterprise,
whether or not such expenditures or obligations are included in or contemplated
by the approved budget.
5.12 Enterprise Funds Management. Manager shall select, and submit to the
Management Committee for approval, systems for tracking and monitoring all
Enterprise monies consistent with applicable provisions of regulations
promulgated by the NIGC and the Gaming Control Ordinance. Manager may from
time-to-time submit to the Management Committee for approval such revisions to
such systems as Manager deems appropriate.
Following approval of such systems by the Management Committee, Manager shall
install and maintain such systems.
The Commission Representative and each member of the Corporate Commission shall
have the right to at any time (i) inspect such systems and observe the
operation thereof; and (ii) be present to observe the counting of Enterprise
monies; provided, however, that the Commission Representative and each such
member shall be accompanied by the Manager Representative or his or her
designee.
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5.13 Bank Accounts; Funds. The Management Committee shall, on behalf of the
Corporate Commission, designate depositories for Enterprise monies. The
Management Committee shall establish such depository accounts at designated
depositories as the Management Committee deems appropriate for the deposit,
holding and disbursement of Enterprise monies. The Management Committee may
from time-to-time establish a petty cash fund and such contingency and other
reserve funds as the Management Committee deems appropriate.
Manager shall administer the deposit, holding and disbursement of Enterprise
monies using the accounts and funds established by the Management Committee.
Manager's administration shall be in accordance with the following:
(a) Deposits. Manager shall collect all Enterprise monies and shall, at
such intervals as are from time-to-time established by the Management
Committee, deposit the same into the account(s) designated by the
Management Committee for such purpose.
(b) Counting. All monies received by the Enterprise shall be
counted at (i) the close of each business day on which the
Enterprise closes, or (ii) at least once every 24 hours for each
period of time during which the Enterprise does not close.
(c) Security. The Management Committee shall from time-to-time
either (i) designate a bonded courier service to transport
designated monies to the Enterprise depositories, or (ii) designate
another secure means of transporting such monies to such
depositories. Manager shall implement such designation. All costs
of such transportation shall be Operating Expenses.
(d) Disbursements. Manager shall make disbursements of
Enterprise monies from the account(s) designated by the Management
Committee for disbursements.
Except for the payment of cash prizes to customers, Manager shall not
make any cash disbursement from any account, and all such
disbursements shall be by check drawn on the appropriate account.
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(e) IRS Reports. Manager shall as requested by the Chief Financial
Officer assist the Chief Financial Officer in timely filing on behalf
of the Enterprise any reports of gaming winnings and other matters
required by the United States Internal Revenue Service.
5.14 Books and Records. Manager shall prepare and maintain accurate books and
records for the Enterprise. Such books and records shall be maintained at the
Facility or at such other location designated by the Management Committee.
Manager shall from time-to-time recommend to the Management Committee for
approval (which approval shall not be unreasonably withheld) accounting
practices and procedures for the Enterprise consistent with generally accepted
accounting principles. Such practices and procedures shall include procedures
for the allocation of Operating Expenses between Gaming-Related Operating
Expenses and other expenses, and a designation of the fiscal months of the
Enterprise (each a "Fiscal Month").
The Commission Representative and each member of the Corporate Commission shall
have the right, during the Enterprise's normal office hours, to inspect,
examine and copy all such books and records; provided, however, that the
Manager Representative or his or her designee shall have the right to be
present at any such inspection, examination or copying. The Corporate
Commission's inspection, examination and copying rights may also be exercised
by any agent, employee, attorney or accountant designated in writing by the
Commission Representative.
5.15 Financial Statements. Manager shall cause to be prepared and provided to
the Management Committee and the Corporate Commission monthly and annual
financial statements of all Enterprise revenues and disbursements. Such
statements shall be prepared in accordance with generally accepted accounting
principles.
5.16 Independent Audits. The Corporate Commission shall select and engage an
independent certified public accountant, reasonably acceptable to Manager, to
provide an annual audit of the financial statements of the Enterprise and such
other audits as may from time-to-time be required by the Management Committee.
Such audit shall be conducted in accordance with
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generally accepted auditing standards. All costs incurred by the Corporate
Commission in obtaining such audit shall be Operating Expenses.
The Corporate Commission shall be responsible for providing copies of such
audits to such local, state, and federal governmental entities as require such
audits from the Corporate Commission or in connection with the Enterprise. The
Corporate Commission shall cause a copy of such audit to be provided to
Manager, and Manager shall have the right to disclose such audit under state
and federal securities laws.
5.17 Alcoholic Beverages. Manager shall permit alcoholic beverages to be
served at the Gaming Site, Facility and Ancillary Facilities only in compliance
with such guidelines as are from time-to-time established by the Management
Committee, applicable law and the Band Assembly of the Band; provided, however,
that each member of the Management Committee shall have the right to withhold
approval of any such guideline in such member's sole discretion.
The Corporate Commission and Manager acknowledge that the Band has previously
established and collects a tax in the amount of $0.50 per drink on each
alcoholic beverage drink sold at the Facility. Such tax shall be paid by the
Enterprise directly to the Band. Revenue from the sale of alcoholic beverages
at the Facility shall be included in Gross Revenues, and the amount of such tax
shall be an Operating Expense.
The parties further acknowledge that the Band has agreed that the amount of
such tax levied on each alcoholic beverage drink sold at the Facility will not
be increased without the prior written consent of both the Corporate Commission
and Manager.
5.18 Tobacco Products. Manager shall permit tobacco products to be sold at
the Gaming Site, Facility and Ancillary Facilities only in compliance with
applicable law and any applicable agreement between the Corporate Commission or
Band or any agency thereof and any other governmental entity having
jurisdiction over such sales.
Gross Revenues shall include (i) all revenues received from the sale of tobacco
products by the Enterprise, and (ii) all tax rebates received from the State of
Minnesota with respect to tobacco products purchased by the Enterprise;
provided, however, that the first $9,000 of such tax rebates
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received during each fiscal quarter of the Enterprise shall be excluded from the
aggregate sum of (a) the Gross Revenues for such quarter under this Agreement,
and (b) the "Gross Revenues" for such quarter under that certain Management
Agreement - Mille Lacs Facility of even date herewith between the Corporate
Commission and Manager and pertaining to that certain facility commonly known as
Grand Casino Mille Lacs.
5.19 Unlawful Activity. Manager shall not knowingly conduct or knowingly
allow to be conducted at the Facility or Ancillary Facilities any unlawful
activity, including any unlawful use of controlled substances.
5.20 Limited Agency. Manager shall have the right to enter into contracts and
agreements in the name and on behalf of the Corporate Commission in the
following (and only the following) circumstances:
(i) the contract or agreement pertains only to the provision of
goods and/or services to the Enterprise;
(ii) the contract or agreement either has a term of 12 months or
less, or may be terminated for any or no reason upon not more than
30 days' notice of termination if the contract or agreement has a
term in excess of 12 months; and
(iii) the contract or agreement provides for total payments of
less than $25,000.
ARTICLE VI
TAXES AND LIENS
6.1 Band Taxes. During the term of this Agreement, except for taxes levied
pursuant to that certain written tax agreement between the Band and the
Minnesota Department of Revenue which became effective on ________, 1996, the
Band shall not impose any tax, fee or other charge on or against (i) Manager,
the Enterprise or the Facility and/or Ancillary Facilities; (ii) Gaming; (iii)
the provision of goods or services to customers of the Enterprise; (iv) the
labor of or compensation paid to employees of Manager or the Corporate
Commission performing work at the Enterprise; (v) goods or
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services purchased by or on behalf of, or otherwise provided to, the Enterprise;
or (vi) any property (including real property, furnishings, equipment, supplies
and inventory) held or used by Manager or the Corporate Commission in connection
with the Enterprise, which tax, fee or charge was not already in existence on
September 10, 1990.
In addition, the Band has waived and shall continue during the term of this
Agreement to waive the following taxes, fees or charges with respect to the
categories described in clauses (i) through (vi) of the preceding paragraph:
(a) The 5% commercial transaction tax with regard to Gaming and
the 4% commercial transaction tax on vending machines (1085 MLC-31,
Section 20);
(b) The tribal employment rights training assessment (1085
MLC-36, Section 55.01); and
(c) All Band tobacco taxes (1085 MLC-30).
6.2 No Liens. Nothing in this Agreement shall be deemed to subject the Gaming
Site or the Facility to any lien or encumbrance.
Neither party hereto shall, without the prior written consent of the other
party hereto (and the prior written consent of the United States of America if
required by law or title restriction), grant to any third party any lien
against, right in or encumbrance against the Gaming Site or the Facility.
ARTICLE VII
MANAGER COMPENSATION;
GUARANTEED MONTHLY PAYMENTS
7.1 Management Fees.
(a) Gaming Management Fee. As compensation for Manager's
management of Gaming under this Agreement, the Enterprise shall pay
to Manager a gaming management fee (the "Gaming Management Fee")
for each Fiscal Month equal to thirty percent
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(30%) of the Net Gaming Revenues received by the Enterprise during
such Fiscal Month.
(b) Nongaming Management Fee. Manager's management obligations under
this Agreement include the management of activities and operations
other than Gaming. The nongaming activities and operations to be
managed by Manager shall be determined by the Management Committee
from time-to-time, and shall initially include the management of
restaurant, retail, entertainment and lodging facilities located at
the Facility and Ancillary Facilities.
The parties hereto acknowledge that the economic uses of Gaming
activities conducted at the Facility will, in part, be attributable
to such nongaming activities, and that such nongaming activities will
substantially increase the number of customers for, and the amounts
customers spend on, Gaming activities. Accordingly, such nongaming
activities are essential to the Enterprise as a means of increasing
Gross Gaming Revenues.
The parties anticipate that nongaming activities will be conducted in
a manner which is designed to increase Gross Gaming Revenues, but may
not maximize Gross Nongaming Revenues. Accordingly, the parties
desire to establish a mechanism by which the nongaming management fee
(the "Nongaming Management Fee") to be paid to Manager as
compensation for Manager's management of such nongaming activities
and operations may be periodically evaluated and adjusted pursuant to
criteria agreed to by the Corporate Commission and Manager. The
Nongaming Management Fee for each Fiscal Month is therefore initially
agreed to be 11.9% Gross Nongaming Revenues received by the
Enterprise during such Fiscal Month.
The Management Committee shall, pursuant to criteria agreed to from
time-to-time in writing by the Corporate Commission and Manager,
evaluate the Nongaming Management Fee monthly during the term of this
Agreement, and shall implement any
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adjustment to the Nongaming Management Fee required by such criteria.
7.2 Guaranteed Monthly Payment to Tribe.
(a) Amount. For each Fiscal Month during the term of this Agreement, Manager
shall pay to the Corporate Commission a guaranteed monthly payment equal to the
amount by which the Net Revenues for such Fiscal Month (or portion thereof)
actually distributed to the Corporate Commission pursuant to Section
7.3(b)(iii) below are less than $25,000; provided, however, that if the
Effective Date is other than the first day of a Fiscal Month, the guaranteed
monthly payment for the Fiscal Month of the Effective Date shall be prorated.
(b) Timing. Such payment shall be paid by Manager to the Corporate Commission
either (i) in advance pursuant to the following paragraph, or (ii) if not so
paid in advance, with the distribution to the Corporate Commission for such
Fiscal Month made by Manager pursuant to Section 7.3(b)(iii) below, and shall be
an advance against future monthly distributions to the Corporate Commission made
pursuant to Section 7.3 below. Such advances shall be repaid by the Corporate
Commission from future Net Revenues in the manner described in Section
7.3(b)(vi) below.
(c) Excess Revenue Applied. To the extent that the Net Revenues for a given
Fiscal Month distributed to the Corporate Commission exceed $25,000, the excess
shall be considered an advance payment of all or part of the guaranteed monthly
payment or payments for the Fiscal Month or Fiscal Months during the then
current fiscal year of the Enterprise for which payment of the guaranteed
monthly payment has not been made. Such excess shall be allocated to such
advance payments until the Corporate Commission has received the guaranteed
monthly payment for each Fiscal Month of such fiscal year. Any such excess
which is thereafter distributed to the Corporate Commission during such fiscal
year shall not be considered an advance payment of any guaranteed monthly
payment.
7.3 Distribution of Revenues.
(a) Report. Within 15 days after the end of each Fiscal Month during which
Gaming is conducted, Manager shall calculate and report in writing to the
Commission Representative the Gross Revenues, Operating Expenses,
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Gross Gaming Revenues, Gross Nongaming Revenues, Gaming-Related Operating
Expenses, Net Gaming Revenues, Gaming Management Fee and Nongaming Management
Fee for such Fiscal Month.
(b) Priority. The Gross Revenues for such Fiscal Month shall be applied and
distributed by Manager in the following order, with such revenues to be applied
to or distributed for each category until all amounts due and payable under
that category are fully paid:
(i) First, to pay unpaid Operating Expenses other than the Gaming
Management Fee, the Nongaming Management Fee, and Operating Expenses
described in clauses 7.3(b)(ii) and (iv) below;
(ii) Second, to third-party lenders as payment of interest, principal and
other amounts then due and payable under third-party loans to the
Enterprise;
(iii) Third to the Corporate Commission as payment for any portion
of the guaranteed monthly payment for such Fiscal Month pursuant to
Section 7.2(a) above not previously prepaid pursuant to such Section
7.2(a);
(iv) Fourth, to Manager as payment of interest, principal and
other amounts then due and payable under the Ancillary Agreements
(in such order as Manager in its sole discretion determines);
(v) Fifth, to Manager as repayment of any unpaid advance of a
guaranteed monthly payment previously made by Manager pursuant to
Sections 7.2(a) and (b) above (in the order advanced);
(vi) Sixth, to Manager as payment of any Gaming Management Fee
earned but not then paid (in the order incurred);
(vii) Seventh, to Manager as payment of any Nongaming Management
Fee earned but not then paid (in the order incurred);
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(viii) Eighth, to such reserves as have been established by the Management
Committee in such amounts as have been determined by such
committee;
(ix) Ninth, for such other items and in such amounts as the Management
Committee may from time-to-time reasonably require; and
(x) Tenth, the remainder to the Corporate Commission as a
distribution of net profits of the Enterprise.
To the extent that the funds available for distribution for a given Fiscal
Month are not sufficient to make any of the distributions required by the items
listed in clauses (i) through (viii) above, distribution for or payment of such
items (together with any additional interest, fees or other charges
required as a result of the failure to make a distribution for or payment of
such item) shall be made from future distributions when funds are available for
distribution in accordance with the priority stated above.
Nothing in this Agreement is intended to or shall be deemed to be inconsistent
with or otherwise affect the Corporate Commission's and the Manager's deposit
obligations under that certain Master Trust Indenture dated October 1, 1996
between the Corporate Commission and First Trust National Association.
Distributions to be made pursuant to Section 7.03(b)(ii) above shall (i) to the
extent required by such Master Trust Indenture, be made in the manner required
by the Master Trust Indenture, and (ii) to the extent not governed by such
Master Trust Indenture, be made in such order as Manager in its reasonable
discretion determines.
Except to the extent prohibited by contractual obligations of the Corporate
Commission pertaining to the Enterprise, the Management Committee may from
time-to-time amend the priority stated above , but only upon agreement of both
members of the Management Committee (which agreement may be withheld in the
sole discretion of either member).
ARTICLE VIII
LITIGATION
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8.1 Defense. If the Manager and/or the Corporate Commission and/or the Band
is sued or named a party to any action brought by a third-party as a result of
or in connection with this Agreement or any activity or operations conducted or
to be conducted under this Agreement, the defense of or response to such suit
or action shall be as follows:
(a) Manager. Manager shall have the right to defend or respond
to any claim in such a suit or action made against Manager by
counsel selected by Manager. The cost of such defense or response
shall be an Operating Expense.
(b) The Corporate Commission. The Corporate Commission shall have the
right to defend or respond to any claim in such a suit or action made
against the Corporate Commission (including any action or suit which
attempts to name the Enterprise as a party even though the Enterprise
is not a separate legal entity) by counsel selected by the Corporate
Commission. The cost of such defense or response shall be an
Operating Expense.
The Corporate Commission shall have the absolute right, based on the
Corporate Commission's sovereign immunity from suit, to decline to
participate in the defense of or response to any such claim.
(c) The Band. The Band shall have the right to defend or respond
to any claim in such a suit or action made against the Band by
counsel selected by the Band. The cost of such defense or response
shall be an Operating Expense.
The Band shall have the absolute right, based on the Band's sovereign
immunity from suit, to decline to participate in the defense of or
response to any such claim.
8.2 No Waiver of Sovereign Immunity. Nothing in this Article VIII shall be
deemed or construed to be a waiver of the either the Corporate Commission's or
the Band's sovereign immunity to suit by any third-party.
ARTICLE IX
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PERFORMANCE; APPROVALS
9.1 Manager's Best Efforts. Manager shall use its best efforts to perform and
fulfill Manager's obligations under this Agreement in the manner required by
this Agreement.
9.2 Compliance. Manager shall, in performing its obligations under this
Agreement, comply with applicable laws, ordinances and regulations adopted by
the Band; provided, however, that:
(a) Neither the Band nor the Corporate Commission shall adopt or enforce
against Manager any law, ordinance or regulation which materially and
adversely affects Manager's economic benefits, or Manager's remedies,
under this Agreement;
(b) Neither the Band nor the Corporate Commission shall adopt or
enforce against Manager any law, ordinance or regulation which
violates IGRA or the Indian Civil Rights Act (Title 25, United
States Code, Sections 1301 through 1303); and
(c) Neither the Band nor the Corporate Commission shall amend any
land use or zoning law, regulation or ordinance in a manner which
materially and adversely affects the use of the Gaming Site or the
Facility for the purposes contemplated by this Agreement.
9.3 Non-interference in Tribe Affairs. Manager shall not interfere with the
internal affairs of the Corporate Commission or the Band, or any subdivision,
department or agency of the Band. For the purposes of this Section 9.3,
"interfere" shall mean any attempt by Manager to influence a decision of the
governing body or any officer of the Corporate Commission or the Band, or to
influence any Band election, by doing any of the following in connection with
such decision or election:
(i) offering any cash incentive;
(ii) making any written or oral threat against any person or
thing; or
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(iii) any similar act;
provided, however, that neither Manager's assertion of its rights under this
Agreement nor any recommendation, suggestion or assertion of opinion made by
Manager regarding the Enterprise shall be "interference" for the purpose of
this Section 9.3.
If the Band believes that Manager has violated the provisions of this Section
9.3 by engaging in prohibited interference, the Band shall give the Manager
written notice describing the incident which the Band claims constitutes
prohibited interference and identifying the person or persons claimed to have
acted on Manager's behalf in engaging in such interference. Manager shall have
the right to cure any breach of this Agreement claimed to be prohibited
interference by terminating the involvement of such person or persons with the
Enterprise.
9.4 Approvals and Consents. If this Agreement requires or contemplates an
approval or consent by a party hereto, that party shall not unreasonably
withhold or delay such approval or consent unless a specific provision of this
agreement states that such approval or consent may be withheld in such party's
sole discretion.
Each approval or consent required or contemplated by this Agreement shall be
evidenced by the following:
(a) Manager. If the approval or consent is by Manager, by
written approval signed by the Manager Representative;
(b) Management Committee. If the approval or consent is by the
Management Committee, by written approval signed by the Commission
Representative and the Manager Representative;
(c) Commission Representative. If the approval or consent is by
the Commission Representative, by written approval signed by the
Commission Representative; and
(d) Corporate Commission. If the approval or consent is by the
Corporate Commission, by written resolution of the Corporate
Commission signed by the Commissioner of the Corporate
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Commission and attested to by the Secretary or Assistant Secretary of
the Corporate Commission.
ARTICLE X
INSURANCE
10.1 Manager to Obtain. Manager shall, during the term of this Agreement,
obtain and maintain in effect on behalf of the Corporate Commission and Manager
the following insurance coverages:
(a) Casualty. Casualty insurance for the Facility and Ancillary
Facilities providing coverage against fire, wind, theft, vandalism,
malicious mischief, sprinkler leakage and such other casualties, and
with such limits, as the Management Committee from time-to-time
reasonably requires;
(b) Liability. Commercial liability insurance against claims for
injury, death and property damage occurring on, in or about the
Gaming Site, Facility or Ancillary Facilities, or in connection with
the Enterprise or any operation thereof, with such limits as the
Management Committee from time-to-time reasonably requires;
(c) Worker's Compensation. Worker's compensation insurance to
the extent deemed appropriate by the Management Committee;
(d) Business Interruption Insurance. Business interruption
and/or continuing expense insurance providing such coverage as the
Management Committee from time-to-time reasonably requires; and
(e) Other. Such other insurance coverages as the Management
Committee from time-to-time reasonably requires.
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10.2 Nature of Coverages. The Management Committee shall from time-to-time
determine the appropriate limits, deductibles and endorsements for the
coverages to be obtained pursuant to Section 10.1 above.
10.3 No Jurisdiction. Nothing in this Article X shall be deemed a waiver of
the sovereign immunity of either the Corporate Commission or the Band or
construed to subject the Corporate Commission or employees of the Corporate
Commission (including Corporate Commission employees assigned to the
Enterprise) to any jurisdiction of the State of Minnesota or any political
subdivision of such state, which jurisdiction does not exist independent of
this Agreement.
10.4 Policy Requirements. Each policy of insurance obtained pursuant to this
Article X shall be issued by an entity reasonably acceptable to the Management
Committee. The Corporate Commission shall be named as insured and Manager and
any parent of Manager shall be named as additional insureds in all such
policies. Manager shall be a loss payee (as Manager's interest appears) with
respect to the coverages described in Sections 10.1 (a), (c) and (d) above.
10.5 Enterprise Expenses. The premiums and other charges to obtain and
maintain insurance coverage pursuant to this Article X shall be Operating
Expenses.
10.6 Business Interruption Proceeds. Proceeds actually received from or under
the business interruption insurance obtained and maintained by Manager pursuant
to Section 10.1 above shall be deemed revenues and receipts of the Enterprise
for the purposes of this Agreement.
ARTICLE XI
REPRESENTATIONS AND WARRANTIES
11.1 Manager's Representations and Warranties. Manager hereby represents and
warrants to the Corporate Commission, as of the date of execution of this
Agreement by Manager, as follows:
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(i) Manager has the full authority to execute, enter into and
perform its obligations under this Agreement, and the persons who
execute this Agreement on behalf of Manager are duly authorized
signatories of Manager;
(ii) the persons or entities which individually own or hold at
least 10% of the common equity of Manager are as follows:
Name Federal Identification Percent of Common Equity
Number Owned
- ------------------ ---------------------------- ----------------------------
Grand Casinos, Inc. 41-1689535 100%
(iii) the board of directors of Manager consists of the following persons:
Name
----
Lyle Berman
Stanley M. Taube
Thomas B. Brosig
(iv) no director, officer or person or entity owing 5% or more of the
common equity of Manager has been convicted of or pleaded nolo
contendre to any felony or gaming offense.
Manager shall notify the Corporate Commission in writing of any future material
change to the representations and warranties stated in this Section 11.1. Such
notice shall be given by Manager within 30 days after the later of (i) the date
of such change, or (ii) the date on which Manager becomes aware of such change.
Each such notice shall be a representation and warranty by Manager, as of the
date of such notice, of the change described therein.
The Corporate Commission shall be responsible for providing notice of any such
change to the NIGC in compliance with IGRA and any regulations adopted pursuant
to IGRA.
11.2 Corporate Commission's Representations and Warranties. The Corporate
Commission hereby represents and warrants to Manager, as of the date of
execution of this Agreement by the Corporate Commission, the
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Corporate Commission has the full authority to execute, enter into and (subject
to approval by the NIGC) perform its obligations under this Agreement, and the
persons who execute this Agreement on behalf of the Corporate Commission are
duly authorized signatories of the Corporate Commission.
ARTICLE XII
CESSATION OF ENTERPRISE
12.1 By Law. If, during the term of this Agreement, Gaming cannot be lawfully
conducted at the Gaming Site by reason of the application of any legislation or
court or administrative agency order or decree adopted or issued by a
governmental entity having the authority to do so, Manager shall, within 60 days
after such legislation, order or decree becomes effective, elect to:
(i) retain Manager's interest in this Agreement and suspend
Gaming operations until such date, if any, during the term of this
Agreement on which Gaming at the Gaming Site becomes lawful;
(ii) retain Manager's interest in this Agreement, suspend Gaming
operations until such date, if any, during the term of this
Agreement on which Gaming at the Gaming Site becomes lawful, and
with the prior approval of the Corporate Commission, which approval
shall not be unreasonably withheld, use the Facility and Ancillary
Facilities for any other lawful purpose pursuant to a use agreement
containing terms reasonably acceptable to Manager and the Corporate
Commission; or
(iii) terminate Gaming operations and terminate this Agreement.
Manager shall give the Corporate Commission written notice of Manager's
election within such 60-day period.
(a) Election to Suspend Gaming. If Manager elects to retain its interest in
this Agreement under clause (i) or (ii) above, Manager shall have the right
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(but not the obligation) to commence Gaming operations within 60 days after the
date on which Gaming becomes lawful. Manager may exercise such right by giving
the Corporate Commission written notice of such exercise within 30 days after
the date on which Gaming becomes lawful.
During any suspension of Gaming pursuant to this Section 12.1, the Corporate
Commission shall remain liable under the Ancillary Agreements in accordance with
the provisions of the Ancillary Agreements to the extent of the Gross Revenues
derived from the Facility and any Ancillary Facilities. Any reasonable payment
to any third party made during the period during which Gaming is unlawful to
preserve or eliminate any leasehold or purchase contract rights of the
Enterprise shall be paid by the Enterprise (or reimbursed by the Enterprise if
paid by Manager) after Gaming is recommenced.
(b) Election to Terminate Agreement. If Manager elects to terminate this
Agreement under this Section 12.1, the provisions of Section 14.5 below shall
apply.
12.2 By Casualty. If, during the term of this Agreement, the Facility and/or
Ancillary Facilities are damaged by casualty or other occurrence to the extent,
as reasonably determined by Manager, that Gaming cannot be conducted at the
Gaming Site, Manager shall, within 60 days after such casualty or occurrence,
elect to:
(i) retain Manager's interest in this Agreement pending repair or
reconstruction, suspend Gaming operations pending the repair or
reconstruction of the Facility and/or Ancillary Facilities, and
arrange for such repair or reconstruction in the manner described in
this Section 12.2; or
(ii) terminate Gaming operations and terminate this Agreement.
Manager shall give the Corporate Commission written notice of Manager's
election within such 60-day period.
(a) Election to Suspend Gaming. If Manager elects to retain its interest in
this Agreement under clause (i) above, Manager shall promptly verify the amount
of insurance proceeds available to pay the cost of repair or reconstruction.
Manager is hereby granted the authority to submit, adjust and settle, on behalf
of the Corporate Commission, all insurance claims associated
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with the casualty or occurrence; provided, however, that Manager shall obtain
the Commission Representative's prior written consent (which consent shall not
be unreasonably withheld) to any settlement. Manager shall provide copies of
all settlement documents to the Commission Representative.
All insurance proceeds received as a result of such settlement shall be applied
to the cost of such repair or reconstruction, and any surplus after paying all
such costs shall be revenues of the Enterprise.
Any repair or reconstruction shall be performed by a contractor selected by the
Management Committee, and shall be completed in accordance with such plans and
specifications or other documents describing the work to be performed as are
approved by the Management Committee.
If the Manager determines, or if the parties hereto otherwise discover, that
available insurance proceeds and Enterprise monies are not sufficient to pay
the costs of the repair or reconstruction, Manager shall:
(i) arrange, on behalf of the Corporate Commission, for
third-party financing of the amount required to pay such costs on
commercially reasonable terms and conditions; or
(ii) loan the amount required to pay such costs to the Corporate
Commission on commercially reasonable terms and conditions; or
(iii) terminate this Agreement.
Manager shall have the right to elect, in its sole discretion, which of the
foregoing actions the Manager will take. The Corporate Commission hereby
agrees to accept, and shall execute and deliver all documents required or
appropriate to evidence and implement, any such third-party or Manager
financing on terms and conditions which are commercially reasonable. If such
financing is provided by a third-party or Manager, such documents shall include
such waiver of the Corporate Commission's sovereign immunity to suit as is
reasonably required by the third-party lender or Manager.
(b) Election to Terminate Agreement. If Manager elects to terminate this
Agreement under this Section 12.2, the provisions of Section 14.5 below shall
apply. If Manager elects to terminate this Agreement under this Section 12.2
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before any insurance claim associated with the casualty or occurrence is
settled, the Corporate Commission shall adjust and settle such claim; provided,
however, that if there is any amount unpaid under the Ancillary Agreements, the
Corporate Commission shall either pay such amount prior to settlement or obtain
Manager's prior written consent (which consent shall not be unreasonably
withheld) to any settlement. If there is any amount unpaid under the Ancillary
Agreements when proceeds from such settlement are received by the Corporate
Commission, such proceeds shall be first applied to amounts unpaid under the
Ancillary Agreement until all such amounts are paid. Such proceeds shall be
deemed revenues and receipts of the Enterprise.
12.3 Guaranteed Payment, Term Suspended. If Gaming operations are suspended
pursuant to Section 12.1 or Section 12.2 above, Manager's obligation to make
guaranteed monthly payments to the Corporate Commission pursuant to Section 7.3
above shall be suspended so long as Gaming operations are suspended.
If Manager has not elected to terminate this Agreement and Gaming operations
are suspended pursuant to Section 12.1 or Section 12.2 above, the term of this
Agreement (or any renewal thereof if the suspension occurs during such renewal)
shall be extended by a period equal to the period of such suspension.
ARTICLE XIII
ARBITRATION
13.1 Arbitration Required. Any claim, controversy or dispute arising out of
or relating to this Agreement, or any alleged default hereunder or breach of
any provisions hereof, except decisions by a party hereto or a member of the
Management Committee which this Agreement specifically states that such party
or member may make in its sole discretion, shall be submitted to binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association in effect at the time of submission. Judgment on any
arbitration award may be entered in any court having jurisdiction over the
parties pursuant to Article XV below.
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13.2 Place of Arbitration. Unless the parties hereto otherwise agree in
writing prior to the submission of such claim, controversy or dispute to
arbitration, arbitration proceedings under this Article XIII shall be held in
the State of Minnesota.
13.3 Selection of Arbitrators. Either party may, at any time prior to the
selection of an arbitrator or arbitrators, require that the arbitrator or
arbitrators selected be an attorney or attorneys licensed to practice law in
the State of Minnesota or in the United States District Court for the District
of Minnesota.
Unless the parties hereto otherwise agree in writing, any matter to be
arbitrated shall be submitted to a panel of three arbitrators. If such a panel
is to be selected, one arbitrator shall be designated by the Corporate
Commission, one arbitrator shall be designated by Manager and the third
arbitrator shall be designated by the two arbitrators designated by the parties
hereto.
13.4 Award. The arbitration award shall be in writing signed by each of the
arbitrators, and shall state the basis for the award.
13.5 Enforcement. Except to the extent such enforcement will be inconsistent
with a specific provision of this Agreement, arbitration awards made pursuant
to this Article XIII shall be enforceable under Title 9 of the United States
Code and any applicable state law governing the enforcement of arbitration
awards.
13.6 Appeal. In addition to any basis for appeal of an arbitration award
stated in Title 9 of the United States Code or any applicable state law
governing the enforcement of arbitration awards, either party hereto may appeal
an arbitration award on the basis that the arbitrator or arbitrators
incorrectly decided a question of law in making the award.
13.7 Injunctive Relief. Either party hereto shall have the right to seek and
obtain a court order from a court having jurisdiction over the parties
requiring that the circumstances specified in the order be maintained pending
completion of the arbitration proceeding.
ARTICLE XIV
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DEFAULTS; TERMINATION
14.1 Termination by Mutual Agreement. This Agreement may be terminated at any
time by written agreement executed on behalf of each of the parties hereto and
stating the terms and conditions pursuant to which this Agreement is to be
terminated.
14.2 Manager's Termination Following Cessation of Gaming. Manager shall have
the right to terminate this Agreement pursuant to and in the manner provided in
Article XII above.
14.3 Manager Default: If:
(i) Manager fails to make any payment to the Corporate Commission
within 5 days after such payment is due and payable, and such
failure is not cured within 10 days after the Corporate Commission
gives Manager written notice of such failure; or
(ii) Manager defaults in any material way in the performance of
any other obligation of Manager under this Agreement or breaches in
any material way any representation or warranty made by Manager in
this Agreement, and such default or breach is not cured within 60
days after the Corporate Commission gives Manager written notice of
such default or breach (provided that if such default or breach
cannot be cured within such 60-day period and Manager commences a
cure within such 60-day period and diligently pursues such cure,
then if such default or breach is not cured within 90 days);
then the Corporate Commission shall have the rights to (i) terminate this
Agreement by giving Manager written notice of termination, or (ii) seek relief
through arbitration under Article XIII above. Manager shall not be in default,
or breach any of Manager's obligations, under this Agreement by reason of any
act or omission by any employee of the Corporate Commission at the Enterprise
unless (i) Manager specifically instructed such employee to perform such act or
omission, or (ii) Manager had actual knowledge of a similar act or omission by
such employee prior to the act or omission claimed
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to have caused such default or breach and Manager failed to request the
supervisor of such employee to take disciplinary action with respect to such
prior act or omission.
14.4 Corporate Commission Default. If the Corporate Commission defaults in any
material way in the performance of any obligation of the Corporate Commission
under this Agreement, and such default is not cured within 60 days after Manager
gives the Corporate Commission written notice describing such default (provided
that if such default cannot be cured within such 60-day period and the Corporate
Commission commences a cure within such 60-day period and diligently pursues
such cure, then if such default is not cured within 90 days), then Manager shall
have the rights to (i) terminate this Agreement by giving the Corporate
Commission written notice of termination, or (ii) seek relief through
arbitration under Article XIII above.
14.5 Effects of Termination. Following any termination of this Agreement, in
addition to and notwithstanding any other right or remedy available to either
party to this Agreement:
(i) the Corporate Commission shall remain liable under the
Ancillary Agreements in accordance with the provisions of the
Ancillary Agreements;
(ii) each party hereto shall be entitled to retain any amounts
distributed or paid under this Agreement to such party prior to the
termination date; and
(iii) amounts to be distributed or paid under this Agreement which
accrued through the date of termination shall be distributed or paid
in accordance with the provisions of this Agreement.
ARTICLE XV
LIMITED WAIVER OF SOVEREIGN IMMUNITY
15.1 Limited Waiver. To induce Manager to enter into this Agreement, the
Corporate Commission hereby waives the Corporate Commission's sovereign
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immunity to suit to the extent (and only to the extent) stated in this Article
XV.
The Corporate Commission hereby waives its sovereign immunity from suit, and
hereby consents to be sued or named a party, in any action brought or pursued in
the United States District Court for the District of Minnesota, the United
States Court of Appeals and the United States Supreme Court; provided, however,
that such waiver shall apply only to actions arising under or related to this
Agreement and/or the Ancillary Agreements. Manager hereby agrees and submits to
the jurisdiction of the United States District Court for the District of
Minnesota, the United States Court of Appeals and the United States Supreme
Court, hereby waives any objection to the jurisdiction of such courts and hereby
agrees not to object to or contest the jurisdiction of such courts. Each of
Manager and the Corporate Commission hereby agrees to forcefully assert and
argue that such courts have jurisdiction in such actions. If Manager challenges
the jurisdiction of such courts in any action, such challenge shall render the
limited waiver of sovereign immunity stated in the Article XV ineffective with
respect to the action in which such challenge occurs.
If the United States District Court for the District of Minnesota is determined
not to have jurisdiction over an action arising under or related to this
Agreement and/or the Ancillary Agreements, then the Corporate Commission's
waiver of sovereign immunity from suit, and the Corporate Commission's consent
to be sued or named a party, in an action arising under or related to this
Agreement and/or the Ancillary Agreements shall also apply to any such action
brought in the state court system of the State of Minnesota.
The Corporate Commission also waives the Corporate Commission's sovereign
immunity to suit, and agrees that the Corporate Commission may be sued or named
a party, in any action arising under or related to this Agreement and/or the
Ancillary Agreements brought in the Court of Central Jurisdiction of the Mille
Lacs Band of Chippewa Indians.
The limited waiver stated in this Article XV shall be effective only for the
following:
(a) Order for Arbitration. Any action seeking to compel
arbitration under Article XIII above.
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<PAGE> 45
(b) Monetary Damages. Any action seeking to enforce an arbitration award
of money damages made pursuant to Article XIII above; provided,
however, that any collection action or execution shall be only
against (i) undistributed or future assets of the Enterprise (other
than the Facility), and (ii) if the arbitration award includes a
determination that the Corporate Commission or the Band prejudiced
Manager's rights under this Agreement or any of the Ancillary
Agreements, or caused in a material way the lack of business success
of the Enterprise, future proceeds of any other gaming operations
conducted by or on behalf of the Corporate Commission or Band. In no
instance shall any such collection action or execution be against any
asset of the Corporate Commission or Band other than those assets
described in the preceding sentence.
(c) Consent/Approval. Any action seeking to enforce an arbitration award
made pursuant to Article XIII above, which award requires that the
Corporate Commission and/or the Commission Representative consent to
or approve an action, request or recommendation, and includes a
determination that the Corporate Commission and/or the Commission
Representative unreasonably withheld such consent or approval
contrary to the provisions of this Agreement.
(d) Injunctive Relief; Specific Performance. Any action seeking
to enforce an arbitration award made pursuant to Article XIII above,
which award requires that the Corporate Commission and/or the
Commission Representative take or refrain from taking any action
(other than the payment of monetary damages) under this Agreement.
ARTICLE XVI
FUTURE IMPROVEMENTS
16.1 Improvements. Manager may from time-to-time recommend to the Management
Committee capital improvements to the Facility and/or Ancillary Facilities.
Any such recommendation shall include Manager's recommendation for financing
the cost of such improvement from existing
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cash flow, existing or future reserves, third-party financing, or funds to be
provided by the Corporate Commission.
The Management Committee shall determine whether any capital improvement is to
be made, the nature and cost of such improvement, and the method of paying for
or financing such improvement. Manager shall not have any obligation to
provide financing for any such improvement.
The plans for such improvement shall be prepared and approved, and the
construction of such improvement shall be completed, in such manner as the
Management Committee deems appropriate.
ARTICLE XVII
NOTICES
17.1 Form and Addresses. All notices, demands, requests or other
communications from one party to the other required or permitted under this
Agreement shall be in writing and, until otherwise specified in a written
notice given in the manner specified in this Section 17.1, shall be sent to the
following addresses:
(a) if to the Corporate Commission:
Mille Lacs Band of Chippewa Indians Corporate Commission
HCR 67, Box 194
Onamia, Minnesota 56359
Attention: Commissioner of Corporate Affairs
(b) if to Manager:
Mille Lacs Gaming Corporation
13705 First Avenue North
Minneapolis, MN 55441-5451
Fax (612) 449-9353
Attention: Chairman of the Board
with a copy to:
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Grand Casinos, Inc.
13705 First Avenue North
Minneapolis, MN 55441-5451
Fax (612) 449-9353
Attention: General Counsel
17.2 Manner of Giving. Each such communication shall be given (i) by
registered or certified mail of the United States Postal Service, return
receipt requested, postage prepaid, (ii) by overnight delivery service
guaranteeing next business day delivery, or (iii) via telecopier or facsimile
transmission to the facsimile number listed above; provided, however, that if
such communication is given by telecopier or facsimile transmission, an
original counterpart of such communication shall concurrently be sent in the
manner specified in clause (ii) above.
17.3 Deemed Given. Each such communication given under Section 17.1 above
shall be deemed to have been given (i) seven (7) days following the deposit of
such communication in the United States mail if mailed; (ii) on the date of
delivery if delivered by overnight delivery service; or (iii) on the day of the
transmission of such communication if sent by telecopier or facsimile
transmission.
ARTICLE XVIII
MISCELLANEOUS
18.1 Captions. The captions in this Agreement are inserted for convenience of
reference only; they are not part of this Agreement and shall not affect its
interpretation.
18.2 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective permitted successors
and permitted assigns.
Neither party hereto shall assign or encumber its interest in this Agreement
without the prior written consent of the other party, which consent shall not
be unreasonably withheld; provided that no such assignment shall release the
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<PAGE> 48
Corporate Commission or Manager from its respective obligations under this
Agreement.
If IGRA or any regulation adopted thereto requires approval by the NIGC or any
official thereof of an assignment of Manager's interest, no assignment by
Manager under this Section 18.2 shall become effective until the required
approval is obtained.
18.3 Entire Agreement; Modifications. This Agreement and the Ancillary
Agreements contain the entire understanding of the parties regarding their
subject matter, and shall, as of the Effective Date, supersede all prior
negotiations, understandings and agreements of the parties with respect
thereto.
The express terms of this Agreement shall control and supersede any course of
performance and/or customary practice inconsistent with such terms. Any
subsequent agreement between the parties hereto shall not change or modify this
Agreement unless in writing and signed by the party against whom enforcement of
such change or modification is sought.
18.4 Provisions Separable. The provisions of this Agreement are independent
of and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by the invalidity or unenforceability of any
other provision.
18.5 No Waiver. No failure or delay by either party to this Agreement to
exercise any right, remedy, power or privilege under this Agreement shall be a
waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege preclude any other or further exercise of the same or of any
other right, remedy, power or privilege with respect to any occurrence. No
waiver shall be effective unless it is in writing and signed by the party
asserted to have granted such waiver.
18.6 No Joint Venture. Manager shall be an independent contractor and agent
engaged by the Corporate Commission to perform the duties and obligations
described in this Agreement. Accordingly, nothing in this Agreement shall be
deemed or construed to create a joint venture between the Corporate Commission
and Manager.
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<PAGE> 49
18.7 No Conveyance. Nothing in this Agreement shall be deemed or construed to
transfer or convey to Manager any lien on or interest in the Gaming Site or
Facility, or to transfer or convey to Manager any proprietary interest in the
Enterprise.
18.8 Time of Essence. Time is of the essence in the performance by the
parties hereto of their respective obligations under this Agreement.
18.9 Execution. Four original copies of this Agreement are being executed on
behalf of each of the parties hereto. Each such party is retaining two
original copies of this Agreement. Each of the four original copies of this
Agreement shall be equally valid.
18.10 Corporate Commission's Obligations Limited. Nothing in this Agreement
shall obligate the Corporate Commission to encumber or make any payment from
assets of the Corporate Commission or Band other than (i) revenues and receipts
and personal property of the Enterprise; and (ii) the revenues and receipts of
any other gaming operation conducted by the Corporate Commission or Band.
18.11 Further Assurances. Each party hereto shall from time-to-time, at the
reasonable request of the other party (i) execute and deliver or cause to be
executed and delivered such additional documents and papers, and (ii) take or
cause to be taken such additional actions as may be reasonably required to
effectively evidence and implement the transactions described in and
contemplated by this Agreement.
18.12 Interpretation. No provision of this Agreement shall be interpreted for
or against either party because that party or that party's legal representative
or counsel drafted such provision.
18.13 Attorneys' Fees. The prevailing party in any arbitration proceeding
under Article XIII above or any action under Article XV above shall recover
from the other party the prevailing party's reasonable attorneys' fees and all
costs and expenses incurred by the prevailing party in such proceeding or
action.
18.14 Corporate Commission's Use of Facility. The Corporate Commission shall
have the right to use the Facility, at the sole cost of the Corporate
Commission, for a reasonable number and reasonable periods of times to hold
49
<PAGE> 50
community and any other events; provided, however, that the Corporate
Commission's exercise of such right shall be only following reasonable notice
to Manager and in a manner which does not materially interfere with the
operation and business of the Enterprise.
18.15 Buyout Option. At any time after the later of (i) May 15, 1997 (if Gaming
operations have not been suspended under Article XII above), or (ii) the date
which is the number of days after May 15, 1997 equal to the number of days
Gaming operations have been suspended (if such operations have been suspended
under Article XII above), the Corporate Commission shall have the option to
purchase all of Manager's rights and obligations under this Agreement. The
Corporate Commission may exercise such option by giving Manager at least 90 days
written notice of such exercise, accompanied by payment of the purchase price
for such rights and obligations (as described in the following paragraph) in
immediately available funds.
The purchase price for such rights and obligations shall be an amount equal to
the amount which Manager would have received under the 1990 Management
Agreement, excluding any amounts due under Section 27 of the 1990 Management
Agreement, as adjusted to reflect the accounting practices and procedures
stated in Exhibit H attached hereto, the Note, the RV Park Note and the
Restaurant Note for the period from the date of closing of such purchase to May
15, 1999 if:
(i) the 1990 Management Agreement as adjusted to reflect the
accounting practices and procedures stated in Exhibit H attached
hereto remained in full force and effect through May 15, 1999; and
(ii) the daily profit for the period from the date of the Corporate
Commission's purchase through May 15, 1999 is assumed to be 1/365 of
the aggregate net profits of the Enterprise (calculated as provided
in the 1990 Management Agreement as adjusted to reflect the
accounting practices and procedures stated in Exhibit H attached
hereto) for the twelve months preceding the first day of the month
during which the Corporate Commission gives written notice the
Corporate Commission's exercise of its option,
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less any interest on the Note, the RV Park Note and the Restaurant Note which
would have occurred after the date of closing of such purchase. In addition,
the Corporate Commission shall pay to Manager the amount described in Section
18.16 below.
18.16 Recapture of Certain Amounts. Within 30 days after the termination of
this Agreement, the Corporate Commission shall pay to Manager (i) all Gaming
Management Fees and Nongaming Management Fees earned but not then paid, and (ii)
forty percent of the then fair market value of all purchases of video slot
machines, but not including any bill acceptors attached to such slot machines,
by or on behalf of the Enterprise during the term of this Agreement and during
the term of the 1990 Management Agreement, which purchases were accounted for as
Operating Expenses under this Agreement or the 1990 Management Agreement.
For the purposes of this Section 18.16, the term "fair market value" shall mean
the fair market value as agreed to by the parties hereto or by arbitration
pursuant to Article XIII above.
ARTICLE XIX
TERMINATION OF PRIOR AGREEMENT
19.1 Management Agreement. The 1990 Management Agreement as adjusted to
reflect the accounting practices and procedures stated in Exhibit H attached
hereto shall remain in full force and effect, and shall not be amended,
modified or affected by this Agreement, until such time as the Effective Date
occurs. The 1990 Management Agreement shall apply to all events and incidents
which occur, all claims which arise, and all revenues and expenses of the
Enterprise received or incurred prior to the Effective Date.
Upon the occurrence of the Effective Date and this Agreement becoming
effective, the 1990 Management Agreement shall without further action be
terminated as of the Effective Date. If, however, the Effective Date does not
occur, the 1990 Management Agreement as adjusted to reflect the accounting
practices and procedures stated in Exhibit H attached hereto shall remain in
full force and effect.
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19.2 Notes; Loan Agreements. The Loan Agreement, Security Agreement, Note, RV
Park Note and Restaurant Note shall remain in full force and effect, and shall
not be amended, modified or affected by this Agreement, until such time as the
Effective Date occurs and the Corporate Commission executes and delivers the
Restated Loan Agreement, Restated Security Agreement, the Restated Note,
Restated RV Park Note and Restated Restaurant Note. The Loan Agreement,
Security Agreement, Note, RV Park Note and Restaurant Note shall apply to all
events and incidents which occur prior to the Effective Date. If the Effective
Date does not occur, or if the Corporate Commission does not comply with the
requirements of the following paragraph, the Loan Agreement, Security Agreement,
Note, RV Park Note and Restaurant Note shall remain in full force and effect.
Upon the occurrence of the Effective Date and this Agreement becoming
effective, the Corporate Commission and Manager shall do the following:
a. If at the time of such occurrence the Note is not fully paid,
(i) the Corporate Commission shall immediately execute and deliver
to Manager the Restated Note, with the principal amount of the
Restated Note being the then unpaid principal balance of the Note,
and (ii) the Corporate Commission and Manager shall execute and
deliver the Restated Loan Agreement and the Restated Security
Agreement.
Upon Manager's receipt of the Restated Note, Manager shall mark
the Note "canceled by restated note" and deliver the Note so
marked to the Corporate Commission.
b. If at the time of such occurrence the RV Park Note is not fully paid,
(i) the Corporate Commission shall immediately execute and deliver to
Manager the Restated RV Park Note, with the principal amount of the
Restated RV Park Note being the then unpaid principal balance of the
RV Park Note, and (ii) the Corporate Commission and Manager shall
execute and deliver the Restated Loan Agreement and the Restated
Security Agreement.
Upon Manager's receipt of the Restated Restaurant Park Note, Manager
shall mark the RV Park Note "canceled by restated
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note" and deliver the RV Park Note so marked to the Corporate
Commission.
c. If at the time of such occurrence the Restaurant Note is not fully
paid, (i) the Corporate Commission shall immediately execute and
deliver to Manager the Restated Restaurant Note, with the principal
amount of the Restated Restaurant Note being the then unpaid
principal balance of the Restaurant Note, and (ii) the Corporate
Commission and Manager shall execute and deliver the Restated Loan
Agreement and the Restated Security Agreement.
Upon Manager's receipt of the Restated Restaurant Note, Manager shall
mark the Restaurant Note "canceled by restated note" and deliver the
Restaurant Note so marked to the Corporate Commission.
IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement
as of the date stated in the introduction hereof.
The Corporate Commission of the
Mille Lacs Band of Chippewa Indians
By s/ Paul Mans
-----------------------
Name Paul Mans
---------------------
Title Interim Commissioner
of Corporate Affairs
----------------------
MANAGER
Mille Lacs Gaming Corporation,
a Minnesota corporation
By s/ Lyle Berman
-----------------------
Name Lyle Berman
---------------------
Title CEO
----------------------
The foregoing Management Agreement is hereby ratified and approved by the
Mille Lacs Band of Chippewa Indians (the "Band"), and, to induce Mille Lacs
Gaming Corporation to enter into such Agreement, the Band hereby
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agrees to be bound by the provisions of Sections 3.3, 3.6, 3.7, 5.17, 6.1 and
9.3 of such Management Agreement as such provisions pertain to the Band.
Mille Lacs Band of Chippewa Indians
By s/ Marge Anderson
-----------------------
Name Marge Anderson
---------------------
Title Chief Executive
----------------------
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Exhibits omitted
55
<PAGE> 1
EXHIBIT 10.63
FEE GUIDELINES AGREEMENT
(HINCKLEY FACILITY)
This Agreement is made effective October 1, 1996, by and between The Corporate
Commission of the Mille Lacs Band of Ojibwe Indians (the "Corporate
Commission"), and Mille Lacs Gaming Corporation, a Minnesota corporation
("Manager").
WHEREAS, the Corporate Commission and Manager are the parties to that certain
Management Agreement - Hinckley Facility dated as of October 1, 1996 (the
"Hinckley Management Agreement"); and
WHEREAS, the Hinckley Management Agreement states the terms and conditions
pursuant to which Manager will, from and after the Effective Date, manage
gaming and nongaming activities at the facility owned by the Corporate
Commission and known as Grand Casino Hinckley; and
WHEREAS, Section 7.1 of the Hinckley Management Agreement provides that the
Corporate Commission and Manager are to agree to criteria to be used in
periodically evaluating and adjusting the Nongaming Management Fee; and
WHEREAS, the Corporate Commission and Manager desire to evidence their
agreement to the criteria stated below;
NOW, THEREFORE, the Corporate Commission and the Manager hereby agree as
follows:
1. Definitions. Capitalized terms used in this Agreement but which are not
defined in this Agreement shall either have the meanings ascribed to them in
the Hinckley Management Agreement or in Section 4 below.
2. Criteria. The Nongaming Management Fee to be established by the Management
Committee pursuant to Section 7.1 of the Hinckley Management Agreement shall be
established for each Fiscal Month during the term of the Hinckley Management
Agreement prior to making the distributions and payments for such Fiscal Month
to be made pursuant to Article VII of the Hinckley Management Agreement. The
Nongaming Management Fee for such Fiscal Month shall be the percentage (the
"Nongaming Management Fee Percentage") of the Gross Nongaming Revenues received
by the Enterprise during such Fiscal Month as
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<PAGE> 2
will produce a Nongaming Management Fee for such Fiscal Month which, when added
to or subtracted from the Gaming Management Fee to be paid for such Fiscal
Month, will equal the aggregate amount which would have been distributed for
such Fiscal Month under the 1990 Hinckley Management Agreement, as modified by
the Accounting Practices and Procedures (the "Accounting Practices") described
in Section 3 below, as the Original Hinckley Fee (had the 1990 Hinckley
Management Agreement remained in effect). Each of the parties hereto
acknowledges that the Nongaming Management Fee for a given fiscal month may,
depending on the results of the calculation of such Nongaming Management Fee,
be either positive or negative.
The Nongaming Management Fee Percentage for a given Fiscal Month shall be
calculated as follows:
(a) First, the Original Hinckley Fee for such Fiscal Month which
would have been paid under the 1990 Hinckley Management Agreement
(as modified by the Accounting Practices) shall be calculated;
(b) Second, the Gaming Management Fee under the Hinckley
Management Agreement shall be calculated;
(c) Third, the result of calculation (b) above shall be
subtracted from the result of calculation (a) above;
(d) Fourth, the result of calculation (c) above shall be divided
by the Nongaming Revenue for such Fiscal Month;
(e) Fifth, the result of calculation (d) above (expressed as a
decimal number) shall be converted into a percentage.
The percentage resulting from the conversion to which subparagraph (e) above
refers shall be the Nongaming Management Fee Percentage for such Fiscal Month.
3. Accounting Practices and Procedures. In determining the Original Hinckley
Fee and the amount which would have been distributed under the 1990 Hinckley
Management Agreement, "net profits" to be allocated between the Corporate
Commission and Manager shall mean income before income taxes determined
pursuant to generally accepted accounting principles, adjusted as follows:
2
<PAGE> 3
Additions:
(i) Add depreciation expense as recorded under generally accepted
accounting principles; and
(ii) Add insurance expense as recorded under generally accepted
accounting principles.
Subtractions:
(i) Subtract principal paid which would have been paid pursuant
to that certain Real Estate Construction and Term Note (the "1991
Note"), in the original principal amount of $5,000,000, dated
November 26, 1991 and given by the Corporate Commission to Peoples
Bank of Commerce had such 1991 Note been paid in accordance with its
original amortization schedule;
(ii) Subtract principal paid under notes, and principal reductions
under asset leases accounted for as capital lease obligations
pursuant to generally accepted accounting principles, which notes
and leases pertain to Enterprise assets;
(iii) Subtract principal, if any, which would have been paid
pursuant to the Original Hinckley Note (and the Restated Hinckley
Note if the Restated Hinckley Note has replaced the Original
Hinckley Note) had the Original Hinckley Note (and Restated Note)
been paid in accordance with its (their) original amortization
schedule;
(iv) Subtract principal, if any, which would have been paid
pursuant to the Original Hinckley Restaurant Note (and the Restated
Hinckley Restaurant Note if the Restated Hinckley Restaurant Note
has replaced the Original Hinckley Restaurant Note) had the Original
Hinckley Note (and Restated Restaurant Note) been paid in accordance
with its (their) original amortization schedule;
(v) Subtract principal, if any, which would have been paid
pursuant to the Original Hinckley RV Park Note (and the Restated
Hinckley RV Park Note if the Restated Hinckley RV Park Note has
replaced the Original Hinckley RV Park Note) had the Original
Hinckley RV Park Note (and
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<PAGE> 4
Restated RV Park Note) been paid in accordance with its (their)
original amortization schedule;
(vi) Subtract such capital expenditure reserves for the Enterprise
established by the Management Committee under the 1990 Hinckley
Management Agreement; and
(vii) Subtract such other costs and expenses of the Enterprise, if
any, as were designated by such Management Committee for such
subtraction.
4. Capitalized Terms. Capitalized terms and phrases which are not defined in
the preceding portions of this Agreement or in the Hinckley Management
Agreement shall have the following meanings:
(a) 1990 Hinckley Management Agreement. "1990 Hinckley
Management Agreement" shall mean that certain Amended and Restated
Management and Construction Agreements between the Corporate
Commission and Manager dated as of September 10, 1990.
(b) Original Hinckley Fee. "Original Hinckley Fee" shall mean
the sum of all amounts which Manager would be entitled to receive
under the 1990 Hinckley Management Agreement (as adjusted by the
Accounting Practices) but excluding (i) all amounts payable under
Sections 11.4 and 27 of the 1990 Hinckley Management Agreement, and
(ii) all amounts payable under Section 11.1 of the 1990 Hinckley
Management Agreement which are attributable to bill acceptors
attached to video slot machines, for the period from October 1, 1996
to May 15, 1999 assuming the 1990 Hinckley Management Agreement
remained in full force and effect through May 15, 1999.
(c) Original Hinckley Note. "Original Hinckley Note" shall mean
that certain Amended and Restated Adjustable Rate Promissory Note
dated as of September 10, 1990 and evidencing a loan made by
Manager to the Corporate Commission.
(d) Original Hinckley RV Note. "Original Hinckley RV Note" shall
mean that certain Promissory Note - Hinckley RV Park dated as of
July 1, 1992 under which Manager made loan advances to the Corporate
Commission.
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(e) Original Hinckley Restaurant Note. "Original Hinckley
Restaurant Note" shall mean that certain Promissory Note-Hinckley
Restaurant dated as of July 1, 1992 under which Manager made loan
advances to the Corporate Commission.
(f) Restated Hinckley Note. "Restated Hinckley Note" shall mean
that certain Restated Note as defined in Section 1.10 of the
Hinckley Management Agreement.
(g) Restated Hinckley RV Note. "Restated Hinckley RV Note" shall
mean that certain Restated Hinckley RV Note as defined in Section
1.10 of the Hinckley Management Agreement.
(h) Restated Hinckley Restaurant Note. "Restated Hinckley
Restaurant Note" shall mean that certain Restated Hinckley
Restaurant Note as defined in Section 1.10 of the Hinckley
Management Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
effective date stated above.
Corporate Commission of the
Mille Lacs Band of Ojibwe
Indians
By s/ Paul Mans
-----------------------------
Name Paul Mans
-------------------------
Title Interim Commissioner of
Corporate Affairs
------------------------
Mille Lacs Gaming Corporation
By /s/ Thomas Brosig
-----------------------------
Name Thomas Brosig
-------------------------
Title President
------------------------
5
<PAGE> 1
FINANCIAL HIGHLIGHTS
Certain of the following information has been derived from the Company's
consolidated financial statements.
(Dollars and shares in thousands, except earnings per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues (owned & managed properties) $1,057,284 $ 776,913 $506,413 $268,264 $118,084
Net revenues $ 490,019 $ 372,872 $285,774 $117,032 $ 9,229
Operating cash flow (1) $ 142,946 $ 140,214 $ 69,338 $ 37,562 $ 3,473
Earnings from operations $ 97,408 $ 116,315 $ 51,859 $ 29,328 $ 3,170
Earnings (Loss) per share
before extraordinary charge ($2.43)(2) $ 1.98 $ .87 $ .71 $ .13
Total assets $1,122,816 $1,128,108 $483,883 $426,644 $ 72,305
Long-term debt $ 511,742 $ 459,070 $123,126 $118,561 $ 8,650
Shareholders' equity $ 439,673 $ 526,100 $276,861 $247,864 $ 55,156
Shares outstanding at year-end 41,796 40,988 33,447 33,415 22,003
Casino space (square footage)(3) 674,186 421,000 321,000 165,000 75,000
</TABLE>
1. Earnings from operations before depreciation and amortization
expense.
2. Earnings per share excluding the effect of Stratosphere are
$1.16.
3. Includes managed and owned casinos.
TOTAL REVENUES
[BAR GRAPH]
NET REVENUES
[BAR GRAPH]
OPERATING CASH FLOW
[BAR GRAPH]
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
The following discussion contains trend information and other forward-looking
statements that involve a number of risks and uncertainties. The Company's
actual results could differ materially from the Company's historical results of
operations and those discussed in the forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and other financial
information included elsewhere in this annual report.
The Company develops, constructs, and manages land-based and dockside casinos
and related hotel and entertainment facilities in emerging and established
gaming jurisdictions. Company revenues are derived from the Company's owned
casinos, Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica,
and from management fee income from Grand Casino Avoyelles, Grand Casino
Coushatta, Grand Casino Hinckley, and Grand Casino Mille Lacs. The Company's
management fee is equal to 40% of net distributable profits from Grand Casino
Avoyelles, Grand Casino Coushatta, Grand Casino Hinckley, and Grand Casino
Mille Lacs.
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, many of which are
beyond the control of the Company.
RESULTS OF OPERATIONS
The Company's operating results for the fiscal year ended January 1, 1995
(fiscal year 1994), reflect four full quarters of management fee income for
Grand Casino Hinckley and Grand Casino Mille Lacs, gaming operations for a full
year for Grand Casino Gulfport, gaming operations for Grand Casino Biloxi since
its opening on January 17, 1994, and management fee income for Grand Casino
Avoyelles since its opening on June 3, 1994. Results of operations for the
fiscal year ended December 31, 1995 (fiscal year 1995), reflect four full
quarters of management fee income for Grand Casino Avoyelles, Grand Casino
Hinckley, and Grand Casino Mille Lacs; gaming operations for a full year for
Grand Casino Biloxi and Grand Casino Gulfport; and management fee income for
Grand Casino Coushatta since its opening on January 16, 1995. Results of
operations for the fiscal year ended December 29, 1996 (fiscal year 1996),
reflect four full quarters of management fee income for Grand Casino Avoyelles,
Grand Casino Coushatta, Grand Casino Hinckley, and Grand Casino Mille Lacs;
gaming operations for a full year for Grand Casino Biloxi and Grand Casino
Gulfport; and gaming operations for Grand Casino Tunica since its opening on
June 24, 1996. Included in the accompanying consolidated financial statements
are the results of Stratosphere Corporation from October 2, 1994, to December
20, 1995, on a consolidated basis and on an equity method of accounting from
January 3, 1994, to October 1, 1994, and from December 21, 1995, to December
29, 1996.
- ---FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
OVERVIEW
The Company's earnings (loss) before extraordinary charge decreased to a loss
of $(101.0) million, or a loss of $(2.43) per weighted average common shares
outstanding, for fiscal year 1996 compared with $70.1 million, or $1.98 per
weighted average common shares outstanding, for fiscal year 1995. The fiscal
year 1996 net loss includes a charge related to the Company's investment in
Stratosphere Corporation (Stratosphere) in the approximate amount of $149.4
million, or $3.59 per weighted average common shares outstanding. The
additional decrease in net earnings is primarily related to amortization of
preopening expenses in the amount of $7.5 million and net of tax charges for
corporate reorganization and project write-downs of $8.4 million.
The combined occupancy of guest rooms for Company-owned properties for fiscal
year 1996 (including occupancy on a complimentary basis) was 96%, with a
combined average rate of approximately $73. The combined occupancy of guest
rooms for Company-owned properties for fiscal year 1995 (including occupancy on
a complimentary basis) was 86%, with a combined average rate of approximately
$72.
The Company incurred an extraordinary charge of $17.1 million, or $.49 per
weighted average common shares outstanding, for fiscal year 1995 due to the
early retirement of long-term debt.
11
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
REVENUES
During fiscal year 1996, revenues increased $117.1 million to $490.0 million.
The increase was primarily attributable to revenues generated by Grand Casino
Tunica, which opened on June 24, 1996, in the amount of $64.5 million; revenues
in excess of 1995 amounts for the combined results of Grand Casino Biloxi and
Grand Casino Gulfport in the amount of $43.0 million; and combined management
fee income earned in the amount of $8.7 million. The Mississippi Gulf Coast
gaming market has become increasingly competitive and, as such, Grand Casino
Biloxi and Grand Casino Gulfport will compete for their respective share of the
Mississippi Gulf Coast gaming market. Currently, the Company believes that
Grand Casino Biloxi and Grand Casino Gulfport earn a disproportionate share of
the Mississippi Gulf Coast gaming market. The Company believes that this trend
will continue because of the Company's strategy at the time it entered
the Mississippi market was to build premier properties and amenities for
long-term shareholder value. However, as the market matures and more
well-capitalized competitors enter the market, the Company's share of the
market may decline. Grand Casino Tunica's gaming revenue for the period of time
since its opening has been below the Company's expectations.
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. The Company believes that the opening of a 600-room hotel in March
1997 and other amenities scheduled to open in 1997 should improve Grand Casino
Tunica's performance. However, there can be no assurance that results will
improve as such additional amenities are added since the market has been, and
is expected to continue to be, very competitive.
Combined management fee income from Grand Casino Mille Lacs and Grand Casino
Hinckley increased $5.9 million, or 27% compared with the prior year, in spite
of additional competition in Minnesota and western Wisconsin. Combined
management fee income from Grand Casino Avoyelles and Grand Casino Coushatta
was $47.2 million in fiscal year 1996 compared with $45.8 million in fiscal
year 1995. Management expects the Louisiana, Minnesota, and western Wisconsin
markets to remain highly competitive.
COST AND EXPENSES
Costs and expenses during fiscal year 1996 increased $136.1 million to $392.6
million. The increase in costs and expenses is primarily attributable to
increased volume in business at the Company's Mississippi Gulf Coast properties
in the amount of $44.6 million, costs and expenses related to the opening of
Grand Casino Tunica, in the approximate amount of $78.0 million (including
preopening expense amortization of $11.6 million), and expenses related to
corporate reorganization and project write-downs of $13.6 million during fiscal
year 1996 compared with none in fiscal year 1995. The main components of the
increases in costs and expenses are as follows.
Casino expenses increased $44.1 million to $126.1 million for fiscal year 1995,
compared with $82.0 million for fiscal year 1995. Grand Casino Tunica accounted
for $25.2 million of the casino expense increase as a result of opening during
1996, with the balance from Grand Casino Biloxi and Grand Casino Gulfport. The
increase in food and beverage expenses of $7 million in fiscal year 1996 over
fiscal year 1995 is primarily attributable to the opening of Grand Casino
Tunica. Depreciation and amortization expense in fiscal year 1996 increased
$21.6 million over fiscal year 1995, primarily due to depreciation of assets
for Grand Casino Tunica ($7.8 million), amortization of preopening expenses
related to Grand Casino Tunica in the amount of $11.6 million, and additional
depreciation for fiscal year 1996 related to assets for the Grand Casino
Gulfport Hotel, which opened in October 1995.
Selling, general, and administrative expenses in fiscal year 1996 increased
$54.0 million over fiscal year 1995. Included in selling, general, and
administrative expenses for fiscal year 1996 are expenses related to the
opening of Grand Casino Tunica in the amount of $24.5 million, increases in
marketing expenses in the amount of $8.4 million for Grand Casino Biloxi and
Grand Casino Gulfport as a result of air charter programs and additional
programs, increases in indirect expenses for Grand Casino Biloxi and Grand
Casino Gulfport in the amount of $9.9 million, and expenses in fiscal year 1996
related to corporate reorganization and project write-downs of $13.6 million.
12
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
OTHER
Interest income increased by $1.1 million to $17.1 million for fiscal year
1996, compared with $16.0 million for fiscal year 1995. The increase is
attributable to interest income earned on cash and cash equivalents the Company
raised in the First Mortgage Note offering in November 1995 net of $6.2 million
of interest income included in fiscal year 1995 as a result of consolidating
Stratosphere for the period January 2, 1995, to December 20, 1995. In addition,
the Company incurred a one-time pretax write-down of its investment in
Stratosphere and the Company's share of Stratosphere's losses during fiscal
year 1996 of $161.8 million.
CASH FLOW, WORKING CAPITAL, AND CAPITAL EXPENDITURES
Net cash provided by operating activities (as shown in the Consolidated
Statements of Cash Flows) totaled $121.4 million in fiscal year 1996 compared
with $114.1 million in fiscal year 1995 and $50.3 million in fiscal year 1994.
The increase in fiscal year 1996 is primarily attributable to the opening of
Grand Casino Tunica, and additional management fee income as previously noted.
The Company's working capital decreased $218.1 million in fiscal year 1996 to
$93.8 million, primarily due to a decrease in cash and cash equivalents of
$187.5 million during fiscal year 1996, as a result of construction
expenditures for Grand Casino Biloxi and Grand Casino Tunica and an advance to
Stratosphere of $50.0 million pursuant to the completion guarantee. Capital
expenditures totaled $308.5 million, $186.0 million, and $89.3 million in
fiscal years 1996, 1995, and 1994, respectively. The significant capital
expenditures in fiscal year 1996 included construction activities at Grand
Casino Tunica and construction of additional amenities at Grand Casino Biloxi
and Grand Casino Gulfport in the amount of $268.5 million, $27.9 million, and
$12.1 million, respectively.
LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS, AND INTEREST EXPENSE
Long-term debt and capital lease obligations at December 29, 1996, totaled
$511.7 million, or 53% of the Company's total capital. The Company secured $120
million in capital lease financing for the Grand Casino Tunica project. As of
December 29, 1996, $74.9 million had been advanced under this capital lease
facility with the balance expected to be advanced during 1997.
Interest expense for fiscal year 1996, net of capitalized interest, was $32.8
million, or an increase of $6.6 million from fiscal year 1995. The $6.6-million
increase is due primarily to the effect of interest expense relating to the
$450 million of First Mortgage Notes outstanding for the entire year and the
advances under the capital lease financing net of capitalized interest.
Management believes the Company will generate sufficient cash flow from
operations to fund debt service on the First Mortgage Notes and the capital
lease financing.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased $86.4 million during fiscal year 1996
principally as a result of fiscal year 1996 net loss of $101.0 million, as
previously noted, netted with an increase of $15.3 million due to the issuance
of common stock on options exercised, warrants exercised, and other.
- ---FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
OVERVIEW
The Company's earnings before extraordinary charge increased to $70.1 million,
or $1.98 per weighted average common shares outstanding, for fiscal year 1995
compared with $29.0 million, or $.87 per weighted average common shares
outstanding, for fiscal year 1994. The fiscal year 1995 earnings per common
share before extraordinary charge increased approximately 128% compared with
fiscal year 1994. The increase was principally due to combined net revenues and
operating income increases at Grand Casino Biloxi and Grand Casino Gulfport of
16% and 48%, respectively, during fiscal year 1995 compared with fiscal year
1994 and an increase in management fee income of 197%. Management fee income
from managed Louisiana properties contributed 159% of the increase. During
fiscal year 1995, the Grand Casino Biloxi Hotel and Grand Casino Gulfport Hotel
were opened in April and October, respectively. The combined occupancy of guest
rooms for the period (including occupancy on a complimentary basis) was 86%,
with a combined average rate of approximately $72.
13
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
The Company incurred an extraordinary charge of $17.1 million, or $.49 per
weighted average common shares outstanding, for fiscal year 1995 due to the
early retirement of long-term debt.
REVENUES
During fiscal year 1995, net revenues increased $87.1 million to $372.9
million. The increase was primarily attributable to revenues in excess of 1994
amounts for the combined results of Grand Casino Biloxi and Grand Casino
Gulfport and combined management fee income earned from Louisiana properties in
the amount of $42.4 million and $36.5 million, respectively. The Mississippi
Gulf Coast gaming market has become increasingly competitive and, as such,
Grand Casino Biloxi and Grand Casino Gulfport will compete for their respective
share of the Mississippi Gulf Coast gaming market. Currently, the Company
believes Grand Casino Biloxi and Grand Casino Gulfport earn a disproportionate
share of the Mississippi Gulf Coast gaming market. The Company believes that
this trend will continue because premier properties and amenities were designed
to enhance long-term shareholder value. However, as the market matures and more
well-capitalized competitors enter the market, the Company's share of the
market may decline.
Revenues from Grand Casino Biloxi and Grand Casino Gulfport in fiscal year 1995
were principally composed of casino and food and beverage, with casino and food
and beverage revenues representing 73% and 9% of total net revenues,
respectively, compared with 84% and 11% of total net revenues in fiscal year
1994.
Combined management fee income from Grand Casino Mille Lacs and Grand Casino
Hinckley increased $9 million, or 65% compared with the prior year, in spite of
additional competition in Minnesota and western Wisconsin. Combined management
fee income from Grand Casino Avoyelles and Grand Casino Coushatta was $45.8
million in fiscal year 1995 compared with $9.3 million in fiscal year 1994.
Management expects the Louisiana, Minnesota, and western Wisconsin markets to
remain highly competitive.
COSTS AND EXPENSES
Costs and expenses during fiscal year 1995 increased $22.7 million to $256.6
million. The increase is primarily attributable to an increased volume of
business in fiscal year 1995 compared with fiscal year 1994. The main
components of the increases in costs and expenses are as follows.
Depreciation and amortization expense in fiscal year 1995 increased $6.4
million over fiscal year 1994, primarily due to depreciation of assets for the
Grand Casino Biloxi Hotel and Grand Casino Gulfport Hotel and the entertainment
barge at Grand Casino Gulfport ($2.8 million) and amortization of debt issuance
costs in the amount of $1.5 million for Stratosphere, which was included in the
consolidated financial statements through December 20, 1995. In December 1995,
the Company converted to the equity method of accounting for its investment in
Stratosphere. In addition, amortization expense increased $1.5 million related
to amortization of casino development costs in the amount of $1.0 million for
Grand Casino Coushatta and amortization of debt issuance costs related to a
credit agreement with First Interstate Bank of Nevada, N.A. (which was paid off
in November 1995) in the amount of $0.5 million.
In addition, as the Company has added new amenities in fiscal year 1995, it has
incurred additional costs and expenses for hotel guest rooms and entertainment
facilities in the amount of $3.6 million and $5.1 million, respectively.
Selling, general, and administrative expenses in fiscal year 1995 increased
$7.4 million over fiscal year 1994. Included in selling, general, and
administrative expenses for fiscal year 1995 are advertising and promotional
expenses of $26.2 million compared with $25.2 million in fiscal year 1994. The
remaining increase of $6.4 million in fiscal year 1995 over fiscal year 1994 is
due to increased expenses at Grand Casino Biloxi and Grand Casino Gulfport
related to the increase in revenues in fiscal year 1995 over fiscal year 1994
and corporate overhead costs, including payroll and related costs, as the
Company expanded its management team to oversee new and anticipated projects.
OTHER
Interest income increased by $8.5 million to $16.0 million for fiscal year
1995, compared with $7.5 million for fiscal year 1994. This increase is
attributable to interest earned on additional advances to Indian tribes as well
as $6.2 million of interest income on funds raised to construct Stratosphere.
14
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
LONG-TERM DEBT AND INTEREST EXPENSE
Long-term debt at December 31, 1995, totaled $459.1 million, or 47% of the
Company's total capital. The Company issued $450 million of 10.125% First
Mortgage Notes in November 1995.
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 I development, capital stock owned by the Company in Stratosphere, and
certain existing Indian-owned notes receivable due the Company.
The net proceeds after the early redemption of long-term debt outstanding prior
to the issuance of the 10.125% First Mortgage Notes are expected to be used for
the construction of Grand Casino Tunica and additional hotel rooms and
entertainment and gaming-related amenities at Grand Casino Biloxi and Grand
Casino Gulfport. Interest expense for fiscal year 1995, net of capitalized
interest, was $26.2 million, or an increase of $12.1 million from fiscal year
1994. The $12.1-million increase is due primarily to the effect of interest
expense in the amount of $10.1 million on Stratosphere's First Mortgage Notes
recognized when the results of Stratosphere were included in the consolidated
financial statements.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $249.2 million during fiscal year 1995
principally as a result of fiscal year 1995 net earnings of $53.0 million and
the issuance of common stock to complete the merger of Gaming Corporation of
America and Grand Gaming Corp. on November 30, 1995, in the amount of $165.5
million. In addition, shareholders' equity increased $23 million related to the
Company's gain on common stock issued by Stratosphere.
- ----
SEASONALITY
Management believes that the operations of all casinos owned or managed by the
Company are affected by seasonal factors, including holidays, weather, and
travel conditions.
REGULATION AND TAXES
The Company is subject to extensive regulation by state gaming authorities. The
Company will also be subject to regulation, which may or may not be similar to
current state regulations, by the appropriate authorities in any other
jurisdiction where it may conduct gaming activities in the future. Changes in
applicable laws or regulations could have an adverse effect on the Company.
The gaming industry represents a significant source of tax revenues. From time
to time, various federal legislators and officials have proposed changes in tax
law, or in the administration of such law, affecting the gaming industry. It is
not possible to determine with certainty the likelihood of possible changes in
tax law or in the administration of such law. Such changes, if adopted, could
have a material adverse effect on the Company's financial results.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At December 29, 1996, the Company had $147.3 million in cash and cash
equivalents, including $67.1 million planned to be used to develop and
construct additional hotel rooms and entertainment and gaming-related amenities
at Grand Casino Biloxi and Grand Casino Gulfport.
During fiscal years 1996, 1995, and 1994 the Company's capital expenditures
totaled $308.5 million, $186.0 million, and $89.3 million, respectively.
Included in fiscal year 1996, capital expenditures were $268.5 million related
to construction of Grand Casino Tunica and other gaming-related amenities at
Grand Casino Tunica and $27.9 million of construction expenditures at Grand
Casino Biloxi related to additional hotel rooms and gaming-related amenities
currently under construction. The remaining capital expenditures of $12.1
million during fiscal 1996 primarily reflect various enhancement projects and
maintenance capital spending at Grand Casino Gulfport.
15
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GRAND CASINOS, INC. AND SUBSIDIARIES
Based on current project needs, the Company's level of capital expenditures
during 1997 will be approximately $200 million to $205 million. The Company
believes in developing first-class facilities in order to maximize long-term
shareholder value. The primary construction projects scheduled at Grand Casino
Tunica include a 600-room hotel (scheduled to open March 1997), RV park
(scheduled to open Fall 1997), convention center (scheduled to open Fall 1997),
and golf course (scheduled to open Spring 1998). The capital expenditures for
Grand Casino Tunica are anticipated to be approximately $95.0 million and are
planned to be funded through cash and cash equivalents and approximately $45.1
million in capital lease financing in place at December 29, 1996.
In addition, during fiscal year 1997, the Company expects capital expenditures
to approximate $70 million related to construction of additional hotel rooms
and entertainment and gaming-related amenities at Grand Casino Biloxi. Lastly,
capital expenditures forecasted for fiscal year 1997 for Grand Casino Gulfport
are $18.5 million related to design of additional hotel rooms and entertainment
and gaming-related amenities at Grand Casino Gulfport (including acquisition of
land). The Company expects to fund the capital expenditures for Grand Casino
Biloxi and Grand Casino Gulfport through internally generated cash.
At December 29, 1996, the Company's long-term debt included 10.125% First
Mortgage Notes due in 2003 in the amount of $450.0 million and capital lease
financing of $72.1 million under a total lease financing agreement of $120.0
million due in 2001. The First Mortgage Notes are redeemable on December 1,
1999, or thereafter based on a stated premium that declines ratably to par
value.
At December 29, 1996, the Company's ownership in Stratosphere was approximately
42% and the Company had advanced Stratosphere $50 million pursuant to a
completion guarantee agreement. As of year-end 1996, the Company's advances and
investment have been fully written down or reserved. In connection with the
closing of the Stratosphere's First Mortgage Notes in 1995, the Company
delivered a Standby Equity Commitment pursuant to which the Company may, under
the terms and conditions described in the Standby Equity Commitment, be
obligated to purchase up to $20 million of additional equity in Stratosphere
during each of the first three years (up to $60 million in total) Stratosphere
is operating to the extent Stratosphere's consolidated cash flow did not reach
$50 million in each of such years. As a result of Stratosphere's Chapter 11
filing and the application of federal bankruptcy laws, the continued
enforceability of the Standby Equity Commitment is in question. In all events,
if Stratosphere's restructuring plan is approved and implemented, the Standby
Equity Commitment would be canceled.
Pursuant to the Company's covenants related to the 10.125% First Mortgage Notes
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. While the
Company believes that it has capital resources, through its existing bank
arrangements, debt markets, and its operating cash flows, to meet all of its
existing cash obligations and fund its commitments on the projects enumerated
above, there can be no assurance that the Company will have available the
financial resources if it is so called upon.
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 Annual
Report 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
the Company's potential participation in the Stratosphere proposed
reorganization, plans for future expansion and other business 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), pending
litigation, 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).
For further information regarding certain risks and uncertainties, see the
Company's Annual Report on Form 10-K for the fiscal year ended December 29,
1996.
16
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
IN THOUSANDS
GRAND CASINOS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 147,254 $ 334,772
Current installments of notes receivable 7,792 13,750
Accounts receivable 13,463 10,864
Deferred income taxes 9,910 6,747
Other current assets 15,335 13,736
- -----------------------------------------------------------------------------------------------------
Total Current Assets 193,754 379,869
- -----------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT -- NET 821,827 542,838
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS:
Cash and cash equivalents--restricted 10,276 6,902
Securities available for sale 23,603 14,200
Notes receivable--less current installments 30,772 43,594
Investments in and notes from unconsolidated affiliates 8,823 109,413
Debt issuance and deferred licensing costs--net 22,851 20,582
Other long-term assets 10,910 10,710
- -----------------------------------------------------------------------------------------------------
Total Other Assets 107,235 205,401
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,122,816 $1,128,108
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade and construction $ 20,002 $ 18,769
Current installments of long-term debt 4,101 7,459
Current installments of capital lease obligations 15,358 4,103
Accrued interest 5,486 4,030
Accrued payroll and related expenses 23,418 17,157
Other accrued expenses 31,542 16,314
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 99,907 67,832
- -----------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt--less current installments 455,002 459,070
Capital lease obligations--less current installments 56,740 -
Deferred income taxes 71,494 75,106
Total Long-term Liabilities 583,236 534,176
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 683,143 602,008
- -----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, and 14)
SHAREHOLDERS' EQUITY:
Capital stock--$.01 par value; 100,000 shares authorized;
common stock issued and outstanding 41,796 and 40,988
at December 29, 1996, and December 31, 1995, respectively 418 410
Additional paid-in capital 412,576 397,298
Net unrealized gains on securities available for sale 1,358 2,102
Retained earnings 25,321 126,290
- -----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 439,673 526,100
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,122,816 $1,128,108
=====================================================================================================
</TABLE>
See accompaning notes to consolidated financial statements.
17
<PAGE> 9
CONSOLIDATED STATEMENTS OF EARNINGS
FISCAL YEARS ENDED DECEMBER 29, 1996,
DECEMBER 31, 1995, AND JANUARY 1, 1995
IN THOUSANDS EXCEPT EARNINGS(LOSS) PER SHARE DATA
GRAND CASINOS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Casino $361,844 $270,683 $239,570
Hotel 25,017 10,908 -
Food and beverage 47,650 33,640 32,408
Management fee income 77,198 68,474 23,041
Retail and other income 11,133 8,022 4,858
- ----------------------------------------------------------------------------------------------------------------
Gross Revenues 522,842 391,727 299,877
Less: Promotional allowances (32,823) (18,855) (14,103)
- ----------------------------------------------------------------------------------------------------------------
Net Revenues 490,019 372,872 285,774
- ----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 126,132 82,003 79,324
Hotel 6,203 3,593 -
Food and beverage 26,436 19,486 19,735
Other operating expenses 11,971 8,394 3,286
Depreciation and amortization 45,538 23,899 17,479
Lease expense 17,713 14,574 16,903
Selling, general, and administrative 158,618 104,608 97,188
- ----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 392,611 256,557 233,915
- ----------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 97,408 116,315 51,859
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 17,055 15,984 7,527
Interest expense (32,767) (26,187) (14,140)
Other income 28 4,781 265
Project write-downs (164,947) (408) (985)
- ----------------------------------------------------------------------------------------------------------------
Total Other Expense-Net (180,631) (5,830) (7,333)
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, minority
interest, and extraordinary charge (83,223) 110,485 44,526
Provision for income taxes 17,746 42,974 15,700
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before minority interest and
extraordinary charge (100,969) 67,511 28,826
Minority interest - 2,594 151
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary charge (100,969) 70,105 28,977
Extraordinary charge-net of income taxes - (17,097) -
- ----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ($100,969) $53,008 $28,977
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share-before
extraordinary charge ($2.43) $1.98 $0.87
Loss per common share-extraordinary charge - (0.49) -
- ----------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE ($2.43) $1.49 $0.87
================================================================================================================
WEIGHTED AVERAGE COMMON SHARES AND
COMMON STOCK EQUIVALENTS OUTSTANDING 41,578 35,476 33,437
================================================================================================================
</TABLE>
18
<PAGE> 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
IN THOUSANDS
GRAND CASINOS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS ON SECURITIES
COMMON STOCK ADDITIONAL RETAINED AVAILABLE
SHARES DOLLARS PAID-IN CAPITAL EARNINGS FOR SALE
TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 2, 1994 33,415 $334 $226,175 $21,355 $ - $247,864
Issuance of stock on
options exercised--net 32 - 162 - - 162
Stock offering costs - - (166) - - (166)
Issuance of stock on
warrants exercised--net - - 24 - - 24
Net earnings - - - 28,977 - 28,977
- -------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 33,447 334 226,195 50,332 - 276,861
Issuance of stock on
options exercised--net 238 2 1,613 - - 1,615
Tax benefit on basis differences
associated with extinguishment
of long-term debt - - 4,100 - - 4,100
Gain on exercise of Stratosphere
warrants and public stock offering--
net of income taxes - - - 22,950 - 22,950
Unrealized loss on securities available
for sale--net of income taxes - - - - 2,102 2,102
Stock issued upon mergers 7,303 74 165,390 - - 165,464
Net earnings - - - 53,008 - 53,008
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 40,988 410 397,298 126,290 2,102 526,100
Issuance of stock on
options exercised--net 411 4 4,568 - - 4,572
Issuance of stock on warrants
exercised and other--net 397 4 10,710 - - 10,714
Unrealized loss on securities available
for sale--net of income taxes - - - - (744) (744)
Net loss - - - (100,969) - (100,969)
- -------------------------------------------------------------------------------------------------------------
Balance, December 29, 1996 41,796 $418 $412,576 $25,321 $1,358 $439,673
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
IN THOUSANDS
GRAND CASINOS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) before extraordinary charge ($100,969) $ 70,105 $ 28,977
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 42,748 20,359 16,624
Amortization of original issue discount and debt issuance costs 2,790 6,035 2,126
Gain on sale of investment - (4,781) (265)
Project write-downs 164,947 408 985
Deferred income taxes (6,775) 5,900 4,700
Minority interest - (2,594) (18)
Changes in operating assets and liabilities:
Current assets (9,113) (2,594) (12,649)
Accounts payable 1,281 8,258 (1,576)
Accrued expenses 26,492 12,974 11,385
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 121,401 114,070 50,289
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable - (28,530) (63,867)
Proceeds from repayment of notes receivable 15,981 18,381 20,957
Investment in and notes receivable from unconsolidated affiliates (60,244) (13,319) (28,703)
Cash acquired upon mergers - 14,642 -
Decrease in cash due to deconsolidation of Stratosphere Corporation - (107,184) -
Payments for property and equipment (308,537) (185,964) (89,335)
Proceeds from sale of investment - 3,881 265
Purchases of securities available for sale (12,330) - -
Increase in cash and cash equivalents--restricted and other (3,374) (120,887) -
Costs paid related to mergers - (3,134) -
(Increase) decrease in other long-term assets (11,823) (275) 10,336
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (380,327) (422,389) (150,347)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in accounts payable--construction - 16,277 (21,139)
Proceeds from issuance of common stock--net 15,286 1,615 20
Proceeds from Stratosphere Corporation warrants exercised and
public offering - 113,604 -
Debt issuance costs and deferred financing costs (4,421) (28,357) (3,686)
Proceeds from issuance of long-term debt 74,912 688,101 2,190
Payments on long-term debt and capital lease obligations (14,369) (177,946) (5,593)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 71,408 613,294 (28,208)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (187,518) 304,975 (128,266)
Cash and cash equivalents--beginning of year 334,772 29,797 158,063
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents--end of year $ 147,254 $ 334,772 $ 29,797
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of capitalized interest of $16,065, $19,480, and $3,652
in fiscal years 1996, 1995, and 1994, respectively) $ 31,310 $ 19,113 $ 14,207
Income taxes $ 17,042 $ 29,792 $ 11,908
Noncash investing and financing activities:
Capital lease obligations entered into for property and equipment $ - $ - $ 7,734
Notes issued in exchange for property and casino development costs $ - $ 2,875 $ 6,190
Increase in noncash assets through stock issued for merger $ - $ 150,852 $ -
Increase (decrease) in various accounts upon consolidating and
deconsolidating Stratosphere Corporation:
Property and equipment $ - ($163,691) $ 27,962
Cash and cash equivalents--restricted (other asset) $ - ($118,366) $ 3,259
Debt issuance costs $ - ($13,604) $ 473
Notes receivable--netted against note payable $ - $ - $ 21,817
Minority interest $ - ($18,703) $ 18,721
Other long-term assets $ - ($15,007) $ 12,556
Accounts payable--trade and current liabilities $ - ($21,928) $ 1,558
Long-term debt $ - ($203,000) $ -
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTE 1, NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
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 (which opened on June 24,
1996), 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 opened the Stratosphere project in Las Vegas,
Nevada, on April 29, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Ultimate results could differ from those estimates.
FISCAL YEAR-END
The Company has adopted a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Grand Casinos,
Inc. and its wholly-owned and majority-owned subsidiaries. The accompanying
consolidated financial statements include the accounts of Stratosphere from
October 2, 1994, the date on which the Company first owned over 50% of the
voting stock of Stratosphere, to December 20, 1995, the date on which the
Company again 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 consolidation.
REVENUES AND EXPENSES
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 rooms, food and
beverage, and other items that are provided to customers on a complimentary
basis. A corresponding amount is deducted as promotional allowances. The
estimated costs of providing such complimentaries, which are classified as
casino expenses on the accompanying statements of earnings, are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Food and Beverage $20,748 $11,919 $8,914
Hotel 1,360 781 -
Other 5,804 3,334 3,078
-------------------------------------------
</TABLE>
Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.
21
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits, and money market funds and other instruments with
original maturities of three months or less. Included in cash and cash
equivalents at December 29, 1996, is approximately $67.1 million, which the
Company intends to use to develop and open additional hotel rooms and
entertainment and gaming-related amenities at Grand Casino Biloxi and Grand
Casino Gulfport.
Restricted cash and cash equivalents consist primarily of funds restricted for
workers' compensation benefits.
INVENTORIES
Inventories consisting primarily 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.
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 fiscal years ended December 29, 1996
(1996), December 31, 1995 (1995), and January 1, 1995 (1994), include
approximately $11.9 million, $1.4 million, and $3.6 million of preopening
amortization expense, respectively. As of December 29, 1996, and December 31,
1995, preopening expenses included in other current assets are $0.5 million and
$0.3 million, respectively.
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. Leasehold acquisition
costs are amortized over the shorter of their estimated useful lives or the
term of the respective leases once the assets are placed in service.
Depreciation and amortization of property and equipment is computed using the
straight-line method over the following estimated useful lives:
Building and Leasehold Improvements 30-40 years
Leasehold Acquisition Costs 30 years
Furniture and Equipment 3-15 years
Land Improvements 15 years
The Company's policy is to capitalize interest incurred on debt during the
course of qualifying construction projects. Such costs are amortized over the
related assets' estimated useful lives. Capitalized interest totaled $16.1
million, $19.5 million, and $3.7 million during the fiscal years 1996, 1995,
and 1994, respectively. The Company periodically evaluates whether events and
circumstances have occurred that may affect the recoverability of the net book
value of its long-lived assets. If such events or circumstances indicate that
the carrying amount of an asset may not be recoverable, the Company estimates
22
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
the future cash flows expected to result from the use of the asset. If the sum
of the expected future undiscounted cash flows does not exceed the carrying
value of the asset, the Company will recognize an impairment loss.
DEBT ISSUANCE COSTS
The costs of issuing long-term debt, including all underwriting, legal, and
accounting fees, have been capitalized and are being amortized over the life of
the related indebtedness using the effective interest method. Deferred debt
issuance costs, net of accumulated amortization, amounting to $5.5 million were
written off during fiscal year 1995 with respect to the early retirement of
outstanding debt (see Note 10).
DEFERRED LICENSING COSTS
Costs incurred to obtain licensing rights from an unrelated third party for the
Company's Gulfport, Mississippi, casino are being charged to income over 30
years. The 30-year period, which commenced in May 1993, represents the
anticipated life of the related license subject to periodic suitability
reviews.
CASINO DEVELOPMENT COSTS
Casino development costs consist of amounts incurred to expand managed casino
facilities, certain direct costs to obtain management contracts, and certain
other direct costs incurred to secure locations for casinos on Indian lands.
Casino development costs are amortized over the lives of the related management
contracts as each becomes effective. Included in other long-term assets at
December 29, 1996, and December 31, 1995, are net casino development costs of
$8.3 million and $7.2 million, respectively.
SECURITIES AVAILABLE FOR SALE
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") , requires certain
securities to be recorded at fair market value. The ending balance of
shareholders' equity as of December 29, 1996, and December 31, 1995, includes
$1.4 million and $2.1 million, respectively (net of deferred income taxes), of
net unrealized gains on securities classified as available-for-sale.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company classifies
deferred tax liabilities and assets into current and noncurrent amounts based
on the classification of the related assets and liabilities.
STOCK SPLIT
On October 18, 1995, the Company declared a three-for-two stock split effected
in the form of a 50% stock dividend. The declared stock split dividend was paid
on December 28, 1995, to shareholders of record as of December 15, 1995.
Dollar, share, and earnings per share have been retroactively adjusted to
reflect the stock split.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share were computed by dividing net earnings (loss)
by the weighted average number of common shares and dilutive common stock
equivalents outstanding. Shares that are issuable upon the exercise of stock
options and warrants have not entered into the computation of earnings per
common share for 1994 because their inclusion would not be significant (See
Note 10).
23
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
BUSINESS COMBINATIONS
On November 30, 1995, the acquisitions of Gaming Corporation of America (GCA)
and Grand Gaming Corp. (GGC) were completed. Pursuant to the agreements and
plans of merger, the assets of GCA and GGC became assets of BL Development
Corp. (BLD), a wholly-owned subsidiary of Grand Casinos, Inc. Total merger
consideration of approximately $165.5 million was paid in Company common stock
plus transaction expenses of $3.1 million. The transactions were accounted for
under the purchase method of accounting and, accordingly, the purchase price
was allocated to assets and liabilities based on the estimated fair values as
of the acquisition date. Due to the development stage of the entities acquired,
all excess purchase price was allocated to property and no excess purchase
price was recorded as goodwill.
Pursuant to the merger plans and as adjusted for the stock split as previously
noted, GCA shareholders received .29796 shares of the Company's common stock
for each GCA share owned (total of 5.8 million common shares of the Company)
and GGC shareholders received .20955 shares of the Company's common stock for
each GGC share owned (total of 1.5 million common shares of the Company
excluding shares previously owned by Grand Casinos Resorts, Inc. and GCA). The
results of operations of GCA and BLD, since November 30, 1995, are included in
the Company's consolidated results.
The pro forma results listed below are unaudited and reflect purchase price
accounting adjustments assuming the acquisition occurred at the beginning of
each year presented.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net revenues $411,892 $285,795
Earnings before extraordinary charge $ 81,196 $ 27,222
Net earnings $ 64,099 $ 27,222
Earnings per common share
before extraordinary charge $2.29 $.67
Loss per common share--
extraordinary charge ($0.49) -
Earnings per common share $1.81 $.67
- --------------------------------------------------------------------------------
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS
The Company holds contracts with the Mille Lacs Band for the management of two
gaming facilities in Onamia and Hinckley, Minnesota, that expire on April 2,
1998, and May 15, 1999, respectively. In addition, the Company holds a contract
with the Tunica-Biloxi Tribe of Louisiana for a gaming facility in Marksville,
Louisiana, that expires on June 3, 2001, and a management contract with the
Coushatta Tribe of Louisiana for a gaming facility in Elton, Louisiana, that
expires on January 16, 2002. See additional discussion in the Company's 1996
Annual Report on Form 10-k regarding the tribal-state compacts which authorize
the management contracts for the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisiana.
The management contracts govern the relationship between the Company and the
tribes with respect to the construction and management of the casinos. The
construction or remodeling portion of the agreements commences with the signing
of the respective contracts and continues until the casinos are open for
business; thereafter, the management portion of the respective management
contracts commences upon the opening of the casino and continues for a
24
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
period of seven years.
Under terms of the contracts, the Company as manager of the casino receives a
percentage of the distributable profits (as defined in the contract) of the
operations as a management fee after payment of certain priority distributions,
a cash contingency reserve, and guaranteed minimum payments to the tribes. In
the event the management contracts are not renewed upon expiration of their
initial term, the Company will be entitled to payments equal to a percentage of
the fair value of certain leased gaming equipment.
The management contracts for the Tunica-Biloxi Tribe of Louisiana and the
Coushatta Tribe of Louisianna have been approved by the Bureau of Indian
Affairs (BIA) and have a seven-year term. In October 1996, the Company entered
into restated management contracts with the Mille Lacs Band for the two
facilities in Onamia and Hinckley, Minnesota, which the Company believes
restate the terms and conditions of the original management contracts
consistent with National Indian Gaming Commission (NIGC) requirements. The
NIGC is currently reviewing the restated management contracts. While the
Company believes that the management contracts meet all requirements of the
Indian Gaming Regulatory Act of 1988 (IGRA), the BIA or the National Indian
Gaming Commission may reduce the terms or the management fees payable under the
management contracts or require other changes to the contracts.
The Mille Lacs Band has an option to purchase the Company's interest in the
management contracts of the two facilities in Onamia and Hinckley, Minnesota,
as of April 2, 1996, and May 15, 1997, respectively. The purchase price is
equal to the Company's share of distributable profits during the 12-month
period preceding the date of purchase, multiplied by the years remaining under
the initial term of the management contract, or portion thereof not to exceed
two years.
PROPERTY AND EQUIPMENT--NET
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements, including
land held for development $176,569 $171,475
Buildings and improvements 441,421 248,026
Leasehold acquisition costs 5,038 5,038
Furniture and equipment 140,643 70,209
Construction in progress 120,264 82,275
----------------------------------------------------------------------------------
883,935 577,023
Less accumulated depreciation
and amortization (62,108) (34,185)
----------------------------------------------------------------------------------
Property and equipment--net $821,827 $542,838
==================================================================================
</TABLE>
Included in property and equipment at December 29, 1996, and December 31, 1995,
are assets recorded under capital leases of $92.2 million and $17.3 million,
respectively. Accumulated depreciation and amortization at December 29, 1996,
and December 31, 1995, includes amounts recorded for capital leases of $13.6
million and $6.8 million, respectively.
25
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Notes from the Coushatta Tribe with interest at
a defined reference rate plus 1% (not to exceed
16%), receivable in 84 substantially equal monthly
installments through January 2002 $23,800 $ 26,903
Notes from the Tunica-Biloxi Tribe with
interest at a defined reference rate plus 1% (not
to exceed 16%), receivable in 84 substantially
equal monthly installments through June 2001 12,558 14,529
Notes from the Mille Lacs Band paid in full - 5,506
October 1996
Note from Casino Magic Corporation related to sale
of assets with interest at 12% per annum, principal
and interest paid in full May 1996 - 2,773
Other, less allowance for doubtful accounts of
$3,050 and $840, respectively 2,206 7,633
----------------------------------------------------------------------------------------
$38,564 $ 57,344
Less current installments of notes receivable (7,792) (13,750)
----------------------------------------------------------------------------------------
Notes receivable--less current installments $30,772 $ 43,594
</TABLE>
The reference rate at December 29, 1996, and December 31, 1995, was 8.25% and
8.5%, respectively.
Repayment of the aforementioned notes receivable from the Coushatta Tribe and
the Tunica-Biloxi Tribe is required to be made only if distributable profits
are available from the operations of the related casinos and are subject to
certain distribution priorities specified in the management contracts.
In addition, repayment of the notes receivable and the manager's fees under the
management contracts are subordinated to certain other financial obligations of
the tribe or band. Through December 29, 1996, no amounts have been withheld
under these provisions.
INVESTMENT IN STRATOSPHERE
The Company owns approximately 42% interest in Stratosphere, which filed for
reorganization under Chapter 11 of the Bankruptcy Code on January 27, 1997.
Stratosphere did not make its scheduled First Mortgage Note interest payment
that was 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 the
restructuring of Stratosphere's Notes and the equity capitalization of
Stratosphere. The agreement-in-principle requires that the restructuring be
implemented pursuant to a Chapter 11 filing by Stratosphere.
The Company made total capital contributions to the Stratosphere project of
approximately $107.6 million and has outstanding advances to Stratosphere of
$50.0 million. The Company has written off or reserved for these investments
and other related costs in the project as of December 29, 1996, in the amount of
$161.8 million and has included this amount in the Company's fiscal year 1996
results on the accompanying Consolidated
26
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS IN PROJECT WRITE-DOWNS.
In addition, in connection with the closing of Stratosphere's First Mortgage
Notes in 1995, the Company delivered a Standby Equity Commitment pursuant to
which the Company may, under the terms and conditions described in the Standby
Equity Commitment, be obligated to purchase up to $20 million of additional
equity in Stratosphere during each of the first three years (up to $60 million
total) Stratosphere is operating to the extent Stratosphere's consolidated cash
flow did not reach $50 million in each of such years. As a result of
Stratosphere's Chapter 11 filing and the application of the federal bankruptcy
laws, the continued enforceability of the Standby Equity Commitment is in
question. In all events, if Stratosphere's restructuring plan is approved and
implemented, the Standby Equity Commitment would be canceled.
The Company's obligations under the restructuring plan are conditioned upon
satisfactory resolution of various matters described in the plan. See
Stratosphere's Form 8-k filed on January 6, 1997 for further information on the
plan. The Company is continuing to monitor those matters.
Summarized consolidated earnings information and balance sheet information for
Stratosphere, which the Company accounts for using the equity method, as of
December 29, 1996, and December 31, 1995, and for the three fiscal years ended
December 29, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Earnings Information 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 108,739 $ 60 $ 107
- ---------------------------------------------------------------------------------
Costs and expenses 439,905 947 107
(Loss) from operations (331,166) 887 943
Other income (expense)--net (17,677) (3,776) 665
---------------------------------
Net (loss) $ (348,843) $ (4,663) $ (278)
- --------------------------------------------------------------------------------
Balance Sheet Information 1996 1995
================================================================================
ASSETS:
Cash and cash equivalents $ 25,237 $ 92,596
Other current assets 12,704 11,683
Property and equipment--net 130,000 194,908
Cash and cash equivalents--restricted - 115,416
Other long-term assets 13,139 19,305
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 181,080 $ 433,906
Balance Sheet Information 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY:
- --------------------------------------------------------------------------------
Current installments of long-term debt
and capital lease obligations $ 9,113 $ -
Long-term debt--net of current installments 272,540 203,000
Other liabilities 36,870 38,616
TOTAL LIABILITIES 318,523 241,616
Shareholders' equity (deficit) (137,443) 192,290
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 181,080 $ 433,906
</TABLE>
27
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
INCOME TAXES
The provision for income taxes for financial reporting purposes for fiscal
1996, 1995, and 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income before extraordinary loss $17,746 $42,974 $15,700
Tax benefit from extraordinary loss
on early retirement of debt - (9,200) -
$17,746 $33,774 $15,700
</TABLE>
The provision for income taxes attributable to earnings before extraordinary
loss on early retirement of debt for fiscal 1996, 1995, and 1994 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
CURRENT:
<S> <C> <C> <C>
Federal $21,185 $33,744 $10,500
State 3,336 3,330 500
24,521 37,074 11,000
DEFERRED (6,775) 5,900 4,700
$17,746 $42,974 $15,700
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
actual rate based on earnings before income taxes for fiscal years 1996, 1995,
and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory federal tax rate (35.0%) 35.0% 35.0%
State income taxes--net of
federal income tax benefit 2.5 2.0 .7
Valuation allowance on Stratosphere net
operating loss carryforward and write-down
of Stratosphere investment 49.8 2.0 -
Other--net 4.0 (.1) (.4)
21.3% 38.9% 35.3%
</TABLE>
The Internal Revenue Service has completed examinations of the Company's
federal income tax returns through the tax year ended August 2, 1992, and all
issues relating to the examinations have been resolved. Examinations of the
federal income tax returns filed for the period August 3, 1992, through January
1, 1995, are currently in process. In the opinion of management, any tax
liability arising from the current examination will not have a material adverse
effect on the Company's financial position or results of operations.
The Company's net deferred income tax liabilities are as follows (in
thousands):
28
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
NONCURRENT DEFERRED TAX LIABILITIES:
Tax depreciation in excess of book depreciation $29,115 $19,300
Financial reporting bases in excess of tax reporting bases of
land acquired in GCA and GGC mergers 40,600 40,600
Tax liability recorded related to subsidiary's
(Stratosphere) direct sale of common stock - 12,400
Net operating losses and write-down of
Stratosphere investment and net operating losses of GGC (54,000) (3,650)
Other temporary differences 1,779 2,806
- -----------------------------------------------------------------------------------------
Net noncurrent deferred tax liabilities 17,494 71,456
Less: valuation allowance 54,000 3,650
Net noncurrent deferred tax liabilities $71,494 $75,106
- -----------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Preopening expenses--net of amortization $ 4,975 $ 1,525
Accruals, reserves, and other 4,935 5,222
- -----------------------------------------------------------------------------------------
Net current tax asset 9,910 6,747
- -----------------------------------------------------------------------------------------
Net deferred tax liability $61,584 $68,359
=========================================================================================
</TABLE>
Management has determined that the deferred tax asset relative to net operating
losses and investment write-down related to Stratosphere and net operating
losses of GGC did not satisfy the recognition criteria set forth in Statement
of Financial Accounting Standards No. 109. Accordingly, a valuation allowance
was recorded to the applicable deferred tax assets. At December 29, 1996, the
Company had financial statement net operating loss and capital loss
carryforwards of approximately $154.3 million, which expire at various times
through December 2010.
LEASES AND CAPITAL LEASE OBLIGATIONS
The Company has entered into various operating leases for land adjacent to its
dockside casinos in Mississippi. The lease for land adjacent to the Company's
Gulfport Casino is for the period from July 1, 1992, through June 30, 1997, and
contains renewal options totaling 45 years. The Company is required to make
annual rental payments of $800,000, subject to adjustment as defined, plus 5%
of gross annual gaming revenues in excess of $25 million and 3% of all
nongaming revenues. The lessor of the Gulfport Casino site has the right to
cancel the lease at any time for reason of port expansion, in which case the
lessor will be liable to the Company for the depreciated value of improvements
and other structures placed on the leased premises as defined.
The lease for land adjacent to the Company's Biloxi Casino has an initial term
of 99 years, and the Company is required to make annual rental payments of $2.5
million, subject to adjustment as defined. Percentage rent is also due equal to
5% of gross gaming revenues in excess of $50 million per year, plus 10% of net
profits from certain other nongaming-related activities.
The Company also entered into a 10-year lease for submerged land adjacent to
the Biloxi Casino with an option to extend the lease for five years after the
expiration of the initial 10-year term. The lease provides for annual rental
payments of $405,000 during the first year of its term and annual increases of
$73,750 for the next four years and subsequent rental payments as defined in
the agreement.
29
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
The land lease in connection with the operation of Grand Casino Tunica provides
for annual rental payments of $2.5 million, subject to adjustment as defined.
The term of the lease is, initially, for six years with nine six-year renewal
options, for a total of 60 years.
In addition to the aforementioned land leases, the Company leases certain other
property and equipment under noncancelable operating and capital leases. Future
minimum lease payments, excluding contingent rentals, due under noncancelable
operating and capital leases as of December 29, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 20,268 $9,824
1998 19,098 10,879
1999 15,377 10,577
2000 10,718 9,799
2001 20,335 9,561
Thereafter - 590,994
- ----------------------------------------------------------------------------------------------------------
Total minimum lease payments 85,796
Less: amounts representing interest at 7.625% (13,698)
- ----------------------------------------------------------------------------------------------------------
Present value of minimum capital lease payments 72,098
Less: current installments (15,358)
- ----------------------------------------------------------------------------------------------------------
Obligations under capital leases--less current liabilities $ 56,740
==========================================================================================================
</TABLE>
Rent expense, under noncancelable operating leases, exclusive of real estate
taxes, insurance, and maintenance expense, for fiscal 1996, 1995, and 1994 was
approximately $19.0 million, $16.2 million, and $18.0 million, respectively.
Percentage rental expense for fiscal 1996, 1995, and 1994 was $12.8 million,
$11.3 million, and $9.3 million, respectively.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------
<S> <C> <C>
First Mortgage Notes due December 1, 2003
(see description following) $450,000 $450,000
Various notes payable in varying installments of
principal and interest with interest from 9% to
10.75%, maturing from December 1997 to
December 2002 9,103 16,529
---------------------------------------------------------------------------------
459,103 466,529
Less current installments (4,101) (7,459)
---------------------------------------------------------------------------------
Long-term debt--less current installments $455,002 $459,070
=================================================================================
</TABLE>
On November 30, 1995, the Company completed its public offering of $450.0
million of 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
retire $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
30
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
a credit facility with First Interstate Bank of Nevada, N.A. (F.I.B. Note).
Pursuant to early redemption of the 12.5% First Mortgage Notes due February 1,
2000, write-off of original issue discount on the First Mortgage Notes, and
related deferred financing costs written off on the First Mortgage Notes and
F.I.B. Note, the Company recognized an extraordinary after-tax loss of $17.1
million.
The 10.125% First Mortgage Notes dated November 30, 1995, are secured by
substantially all the assets of Grand Casino Biloxi and Grand Casino Gulfport,
Grand Casino Tunica assets included in Phase I development, capital stock owned
by the Company in Stratosphere, and certain existing Indian-owned notes
receivable due the Company.
The notes require semi-annual payments of interest only on June 1 and December
1 of each year, which commenced on 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.
The terms of the 10.125% First Mortgage Notes contain covenants relating to
certain business, operational, and financing matters including, but not limited
to, maintenance of certain financial ratios and limitations on additional debt,
dividends, stock repurchases, disposition of assets, mergers, restricted
payments (as defined), and similar transactions. The Company was in compliance
with such covenants as of December 29, 1996.
The future aggregate annual maturities of long-term debt at December 29, 1996,
are as follows:
FISCAL YEAR (IN THOUSANDS)
<TABLE>
<S> <C>
--------------------
1997 $ 4,101
1998 3,507
1999 56
2000 60
2001 65
Thereafter 451,314
--------------------
$459,103
====================
</TABLE>
STOCK OPTIONS
STOCK OPTION AND COMPENSATION PLAN
The Company has a Stock Option and Compensation Plan and a Director Stock
Option Plan whereby incentive and nonqualified stock options and other awards
to acquire up to an aggregate of 6,451,500 shares of the Company's common stock
may be granted to officers, directors, and employees.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net
earnings (loss) and earnings (loss) per share would have been reduced to the
following pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss): As reported ($100,969) $53,008
Pro forma (107,316) 51,533
Earnings (loss) As reported ($2.43) $1.49
per share: Pro forma (2.58) 1.45
</TABLE>
31
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each award under the option plans is estimated on the date of
grant using the Black Scholes option pricing model. The following assumptions
were used to estimate the fair value of options:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.68%-6.95% 5.96%-7.58%
Expected life 10 year 10 year
Expected volatility .528-.613 .625-.665
Expected dividend yield 0 0
</TABLE>
Information with respect to the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE PRICE RANGE
OUTSTANDING FOR GRANT PER SHARE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 2, 1994 1,190,550 46,950 ($3.03-$8.09)
Additional shares authorized - 1,237,500 -
Granted 774,900 (774,900) ($8.09-$12.25)
Canceled (26,490) 26,490 ($7.20-$8.09)
Exercised (33,750) - ($3.03-$7.20)
--------------------------------------------------------------------------------------------------
Balance at January 1, 1995 1,905,210 536,040 ($3.03-$12.25)
Additional shares authorized - 1,050,000 -
Granted 734,100 (734,100) ($9.50-$27.33)
Assumed upon merger 221,234 (221,234) ($8.81-$28.63)
Canceled (4,759) 4,759 ($12.25-$27.33)
Exercised (238,107) - ($3.03-$12.25)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 2,617,678 635,465 ($3.03-$28.63)
Additional shares authorized - 2,775,000 -
Granted 1,997,522 (1,997,522) ($14.75-$32.125)
Canceled (9,096) 9,096 ($8.08-$10.42)
Exercised (411,827) - ($3.03-$15.10)
--------------------------------------------------------------------------------------------------
Balance at December 29, 1996 4,194,277 1,422,039 ($3.03-$32.125)
==================================================================================================
Exercisable at December 29, 1996 972,431 - ($3.03-$27.33)
==================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value.
CASH EQUIVALENTS, RECEIVABLES, AND ACCOUNTS PAYABLE
The carrying amount approximates fair value because of the short maturity of
these instruments.
AVAILABLE-FOR-SALE SECURITIES
32
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995 AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
The fair value of the Company's investments equals the quoted market price when
available and a quoted market price for similar securities if a quoted market
price is not available. The Company has classified all of its marketable
securities as available-for-sale as of December 29, 1996.
LONG-TERM INVESTMENTS
The notes receivable are generally advances made to Indian communities for the
development of gaming properties. The repayment terms, while specific, are
largely dependent upon the operating performance of specific gaming properties.
The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values based on
estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ
from the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The fair value of the Company's long-term debt is estimated based on quoted
market rates for the First Mortgage Notes. The fair value of capital lease
obligations approximates the carrying amount based on the maturity and security
of the related obligation.
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $157,530 $157,530 $341,674 $341,674
Accounts receivable 13,463 13,463 10,864 10,864
Notes receivable 38,564 38,564 57,344 57,344
Securities available-for-sale 23,603 23,603 14,200 14,200
Accounts payable 20,002 20,002 18,769 18,769
First Mortgage Notes 450,000 455,063 450,000 450,000
Long-term debt 9,103 9,103 16,529 16,529
Capital lease obligation 72,098 72,098 4,103 4,103
</TABLE>
CONCENTRATIONS OF CREDIT RISK
The financial instruments that subject the Company to concentrations of credit
risk consist principally of accounts and notes receivable.
Notes receivable are concentrated in specific Indian and other legalized gaming
regions. As of December 29, 1996, and December 31, 1995, accounts and notes
receivable are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------
<S> <C> <C>
Regions:
Louisiana (Indian) 86.9% 81.5%
Minnesota (Indian) 2.9 13.4
Mississippi (dockside) 10.2 5.1
------------------------------------------
100.0% 100.0%
==========================================
</TABLE>
EMPLOYEE RETIREMENT PLAN
33
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 31, 1995, AND JANUARY 1, 1995
GRAND CASINOS, INC. AND SUBSIDIARIES
The Company has a section 401(k) employee savings plan for all full-time
employees. Currently, the Company's employees are not part of a bargaining
unit and, as such, all employees who are eligible can participate. The savings
plan allows participants to defer, on a pretax basis, a portion of their
salary and accumulate tax-deferred earnings as a retirement fund. Eligibility
is based on years of service and minimum age requirements. Contributions are
invested, at the direction of the employee, in one or more funds available. The
Company matches employee contributions up to a maximum of 1% of participating
employees' gross wages. Company contributions are vested over a period of five
years. The 401(k) plan commenced on September 1, 1995. Company contributions
for fiscal 1996 and 1995 were $0.4 million and $0.1 million, respectively.
COMMITMENTS AND CONTINGENCIES
JOINT VENTURES
The Company had joint venture agreements with a nonaffiliated party that
assisted with the construction and management of the casino operations for the
Coushatta Tribe of Louisiana and the Tunica-Biloxi Tribe of Louisiana. During
1995, the Company exercised its option to purchase the party's interest under
the contracts for $5.8 million. As of December 29, 1996, the Company had paid
all amounts due.
STRATOSPHERE CORPORATION
On March 9, 1995, Stratosphere closed on a public offering of $203 million of
14.25% First Mortgage Notes due in the year 2002 with contingent interest. The
proceeds of this offering were used to construct the Stratosphere tower and
casino/hotel project in Las Vegas, Nevada. The Company has executed a Standby
Equity Commitment pursuant to which the Company may, under the circumstances as
defined in the Standby Equity Commitment, be obligated to purchase up to $20
million of additional equity in Stratosphere during each of the first three
years (up to $60 million total) Stratosphere is operating to the extent
Stratosphere's consolidated cash flow does not reach $50 million in each of
such years (See Note 6).
As a result of Stratosphere's Chapter 11 filing and the application of federal
bankruptcy laws, the continued enforceability of the Standby Equity Commitment
is in question. In all events, if Stratosphere's restructuring plan is approved
and implemented, the Standby Equity Commitment would be canceled.
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 is for four years, and as of December 29, 1996,
the amount outstanding was $6.8 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, and as of
December 29, 1996, the amounts outstanding were $11.5 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 $2.7 million as
of December 29, 1996.
LITIGATION
The company is involved in various inquiries, administrative proceedings, and
litigation relating to contracts and other matters arising in the normal course
of business. While any proceeding or litigation involves uncertainty,
management believes that the final outcome of these matters will likely not
have a material adverse effect upon the Company's consolidated financial
position or its results of operations.
In addition to the matters described above, the Company has been named as a
defendant in a number of lawsuits related to Stratosphere, in which the Company
owns approximately 42% interest. The Company intends to defend these actions
vigorously and believes that the final outcome of these lawsuits will not have
a material adverse effect upon the Company's consolidated financial position or
its results of operations.
34
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grand Casinos, Inc.:
We have audited the accompanying consolidated balance sheets of Grand Casinos,
Inc. (a Minnesota corporation) and Subsidiaries as of December 29, 1996, and
December 31, 1995, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the two-year
period ended December 29, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of Grand Casinos, Inc. and
Subsidiaries as of January 1, 1995 and for the year ended January 1, 1995, were
audited by other auditors whose report dated February 8, 1995, except as to the
last paragraph of Note 11 and Note 18 of those statements, which were dated
March 9, 1995, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Casinos, Inc.
and Subsidiaries as of December 29, 1996, and December 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 29, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 7, 1997
<PAGE> 1
EXHIBIT 21
GRAND CASINOS, INC.
SUBSIDIARIES
- BL Development Corp., a Minnesota corporation
- BL Utility Corp., a Minnesota corporation
- Grand Casinos Nevada I, Inc., a Minnesota corporation
- Mille Lacs Gaming Corporation, a Minnesota corporation
- Grand Casinos of Louisiana, Inc. - Tunica-Biloxi, a
Minnesota corporation
- Grand Casinos of Louisiana, Inc. - Coushatta, a Minnesota
corporation
- Magnum Investments of Lake Charles, Inc., a Louisiana
corporation
- R & W Investments of Lake Charles, Inc., a Louisiana
corporation
- Grand Media & Electronic Distributing, Inc., a Minnesota
corporation
- Grand Casinos Resorts, Inc., a Minnesota Corporation
- Grand Casinos of Mississippi, Inc. - Gulfport, a Minnesota
corporation
- Grand Casinos of Mississippi, Inc. - Biloxi, a Minnesota
corporation
- Grand Casinos Biloxi Theater, Inc., a Minnesota
corporation
- Stratosphere Corporation, a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report on the Grand Casinos, Inc. and Subsidiaries consolidated financial
statements incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 33-54188, 33-82936, and
33-97364.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 28, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into Grand Casinos, Inc.'s previously filed
Registration Statements on Form S-8, File Nos. 33-54188, 33-82936, and 33-97364.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada,
March 26, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Grand Casinos, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-97364, 33-82936, and 33-54188) on Form S-8 of Grand Casinos, Inc. of our
report dated February 8, 1995, except as to the second paragraph of Note 15 as
to which the date is March 9, 1995, relating to the consolidated statements of
earnings, shareholders' equity, and cash flows of Grand Casinos, Inc. and
subsidiaries for the fiscal year ended January 1, 1995, which report appears in
the December 29, 1996, annual report on Form 10-K of Grand Casinos, Inc.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 28, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Stratosphere Corporation:
We consent to incorporation by reference in registration statements (Nos.
33-97364, 33-82936, and 33-54188) on Form S-8 of Grand Casinos, Inc. of our
report dated February 3, 1995, relating to the consolidated statements of
operations, stockholders' equity, and cash flows of Stratosphere Corporation
(a development stage company majority-owned by Grand Casinos Resorts, Inc.)
and subsidiary for the year ended December 31, 1994, which report appears in
the Form 10-K of Grand Casinos, Inc. for the fiscal year ended December 29,
1996.
KPMG Peat Marwick LLP
Las Vegas, Nevada
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 147,254
<SECURITIES> 0
<RECEIVABLES> 13,463
<ALLOWANCES> 0
<INVENTORY> 5,464
<CURRENT-ASSETS> 193,754
<PP&E> 883,935
<DEPRECIATION> 62,108
<TOTAL-ASSETS> 1,122,816
<CURRENT-LIABILITIES> 99,907
<BONDS> 511,742
0
0
<COMMON> 418
<OTHER-SE> 439,255
<TOTAL-LIABILITY-AND-EQUITY> 1,122,816
<SALES> 490,019
<TOTAL-REVENUES> 522,842
<CGS> 170,742
<TOTAL-COSTS> 392,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,767
<INCOME-PRETAX> (83,223)
<INCOME-TAX> 17,746
<INCOME-CONTINUING> (100,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,969)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> (2.43)
</TABLE>
<PAGE> 1
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants 2
Independent Auditors' Report 3
Consolidated Balance Sheets at December 29, 1996, and December 31, 1995 4
Consolidated Statement of Operations for the fiscal years ended December 29, 1996,
December 31, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity for the period from January 1, 1994,
to December 29, 1996 6
Consolidated Statements of Cash Flows for the fiscal years ended December 29, 1996,
December 31, 1995 and 1994 7
Notes to Consolidated Financial Statements 9
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Stratosphere Corporation:
We have audited the accompanying consolidated balance sheets of Stratosphere
Corporation (a Delaware corporation) and subsidiaries as of December 29, 1996
and December 31, 1995, and the related consolidated statements of operation,
stockholders' equity and cash flows for the years ended December 29, 1996 and
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stratosphere
Corporation and subsidiaries as of December 29, 1996 and December 31, 1995, and
the results of their operations and their cash flows for the years ended
December 29, 1996 and December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company filed for Chapter 11
bankruptcy protection on January 27, 1997. The bankruptcy filing raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 8.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1997
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Stratosphere Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Stratosphere Corporation (a development
stage company majority-owned by Grand Casinos Resorts, Inc.) and subsidiary for
the year ended December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of Stratosphere
Corporation and subsidiary referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
February 3, 1995
<PAGE> 4
CONSOLIDATED
BALANCE SHEETS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,558,804 $ 92,595,770
Cash and cash equivalents - restricted 2,678,344 -
Securities available for sale 2,000,905 5,140,950
Accounts receivable 4,575,490 4,485,681
Other current assets 6,127,325 2,056,897
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 37,940,868 104,279,298
- --------------------------------------------------------------------------------------------------------------
Property and Equipment, Net 130,000,000 194,908,237
- --------------------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted - 115,413,435
Debt issuance and deferred financing costs-net 12,339,097 13,507,699
Pre-opening costs-net - 5,796,862
Related party receivable - net 800,000 -
- --------------------------------------------------------------------------------------------------------------
Total Other Assets 13,139,097 134,717,996
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 181,079,965 $ 433,905,531
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable-trade $ 1,250,786 $ 338,745
Accounts payable-construction 858,665 33,523,612
Current installments of long-term debt 429,103 -
Current installments of capital lease obligations 8,684,360 -
Accrued interest 18,644,462 3,645,657
Accrued payroll and related expenses 5,005,047 166,485
Affiliate payable 1,878,717 803,865
Other accrued expenses 9,231,792 137,403
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 45,982,932 38,615,767
- --------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt - less current installments 203,000,000 203,000,000
Capital lease obligations - less current installments 19,539,815 -
Note payable to affiliate 50,000,000 -
- --------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 272,539,815 203,000,000
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 318,522,747 241,615,767
- --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value; authorized 10,000,000 shares;
no shares issued and outstanding
Common stock, $.01 par value; authorized 100,000,000 shares;
issued and outstanding 58,393,105 and 56,361,117
at December 29, 1996 and December 31, 1995,
respectively 583,931 563,611
Additional paid-in-capital 218,787,643 199,697,889
Accumulated deficit (356,814,356) (7,971,736)
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit) (137,442,782) 192,289,764
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 181,079,965 $ 433,905,531
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED
STATEMENTS OF OPERATIONS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 AND 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Casino $ 47,901,144 $ - $ -
Hotel 19,698,730 - -
Food and beverage 26,825,729 - -
Tower, retail and other income 25,541,729 59,864 107,132
- -----------------------------------------------------------------------------------------------------------------
Gross Revenues 119,967,332 59,864 107,132
Less: Promotional allowances 11,228,465 - -
- -----------------------------------------------------------------------------------------------------------------
NET REVENUES 108,738,867 59,864 107,132
- -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 21,474,255 - -
Hotel 7,082,100 - -
Food and beverage 22,416,703 - -
Other operating expenses 9,444,697 - -
Depreciation and amortization 11,477,925 - -
Pre-opening costs amortization 23,909,146 - -
Impairment of long-lived assets 295,946,633 - -
Selling, general and administrative 48,153,596 947,008 1,049,838
- -----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 439,905,055 947,008 1,049,838
- -----------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (331,166,188) (887,144) (942,706)
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 3,992,108 8,361,087 664,540
Interest expense (21,761,565) (11,970,178) -
Gain (loss) on sale of assets 93,025 (166,815) -
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Expense), net (17,676,432) (3,775,906) 664,540
- -----------------------------------------------------------------------------------------------------------------
Loss before income taxes (348,842,620) (4,663,050) (278,166)
Provision for income taxes - - -
- -----------------------------------------------------------------------------------------------------------------
NET LOSS $ (348,842,620) $ (4,663,050) $ (278,166)
=================================================================================================================
LOSS PER COMMON SHARE $ (6.00) $ (0.12) $ (0.01)
=================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,134,811 37,583,065 30,000,000
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED
STRATOSPHERE CORPORATION AND SUBSIDIARIE
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Total
Common Preferred Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity (Deficit)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 10 $ - $ 10,066,550 $ (3,030,520) $ 7,036,040
Net loss - - - (278,166) (278,166)
Contributions of capital (Note 9) - - 69,337 - 69,337
Proceeds from initial public offering 299,990 - 53,613,185 - 53,913,175
Cost of initial public offering - - (2,519,156) - (2,519,156)
Sale of common stock purchase
warrants - - 675 - 675
Preferential distribution to stockholder - - (20,209,840) - (20,209,840)
----------------------------------------------------------------------------
Balances at December 31, 1994 300,000 - 41,020,751 (3,308,686) 38,012,065
Net loss - - (4,663,050) (4,663,050)
Sale of preferred stock to parent - 82 33,524,778 - 33,524,860
Issuance of common stock in payment
of underwriting fees 8,000 - 3,992,000 - 4,000,000
Convert preferred to common stock 82,500 (82) (82,418) - -
Cost of initial public offering - - (23,570) - (23,570)
Adjustment to preferred distribution for
cash received in lieu of Vegas World equipment - - 736,116 - 736,116
Adjustment to preferential distribution for the
net book value of the gaming equipment
received in excess of purchase price - - 490,725 - 490,725
Exercise of 26,500 stock options 265 - 112,360 - 112,625
Exercise of 5,874,617 common stock
purchase warrants 58,746 - 34,132,741 - 34,191,487
Proceeds from secondary stock offering 112,600 - 89,199,400 - 89,312,000
Cost of secondary stock offering - - (4,841,904) - (4,841,904)
Purchase of land for common stock 1,500 - 1,292,250 - 1,293,750
Unrealized holding gain on investment - - 144,660 - 144,660
----------------------------------------------------------------------------
Balances at December 31, 1995 563,611 - 199,697,889 (7,971,736) 192,289,764
Net loss - - - (348,842,620) (348,842,620)
Exercise of 134,833 stock options 1,348 - 571,692 - 573,040
Exercise of 81,596 common stock 816 - 722,590 - 723,406
purchase warrants
Cost of secondary stock offering - - (248,047) - (248,047)
Purchase of land for common stock 18,156 - 18,186,604 - 18,204,760
Unrealized holding loss on investment - - (143,085) - (143,085)
----------------------------------------------------------------------------
Balances at December 29, 1996 $583,931 $ - $218,787,643 $(356,814,356) $(137,442,782)
============================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 AND 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (348,842,620) $ (4,663,050) $ (278,166)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,407,234 1,718,209 -
Amortization of pre-opening costs 23,909,146 - -
Provision for doubtful accounts 3,166,829 - -
Impairment of long-lived assets 295,946,633 - -
Loss on sale or disposal of assets 214,495 166,815 -
Changes in operating assets and liabilities:
Accounts receivable (278,951) (4,485,681) -
Other current assets (4,070,428) (2,051,650) (5,247)
Accounts payable - trade 912,041 499,630 90,823
Other accrued expenses 28,931,755 3,928,575 3,971
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,296,134 (4,887,152) (188,619)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to stockholder - (4,411,798) (42,396,686)
Change in cash and cash equivalents-restricted 112,592,006 (115,268,775) -
Change in securities available for sale 3,140,045 (5,140,950) -
Payments for property and equipment (224,526,056) (124,470,643) (27,431,080)
Change in construction payables (32,664,947) 29,883,865 3,639,747
Pre-opening costs (18,112,284) (5,796,862) -
Increase in related party receivable and other (3,777,687) - (55,000)
Cash proceeds from sale of property and equipment - 928,134 -
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (163,348,923) (224,277,029) (66,243,019)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 1,296,446 84,470,097 53,913,175
Proceeds from exercise of stock options/common stock
purchase warrants - 34,304,112 675
Costs of secondary stock offering (248,046) - -
Debt issuance and deferred financing costs (760,707) (11,221,825) -
Change in prepaid offering costs - 935,395 (1,345,956)
Proceeds from issuance of long-term debt and capital lease obligations 34,394,550 216,493,456 25,596,513
Payments on long-term debt and capital lease obligations (5,741,272) (3,737,763) (5,582,920)
Proceeds from loans from related party - - 68,122
Payments of loans from related party - - (7,688,347)
Increase in affiliate payable 1,074,852 - -
Proceeds from issuance of debt to affiliate 50,000,000 - -
Capital contributions - - 69,337
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 80,015,823 321,243,472 65,030,599
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (70,036,966) 92,079,291 (1,401,039)
Cash and cash equivalents - beginning of period 92,595,770 516,479 1,917,518
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 22,558,804 $ 92,595,770 $ 516,479
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
CONSOLIDATED
STATEMENTS OF CASH FLOWS STRATOSPHERE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995 and 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest $ 2,014,243 $ - $ -
Income taxes $ - $ 275,877 $ -
Non-Cash Investing and Financing Activities:
Issuance of common stock in purchase of land $18,204,760 $ 1,293,750 $ -
Issuance of common stock in payment of underwriting fees in connection
with First Mortgage Notes $ - $ 4,000,000 $ -
Purchase of land, buildings, furniture and equipment from
stockholder (principally Vegas World assets) as follows:
Purchase price $ - $ 1,000,000 $51,225,000
Cash paid (5,496,516)
------------------------------------
Note payable to stockholder - 1,000,000 45,728,484
Preferential distribution to
stockholder - 1,226,841 (20,209,840)
------------------------------------
Predecessor cost of assets aquired for non-cash consideration $ - $ 2,226,841 $ 25,518,644
=====================================
Increase in furniture and equipment from
reduction in notes receivable from stockholder $ - $ 80,000 $ -
Offering costs recognized as a reduction in additional paid-in capital
in connection with initial public offering of common stock $ - $ 23,570 $ 2,519,156
Issuance of preferred stock to parent in payment of notes payable $ - $33,524,860 $ -
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of Stratosphere
Corporation and its wholly-owned subsidiaries, Stratosphere Gaming Corp.,
Stratosphere Land Corporation, Stratosphere Advertising Agency and 2000 Las
Vegas Boulevard Retail Corporation (collectively the "Company"). Stratosphere
Corporation was incorporated in the State of Delaware on January 15, 1993,
under the name of Stratosphere Tower Corporation and on February 8, 1993, a
Certificate of Amendment was filed which changed the name of the Company to
Stratosphere Corporation. The Company is owned 41.9% by Grand Casinos Resorts,
Inc. ("Grand") which is in turn a wholly-owned subsidiary of Grand Casinos,
Inc.
The Company was organized for the purpose of completing the development and
construction of, and thereafter owning and operating, the Stratosphere Tower, a
1,149 foot, free-standing observation tower with integrated casino, hotel and
entertainment facilities in Las Vegas, Nevada (the "Stratosphere Tower"). The
Company commenced operations of the resort facility on April 29, 1996.
On January 27, 1997, Stratosphere Corporation and its wholly-owned subsidiary
Stratosphere Gaming Corporation ("SGC") filed voluntary petitions for Chapter 11
Reorganization pursuant to the United States Bankruptcy Code. As of that date,
the United States Bankruptcy Court for the District of Nevada assumed
jurisdiction over the assets of Stratosphere Corporation and SGC. Stratosphere
Corporation and SGC are acting as debtors in possession on behalf of their
respective bankrupt estates, and are authorized as such to operate their
business subject to bankruptcy court supervision (See Note 8). The fiscal 1996
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. These consolidated financial statements do
not include any adjustments that might result if the Company is unable to
successfully emerge from bankruptcy.
BASIS OF PRESENTATION
The accompanying consolidated financial statements through February 23, 1994,
the date of consummation of the Company's initial public offering ("IPO"),
represent a "carve out" of the activities and operations of the Stratosphere
Tower project from the accounting records of Bob Stupak Enterprises, Inc.
("BSE"), a company wholly-owned by Robert E. Stupak ("Stupak"), and certain
other affiliates (principally Vegas World Hotel and Casino, a sole
proprietorship owned by Stupak). The "carve out" through February 23, 1994,
was based on the following assumptions:
Acquisition of real estate for the project began in January 1989.
Accordingly, for purposes of these consolidated financial statements,
January 1, 1989, is considered to be the date of inception. All assets
acquired have been included in these consolidated financial statements at
the historical cost of the acquiror. The consolidated financial statements
assume that the Company purchased all the land, and improvements thereon,
and paid for all construction, and related activities, costs of the IPO and
other operating expenses.
Payroll and related expenses, comprised of officers' and directors'
compensation, are reflected at amounts based upon the anticipated
compensation to be paid to those levels subsequent to the consummation of
the IPO.
Professional fees are the actual amounts for legal, accounting and other
consulting services incurred on behalf of the Company.
Property taxes and interest are the actual expenses associated with the
acquired real estate and their financings.
General and administrative expenses are comprised of actual travel expenses
and an allocation of Vegas World Hotel and Casinos' ("Vegas World")
insurance, rent, supplies, telephone and utility expenses based on
management's estimate of a 1,000 square foot office. Management believes
that this estimate is reasonable.
The Company believes that the expenses recorded in the consolidated financial
statements through February 23, 1994, reflect the expenses that would have been
incurred had the consolidated Company operated on a stand alone basis during
the periods presented. Subsequent to February 23, 1994, the Company recorded
its own assets, liabilities and operations.
<PAGE> 10
The consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. While the
Chapter 11 cases are in process, Stratosphere Corporation and SGC continue
in possession of their properties and operates and manage their business as a
debtor-in-possession pursuant to the Bankruptcy Code.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stratosphere
Corporation and all subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
REVENUES AND EXPENSES
The Company recognizes revenues 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 rooms, food and beverage, and other items that are provided to
customers on a complimentary basis. A corresponding amount is deducted as
promotional allowances. The cost of such complimentaries included as casino
expenses for the fiscal year 1996 was $458,000 for rooms, $3,339,000 for food
and beverage and $59,000 for other items.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks, interest bearing
deposits, money market funds and investments purchased with an original
maturity of 90 days or less. Cash and cash equivalents-restricted in 1996
consist primarily of funds pledged for workers compensation benefits while the
long-term balance at December 31, 1995 related to the remaining proceeds from
the First Mortgage Notes restricted for funding the construction of the
facility.
SECURITIES AVAILABLE FOR SALE
The Company invests a portion of its Restricted Investments in short term
bond mutual funds which are classified as available for sale and valued at
market in the accompanying balance sheet. The cost of such investments at
December 29, 1996 was $2,000,905, while the market value was $2,002,480.
INVENTORIES
Inventories, consisting primarily 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost (See Note 4) , 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. Leasehold
acquisition costs are amortized over the shorter of their estimated useful
lives or the term of the respective leases once the assets are placed in
service.
Depreciation and amortization of property and equipment is computed using the
straight-line method over the following useful lives:
Building and improvements 39 years
Furniture, fixtures and equipment 3-15 years
Land Improvements 15 years
The Company's policy is to capitalize interest incurred on debt during the
course of qualifying construction projects. Such costs are amortized over the
related assets' estimated useful lives. Capitalized interest totaled
$13,954,854, $13,223,121, and $97,000 during the fiscal years 1996, 1995, and
1994 respectively.
RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
In 1996 the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of." Pursuant to SFAS 121, the Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or a group of
assets may not be recoverable. The Company considered its default on its
required debt service payment and significant operating losses to be its
primary indicator of potential impairment. Assets are grouped and evaluated
for impairment at the lowest level for which there are identifiable cash flows
that are largely independent of the cash
<PAGE> 11
flows of other groups of assets. The Company deems an asset to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the asset, including disposal value if any, is less than its
carrying amount. If an asset is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the asset exceeds fair
value. The Company generally measures value by discounting estimated cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.
DEBT ISSUANCE COSTS
Deferred debt issuance costs represent direct costs and expenses of $15,205,738
that were incurred in connection with the Company's offering of $203,000,000 14
1/4% First Mortgage Notes. Such amount is amortized using the straight line
method over the term of the Notes. For the fiscal years ended December 29,
1996, and December 31, 1995, $2,113,383 and $1,718,209 of debt issuance cost
was amortized. There was no amortization of deferred debt issuance costs for
the year ended December 31, 1994.
PRE-OPENING COSTS
Pre-opening costs incurred prior to the opening are capitalized and amortized
to expense using the straight line method over the six months following the
opening. These costs include payroll, training and marketing costs incurred
prior to commencement of operations. Amortization of pre-opening costs
totaled $23,909,146 for fiscal year ended December 29, 1996. There was no
amortization of pre-opening costs for the years ended December 31, 1995 and
1994. There were no amounts related to pre-opening costs included in asset
balances as of December 29, 1996.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes". SFAS 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion No. 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Effective January 1, 1993, the Company adopted
SFAS 109.
As the Company is a less than 80% owned subsidiary, its operations are not
included in the consolidated federal income tax return of Grand Casinos, Inc.
Accordingly, the Company files a separate federal income tax return.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Based on the application of significant judgment, actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications, having no effect on net losses, have been made to
the prior years Consolidated Financial Statements to conform with the current
year presentation.
FISCAL YEAR-END
The Company has adopted a 52- or 53-week accounting period.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following as of December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Hotel and related $3,691,103 $ -
Gaming 554,268 -
Construction build-out receivables - 4,209,804
Other 519,261 275,877
---------- ----------
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C>
Total 4,764,632 4,485,681
Less allowance for doubtful accounts (189,142) -
---------- ----------
Accounts receivable net $4,575,490 $4,485,681
========== ==========
</TABLE>
(3) OTHER CURRENT ASSETS
Other current assets consists of the following as of December 29, 1996, and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Inventory $3,270,532 $ -
Prepaid expenses 2,407,852 213,451
Other 448,941 1,843,446
---------- ----------
Other Current Assets $6,127,325 $2,056,897
========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT - NET
Property and equipment consist of the following as of December 29, 1996, and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Land and land improvements, including
land held for development $ 21,127,893 $ 24,336,016
Building and improvements 66,673,110 26,062,670
Furniture, fixtures and equipment 37,716,774 3,324,251
Construction in progress 15,919,491 141,185,300
------------ ------------
141,437,268 194,908,237
Less accumulated depreciation (11,437,268) -
------------ ------------
Property and Equipment - Net $130,000,000 $194,908,237
============ ============
</TABLE>
Included in property and equipment at December 29, 1996 are assets recorded
under capital leases of $33.5 million. Accumulated depreciation and
amortization at December 29, 1996 includes amounts recorded for capital leases
of $3,073,185.
In connection with the adoption of SFAS 121, the Company recorded a non-cash
impairment loss of $295.9 million or $5.09 loss per weighted average common
share. The impairment loss was measured as the amount by which the carrying
value of the long-lived assets exceeded their fair market value. Management has
made a preliminary assessment of the fair market value of each long-lived asset
category to reflect the impairment loss. Any changes in such fair market value
determination which would result from independent appraisal or other third party
sources are not expected to have a material impact on the Company's future
consolidated results of operations. As a result of the reduced carry amount of
the impaired assets, depreciation and amortization expense will be reduced
during future periods.
Future adjustment of asset carry amounts is possible with the anticipated
adoption of fresh-start reporting at the confirmation date upon bankruptcy court
approval of a plan of reorganization.
(5) OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following as of December 29, 1996, and
December 31, 1995.
<TABLE>
<S> <C> <C>
Accrued liabilities $5,147,109 $ -
Deposits 443,914 30,000
Accrued taxes 1,436,719 107,403
Other 2,204,050 -
---------- --------
Other Accrued Expenses $9,231,792 $137,403
========== ========
</TABLE>
(6) LONG TERM DEBT
A summary of debt outstanding as of December 29, 1996 and December 31, 1995 is
as follows:
<PAGE> 13
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
14.25% First Mortgage Notes due April 1, 2002 $203,000,000 $203,000,000
(see description following)
Other 429,103 -
------------ ------------
203,429,103 203,000,000
Less current portion (429,103) -
------------ ------------
Long-term debt-less current portion $203,000,000 $203,000,000
============ ============
</TABLE>
The prime rate of interest was 8.25% and 8.5% at December 29, 1996 and December
31, 1995 respectively.
14.25% FIRST MORTGAGE NOTES
On March 9, 1995, the Company closed on its offering of $203,000,000 14 1/4%
First Mortgage Notes due 2002 with Contingent Interest; Contingent Interest is
equal to 10.8% of the Company's consolidated cash flow, up to a limit of $100
million during any two consecutive semiannual periods (as defined in the
Indenture) ending March 31, once operational. The fair value of the First
Mortgage Notes at December 29, 1996 was approximately $188,790,000. The
indenture relating to the First Mortgage Notes (the "Indenture") contains
covenants that include a requirement that the Company maintain certain
financial ratios. The proceeds of the offering were used to develop and
construct Phase I, an integrated casino/hotel and entertainment complex. The
Company did not make the required November 15, 1996 interest payment of $14.5
million. As of December 29, 1996 the Company accrued $18,251,244 of
interest expense related to these notes.
On January 27, 1997, the Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corporation ("SGC") filed voluntary petitions for
Chapter 11 Reorganization pursuant to the United States Bankruptcy Code. As of
that date, the United States Bankruptcy Court for the District of Nevada assumed
jurisdiction over the assets of the Company and SGC. The Company and SGC are
acting as debtors in possession on behalf of their respective bankrupt estates,
and are authorized as such to operate their business subject to bankruptcy court
supervision.
The future aggregate annual maturities of non-affiliate long-term debt at
December 29, 1996, are as follows:
1997 $ 429,103
1998 -
1999 -
2000 -
2001 -
Thereafter 203,000,000
------------
Total $203,429,103
============
(7) OPERATING LEASES AND CAPITAL LEASE OBLIGATIONS
The Company consummated a $37.5 million capital lease transaction on
May 3, 1996. On October 30, 1996 the Company executed a Standstill Agreement
as the Company was in default with the lease agreement based on its failure to
meet certain financial covenants. Pursuant to the agreement the Company
reduced the principal by $4.2 million on a pro rata basis with funds held in
an escrow account. The Company subsequently made all required payments
relating to the capital lease obligations. The capital lease obligations
currently yield interest at 8.3%. The Standstill Agreement is no longer in
effect as the Company has filed bankruptcy as noted above.
The Company leases equipment under noncancelable operating and capital leases.
Future minimum lease payments, excluding contingent rentals, due under
noncancelable operating and capital leases for the five years subsequent to
December 29, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
- ----------- -------------- ----------------
<S> <C> <C>
1997 $10,757,582 $2,598,897
1998 10,037,899 1,189,980
1999 9,316,012 217,808
2000 2,216,213 163,835
2001 - 54,612
Thereafter -
</TABLE>
<PAGE> 14
<TABLE>
<S> <C>
Total minimum lease payments 32,327,706
Less: amounts representing
interest @ 8.30% (4,103,531)
-----------
Present value of minimum
capital lease payments 28,224,175
Less:current installment (8,684,360)
-----------
Obligations under capital leases $19,539,815
===========
</TABLE>
(8) RESTRUCTURING
On January 27, 1997, the Stratosphere Corporation and SGC (the
"Debtors"), filed voluntary petitions for Chapter 11 Reorganization pursuant to
the United States Bankruptcy Code. As of that date, the United States
Bankruptcy Court for the District of Nevada assumed jurisdiction over the
assets of the Debtors. The Debtors are acting as debtors in possession on
behalf of their respective bankrupt estates, and are authorized as such to
operate their business subject to bankruptcy court supervision. A Joint Plan
of Reorganization (the "Plan") was filed by the Debtors and Grand Casinos Inc.
with the bankruptcy court. The Plan includes several conditions of which none
are currently satisfied. Failure to meet the conditions could result in
further negotiation of the Plan or the development of a new plan. There can
be no assurance that the Plan on file will be confirmed.
Under the terms of the Plan, Stratosphere's $203 million 14 1/4% Notes
currently outstanding will be exchanged for $203 million of new Stratosphere
Notes bearing interest at 11 1/4%, due May 15, 2002. The Plan calls for
interest payable in kind at 14 1/4% per annum for the November 15, 1996,
interest payment, now in arrears, and a payment in kind at 11 1/4% per annum
for the May 15, 1997 interest payment, with all subsequent interest payments
paid in cash. The new Notes will also receive additional contingent interest
equal to 15% of Stratosphere's consolidated annual cash flow from $60.0 million
to $80.0 million, up to $3.0 million per year. The new Notes will be callable
at 110% of par (plus accrued interest) on May 15, 1999. Stratosphere also will
be permitted to issue up to $25.0 million in additional new Notes to fund its
working capital requirements.
In addition, the restructuring Plan will include a Rights Offering to all
existing holders of Stratosphere Common Stock, including Grand, which will
guarantee net proceeds of at least $75.0 million. The proceeds of the
Rights Offering will be used to finance completion of Phase II of the
Stratosphere resort complex. Existing Stratosphere shares will be canceled and
shareholders will receive transferable rights to purchase one share of Common
Stock in reorganized Stratosphere at $1.31 per share. Each purchaser of a share
pursuant to the Rights Offering, other than those subscribed for by Grand, as
its pro-rata share, also will receive a three-year warrant to purchase one-half
of a share of Common Stock at $3.00 per full share. As part of the
restructuring plan, Grand has agreed to purchase its pro-rata share of the
Rights Offering (approximately 42 percent) for approximately $31.9 million.
Additionally, Grand will provide a standby commitment to purchase any
unsubscribed portion of the Rights Offering not exercised by other Stratosphere
shareholders. Grand has also agreed to provide a new Completion Guarantee for
Phase II of the Stratosphere project, which includes a new hotel tower
consisting of approximately 1,000 room bays, a pool and recreation area,
landscaping and other improvements to the Stratosphere complex. The guarantee
will cover up to $25 million in cost overruns on completion of Phase II. Any
amounts paid by Grand pursuant to the Completion Guarantee would constitute
subordinated debt of Stratosphere with interest payable at 11 1/4 %.
The Rights Offering will result in the issuance of 58.0 million shares of
Stratosphere Common Stock, with net proceeds of at least $75.0 million.
Upon completion of the reorganization and Rights Offering, Stratosphere will
have approximately 96.8 million shares of Common Stock outstanding and warrants
outstanding to purchase an additional 17.0 million shares of Common Stock at
$3.00 per share.
Under the Plan, Grand will convert $50 million due from Stratosphere into 39.7%
(approximately 38.4 million shares) of the Common Stock of Stratosphere
Corporation outstanding upon the completion of the reorganization. Grand
previously loaned this amount to Stratosphere pursuant to its Completion
Guarantee on the construction of the Stratosphere casino, hotel and tower,
which opened in Las Vegas on April 29, 1996. Assuming full subscription by the
public shareholders in the Rights Offering, Grand will subscribe for
approximately 24.5 million shares of reorganized Stratosphere Corporation for
$32.1 million. These shares together with shares received from the conversion
of $50 million of debt, will result in Grand owning 65% of Stratosphere
Corporation (without giving effect to the warrants).
The Plan is subject to a number of conditions, including plan confirmation by
the United States Bankruptcy Court, District of Nevada, receipt of all necessary
regulatory approvals, including those required by Nevada gaming authorities,
completion of definitive Plan related documents, and other customary closing
conditions. In addition, Grand's obligations under the Plan are conditioned
upon resolution or discharge of certain pending securities litigation, receipt
by Grand of an investment banking fairness opinion, a two year Management
Agreement wherein Grand agrees to manage construction of Phase II and the day to
day operations of Stratosphere for $500,000 per year inclusive of all costs and
expenses, and Stratosphere's consolidated cash flows (as defined in the Plan)
for the months between October 1, 1996 and June 30, 1997, averaging not less
than $2,267,000 per month. The average for the five months ended February 23,
1997 was $1,615,736. Based on these conditions there can be no assurance that
the Plan on file will ultimately be confirmed. If the Plan or a similar
proposal is not confirmed the Company will likely be unable to continue as a
going concern.
<PAGE> 15
The Company plans to expense future restructuring expenses as incurred. All
professional fees and other restructuring charges related to the bankruptcy
filing will require United States Bankruptcy Court approval. During the fourth
quarter of fiscal 1996 the Company expensed approximately $1.0 million related
to professional fees incurred as the Company was developing a plan to
restructure its debt.
(9) STOCKHOLDERS' DEFICIT
CAPITAL CONTRIBUTIONS AND INITIAL PUBLIC OFFERING
On February 23, 1994, the Company consummated an Initial Public Offering
("IPO") of 11,700,000 Units (each $5.00 Unit consisting of one share of Common
Stock and a redeemable warrant to purchase one share of Common Stock). The
redeemable warrants, exercisable for a period of five years, had an exercise
price of $5.83 per share and could be redeemed by the Company for $.01 per
warrant upon 30 days' prior written notice in the event the closing bid price
of the Company's Common Stock equaled or exceeded $7.375 per share for 10
consecutive trading days ending not more than 30 days preceding the date of the
notice of redemption. The Company received proceeds of $53,913,175 from the
IPO, net of commissions and escrow fees but prior to other offering related
expenses of $2,519,156.
Prior to receipt of the net proceeds from the IPO, the Company met its capital
requirements through capital contributions and loans from BSE or its
affiliates, loans from Grand and mortgage financing. The Company used
$12,465,700 of the proceeds to repay amounts borrowed from BSE and Grand (see
Note 10).
On February 17, 1994, BSE transferred certain assets and services to the
Company with a historical cost of $15,689,347 representing a capital
contribution of $8,001,000 (18,299,000 shares of Common Stock) and a loan for
$7,688,347. The transfers made by BSE consisted principally of the following:
(i) real estate comprised of land upon which the Stratosphere Tower was
constructed and additional real estate, including certain existing rental
properties, upon which additional attractions and possible future projects will
be constructed: (ii) all plans, designs, contracts, concepts and construction
in progress relating to the Stratosphere Tower and (iii) certain direct costs
and expenses incurred in connection with the IPO and certain other reimbursable
expenses directly associated with the Stratosphere Tower project. In addition,
through February 17, 1994, BSE or its affiliates (principally Vegas World)
contributed services to the Company aggregating $2,134,887. These expenses
represent an allocation of expenses incurred by those affiliates on behalf of
the Company and management's estimate of other expenses that would have been
incurred had the Company operated on a stand alone basis during the periods
presented. As discussed in Note 1, for purposes of the accompanying
consolidated financial statements, the aforementioned capital contributions and
loans made by BSE or its affiliates are reflected in the periods the underlying
assets were acquired and services rendered.
In connection with the IPO, the Company, BSE, Stupak and Grand entered into
various agreements pursuant to which:
Grand purchased 5,750,000 of the 11,700,000 Units sold in the IPO for
$26,915,750.
At the close of the IPO, Grand acquired 5,357,132 shares of Common Stock
from BSE at BSE's cost of approximately $.44 per share.
Grand was granted the option to purchase certain assets of Vegas World
(See Note 10).
At the close of the IPO, BSE deposited into escrow an additional
4,119,572 shares of the Company's Common Stock then owned by BSE ("BSE
Escrow Shares"). Subsequent to the exercise of an option by the Company
to purchase certain assets of Vegas World (See Note 10), Grand acquired
the BSE Escrow Shares in August, 1994 at BSE's cost of approximately $.44
per share.
Concurrent with the closing of the First Mortgage Notes Offering, Grand
invested approximately $33.5 million in the Company by purchasing 8,250
unregistered shares of the Company's Series A Convertible Non-Voting Preferred
Stock for $4,063 per share (the "Series A Preferred Stock"). Each share of
Series A Preferred Stock was convertible into 1,000 shares of the Company's
Common Stock. At the Company's annual meeting of stockholders on May 19, 1995,
the Company's stockholders approved Grand's conversion of the Series A
Preferred Stock into the Common Stock.
Subsequently, Grand has converted the Series A Preferred Stock into 8,250,000
shares of the Common Stock. The shares of Common Stock issued upon conversion
of the Series A Preferred Stock are not transferable for a period of five years
from March 9, 1995. Grand has also agreed that it will not transfer or
exercise the 5,750,000 Redeemable Warrants beneficially owned by Grand.
On September 7, 1995, the Company called for redemption on October 10, 1995,
all of the outstanding Redeemable Warrants at a price of $0.01 per Redeemable
Warrant, for a total redemption price of $117,000. Each Redeemable Warrant
entitled the registered holder thereof to purchase one share of Common Stock at
$5.83 per share. The Company received approximately $34.2 million in net
proceeds from the issuance of the
<PAGE> 16
Common Stock upon exercise of all the Redeemable Warrants (excluding those
held by Grand). In addition the Company received $112,625 from the exercise of
26,500 Stock Options.
On December 22, 1995, the Company closed an offering (the "First Offering") of
10,000,000 shares of the Common Stock, resulting in proceeds to the Company of
$75,200,000. Of these shares, 8,400,000 shares were sold at $8.00 per share in
an underwritten public offering (the "Public Offering"), resulting in net
proceeds to the Company, after underwriting discounts, of $7.52 per share. The
remaining 1,600,000 shares (the "Direct Shares") of the First Offering were
sold directly by the Company for $7.52 per share to affiliates of the Company.
Of the Direct Shares, 1,000,000 were sold to Grand, 500,000 shares were sold to
Lyle Berman, Chief Executive Officer and a director of the Company and Chief
Executive Officer and Chairman of the Board of Grand, and 100,000 shares were
sold to Stanley Taube, a director of the Company and the Vice President and a
director of Grand. On December 29, 1995, the Company closed on the offering
(the "Second Offering," together with the First Offering, the "Equity
Offerings"), of 1,260,000 shares granted in an option to the underwriters of
the Equity Offerings. Proceeds to the Company from the Second Offering were
$9,475,200.
On January 11, 1996 the Company purchased approximately 3.5 acres across the
street from its property. The property was used to build a 500-car parking lot.
The Company issued 1,050,000 shares of Common Stock for the purchase of which
500,000 shares went directly to the owner of the land, 500,000 shares were sold
to an unrelated third party and 50,000 shares were paid as a fee to the broker
of the transaction.
During March 1996 the Company acquired approximately two acres through the
issuance of 765,559 shares to an unrelated third party. The property has been
used to stage Phase II construction materials and equipment, and may be used to
provide future additional parking.
On May 6, 1996 the Company received proceeds of $723,406 through the exercise
of 81,596 sales agent warrants that were issued in connection with the IPO.
The Company's Common Stock was delisted from the Pacific Stock Exchange on
December 3, 1996, and the Company has been notified by Nasdaq that because the
Company no longer satisfies Nasdaq's listing standards, the Company's Common
Stock will be delisted from the National Market System on March 31, 1997. The
Company has appealed Nasdaq's determination to delist the Company's Common
Stock, however, there can be no assurance that the Company's appeal will be
successful. If the Company's Common Stock is delisted from the National Market
System, the liquidity of the Common Stock will be adversely affected.
STOCK OPTION PLANS
The Company has reserved for issuance an aggregate of 3,125,000 shares of
Common Stock under the 1993 Stock Option Plan ("Stock Option Plan") and the
1993 Non-Employee Directors' Plan ("Directors Plan"). This amount includes
1,000,000 shares approved by shareholders at the annual meeting held May 22,
1996.
1993 STOCK OPTION PLAN
Officers (including officers who are members of the Board of Directors),
directors (other than members of the Stock Option Committee (the "Committee")
to be established to administer the Stock Option Plan and the Director' Plan)
and other employees of, and consultants to, the Company and its subsidiaries
will be eligible to receive options under the Stock Option Plan. The Committee
will administer the Stock Option Plan and will determine those persons to whom
options will be granted, the number of options to be granted, the provisions
applicable to each grant and the time periods during which the options may be
exercised. No options may be granted more than ten years after the date of the
adoption of the Stock Option Plan.
Unless the Committee, in its discretion, determines otherwise, nonqualified
stock options will be granted with an option price equal to the fair market
value of the shares of Common Stock on the date of grant. In no event may the
option price with respect to an incentive stock option granted under the Stock
Option Plan be less than the fair market value of such Common Stock on the date
of grant.
Options granted under the Stock Option Plan will be exercisable for a term of
not more than ten years after the date of grant. Certain other restrictions
will apply. In the event of a change of control (as defined in the Stock
Option Plan), the date on which all options outstanding under the Stock Option
Plan may first be exercised will be accelerated. Generally, all options
terminate 90 days after a change of control.
At December 29, 1996, 1,083,000 shares were available for granting further
options and options for 1,567,167 shares were outstanding at $4.00 to $8.00 per
share, of which options for 815,666 were exercisable. During 1996 options for
134,833 shares were exercised at $4.25 per share and options for 527,500 shares
became void upon employee separations. There was no exercise of stock options
during 1995 and 1994. The Company anticipates that all options will be
canceled upon United States Bankruptcy Court confirmation of a plan of
reorganization. The Company does not expect any issuance or exercise of
additional stock options.
NON-EMPLOYEE DIRECTORS' PLAN
The Directors' Plan provides for the grant of stock options to the persons who
are members of the Board of Directors and who at the time they joined the Board
of Directors were not employees of the Company or any of its affiliates
("Non-Employee Directors"). The Committee will administer the Directors' Plan.
Each of the Non-Employee Directors will receive an option to purchase 37,500
shares of Common Stock, provided that in the case of one director, the Company
has committed to grant options for the purchase of 75,000 shares. Such options
will vest in three equal annual installments commencing on the first
anniversary of such Non-Employee Director's election. The options of
<PAGE> 17
Non-Employee Directors who joined the Board prior to completion of the IPO are
exercisable at $4.25 per share, the fair market value of the Common Stock on
the date of grant and of those non-employee directors elected after the IPO are
exercisable at the fair market value of the Common Stock on the date of grant.
Options granted under the Directors' Plan may not be exercised more than ten
years after the date of adoption of the Directors' Plan. In the event of a
change of control (as defined in the Directors' Plan), the date on which all
options outstanding under the Directors' Plan may first be exercised is
accelerated.
At December 29, 1996, 1,083,000 shares were available for granting further
options and options for 340,000 shares were outstanding at $2.00 to $4.625 per
share, of which options for 90,000 were exercisable. Options for 10,000 shares
were exercised during 1996 and no options were exercised during 1995 and 1994.
On October 21, 1996 the Company granted 100,000 options at $2.00 to each of
the two Directors serving as the Committee of Independent Directors. Such
options vest over a five year period. The Company anticipates that all options
will be canceled upon United States Bankruptcy Court confirmation of a plan
of reorganization. The Company does not expect any issuance or exercise of
additional stock options prior to plan confirmation.
Accounting For Stock-Based Compensation
In accordance with the anticipated cancellation of all options pursuant to the
bankruptcy proceedings described in Note 8, no Financial Accounting Standards
Board No. 123 "Accounting for Stock-Based Compensation" proforma disclosures
have been made.
(10) PURCHASE OF VEGAS WORLD HOTEL & CASINO ASSETS
On June 1, 1994, Grand assigned to the Company and the Company then exercised
an option to acquire for $50.8 million ("Purchase Price") certain assets
("Vegas World Assets") of Vegas World, principally land, buildings, furniture
and equipment. On November 4, 1994, the Company closed on the purchase of the
Vegas World Assets. The Vegas World Assets were then leased back to Stupak
under a triple net lease. Rental payments under the lease, which expired upon
the closing of Vegas World, were de minimis. The Vegas World Assets were
recorded at the closing of the purchase of Vegas World's net book values. In
addition to the Vegas World Asset Purchase, on November 4, 1994, the Company
purchased $1,725,000 in additional land and buildings from Stupak. The excess
of the purchase prices over the net book values of the assets acquired, which
amounts to $20,209,840, was recorded as a preferential distribution to Stupak.
The Vegas World Assets purchased as described above, included certain gaming
equipment that was not transferred at the time of sale. A portion of this
equipment and cash received in lieu of the equipment was reflected in the
consolidated financial statements as a reduction in the preferential
distribution to Stupak.
In connection with the closing of the Vegas World Assets purchase, $5.1
million was disbursed for closing costs and to pay off existing mortgages and
the Company issued non-interest bearing promissory notes to Stupak in the amount
of $46,728,484. The Consolidated Financial Statements reflect the offset of the
Stupak advances and the non-interest bearing promissory notes.
The liabilities retained by Stupak in connection with the Vegas World Asset
Purchase were principally comprised of accounts payable and accrued expenses
and certain obligations for presold vacation packages consisting of goods and
services (cash, casino action, hotel room nights, beverages at casino bars,
show tickets, admissions to the Stratosphere Tower upon opening and certain
other goods and services), to be provided in the future.
Pursuant to an escrow agreement mandated by the Nevada Gaming Authorities, to
the extent that Stupak's assumed obligations to the vacation package holders
were not satisfied by the date of the closing of Vegas World (either through
use, refund or expiration), an amount equal to 100% of the obligation in cash
and, to the extent not covered in cash, 150% of the remaining obligation in
Company's Common Stock owned by Stupak is required to be placed in escrow by
Stupak.
The Company had agreed to provide the goods and services to customers holding
unused vacation packages upon the opening of the Stratosphere Tower project so
long as the escrow is in good standing. The Company will invoice and be
reimbursed by the escrow fund for "one visit" vacation package at an agreed upon
fixed cost, which may be more or less than the Company's actual cost to provide
such facilities and services. The escrow will further be used to service
"multiple visit" vacation packages at the actual cost of providing such goods
and services. Certain goods and services (agreed upon numbers of hotel room
nights, admissions to the Stratosphere Tower and beverages at casino bars) will
be provided by Stratosphere without reimbursement. The cost of providing these
services was not expected to be material to the Company's results of operations
in the periods the services are provided. The Company ceased servicing vacation
packages on January 13, 1997. The ability of the Company to provide its resort
as a facility for servicing the vacation packages in the future is dependent on
the Company and Bob Stupak being able to make adequate arrangements that would
be subject to Bankruptcy Court approval.
(11) GRAND AGREEMENT
In June 1994, Grand and the Company entered into an agreement (the "Management
and Development Agreement") which provided that Grand would, among other
things, supervise the design, development, construction and commencement of the
Company's operations (the "Opening"). Pursuant to the Management and
Development Agreement, prior to the opening, Grand provided the necessary
personnel to oversee and manage the development of the entire project. Since
the opening on April 29, 1996, upon the Company's request, Grand has continued
to provide consulting services. Reimbursement of Grand's costs will be subject
to United States Bankruptcy Court approval. The
<PAGE> 18
Company is currently negotiating a new agreement with terms that are
substantially similar to the existing agreement which will also require the
approval of the United States Bankruptcy Court.
(12) INCOME TAXES
The income tax benefit attributable to losses from continuing operations for
the years ended December 29, 1996, December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred benefit (122,094,917) (1,632,068) (97,358)
Increase in deferred tax asset
valuation allowance 122,094,917 1,632,068 97,358
------------- ----------- --------
$ - $ - $ -
============= =========== ========
</TABLE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities for the Company is as follows at December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for doubtful accounts $ 66,200 $ -
Progressive jackpots 258,177 -
Accrued vacation, workers
compensation 1,752,766 -
Outstanding chip and token
liability 188,466 -
------------- -----------
2,265,609 -
------------- -----------
Long-term:
Depreciation (1,060,167) -
Pre-opening costs 7,252,441 -
Allowance for doubtful accounts 1,042,191 -
Excess of tax over book basis of
assets acquired in connection
with Vegas World Asset
Purchase 6,850,000 6,850,000
Excess of tax over book basis of
assets due to write down of
assets 103,581,322 -
Net operating loss carryforward 9,630,571 617,050
------------- -----------
127,296,358 7,467,050
------------- -----------
Total deferred taxes 129,561,967 7,467,050
Valuation allowance (129,561,967) (7,467,050)
------------- -----------
$ - $ -
============= ===========
</TABLE>
The Company recorded a valuation allowance at December 29, 1996, December 31,
1995, and 1994 relating to recorded tax benefits, because of the significant
uncertainty as to whether such benefits will ever be realized.
<PAGE> 19
As of December 29, 1996, the Company has a net operating loss carryforward of
approximately $27,486,000. The availability of the net operating loss
carryforward will be subject to the tax consequences of the final plan of
reorganization approved by the bankruptcy court.
(13) RELATED PARTY TRANSACTIONS
Pursuant to the Completion Guarantee under the Indenture to the First Mortgage
Notes, the Company borrowed $50.0 million from Grand Casinos Inc. as of
December 29, 1996. The loan is subordinate to the First Mortgage Notes and
Capital lease obligations and accrues interest at the rate of 14.25%. The
interest will accrue but will not be paid until the Company meets certain
financial covenants pursuant to the Indenture under the First Mortgage Notes.
The loan is due along with accrued interest in 2003. This debt is subject to
the outcome of the bankruptcy proceedings mentioned above.
Further, pursuant to the Memorandum of Agreement, Grand Casinos, Inc.
also entered into a Standby Equity Commitment with the Company pursuant to
which Grand Casinos, Inc., may contribute to the Company up to $20 million in
new equity through the purchase of Capital Stock (other than Disqualified
Stock), on non-cumulative bases, in each of the first three years following the
time that the Stratosphere Tower Project is operating. Such funds would be
contributed to the Company during each of the first three years Stratosphere
is operating as long as the Company's Consolidated Cash Flow does not reach
$50.0 million, subject to certain terms and conditions to cover, on a dollar
for dollar basis, any shortfall in the Company's consolidated cash flow. The
maximum commitment for the three years would be $60 million. Funds for the
Standby Equity Commitment would be made available, to the extent necessary,
through a rights offering of Common Stock, at a discount of approximately 50%
from the then-current market price, to all stockholders of the Company;
provided, however, that Grand Casinos, Inc. would be obligated to purchase any
such shares of Common Stock, in addition to its pro rata share as a stockholder
of the Company, not so purchased by the other public stockholders. The Company
will retain the right to obtain the equity funds which would otherwise be
provided by the Standby Equity Commitment through other means deemed
appropriate. The ability of the Company to enforce the Standby Equity
Commitment is uncertain as the ultimate status of this claim in the bankruptcy
proceedings is not known at this time.
In connection with the Management and Development Agreement previously
discussed in Note 11, the Company paid Grand consulting fees and reimbursed
expenses totaling $2,318,873 and $414,000 during the fiscal years ended 1996
and 1995, respectively. No such fees were paid for the year ended December 31,
1994.
In connection with the construction of the Company's facility and its normal
operations, approximately $3,296,924 and $359,000 of fixed assets were
purchased from Grand Media & Electronics which is a wholly owned subsidiary of
Grand Casinos, Inc. during the years ended December 29, 1996 and December 31,
1995, respectively.
During 1996 the Company billed Bob Stupak $4,777,687 of which
$1,000,000 was paid for amounts related to the Company providing its facility
to service Bob Stupak's vacation packages. The Company has reserved the
remaining unpaid amount of $2,977,687 in 1996. Bob Stupak has disputed the
billing and the escrow account set up to satisfy these obligations remains
under funded. The amount of the net receivable is classified as a related
party receivable under other assets in the December 29, 1996 balance sheet.
The Company ceased servicing Bob Stupak's vacation packages on Janary 13, 1997.
(14) COMMITMENTS AND CONTINGENCIES
As a result of the restructuring plans and subsequent loss of certain
management, as well as the concern of further losses of management personnel
due to the opening of other new hotel-casinos, the Company has entered into
agreements with various key personnel, wherein these employees agreed to remain
employed by the Company for a period of one year in exchange for the promise of
severance pay should the employee be terminated as a result of the
restructuring or change in management or the board of directors.
On August 5, 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 the Company, Lyle A. Berman (an officer and
director of the Company and Grand), Robert E. Stupak (a former officer and
director of the Company), Thomas A. Lettero (an officer of the Company"), Thomas
G. Bell (a director of the Company), Andrew S. Blumen (an officer and director
of the Company), and Grand. The complaint purports to seek relief on behalf of
a class of plaintiffs who purchased the Company's Common Stock during the period
from December 19, 1995, through July 2, 1996, inclusive. The complaint alleges
that the defendants made misrepresentations and engaged in other wrongdoings.
In addition to the Caesar case, eight additional cases making the same
claims against the same defendants (and in one instance also against Stanley
Taube - a director of the Company and also an officer and director of Grand)
have been filed by the following plaintiffs: Regina Peltz on August 13, 1996;
Ronald Stengel on August 13, 1996; Robert Johnson on September 19, 1996; David
Vallee on September 25, 1996; Anthony L. Poli on October 7, 1996; Darrell
Russell and Gail Russell on October 7, 1996; Mitchell Gordon on October 7,
1996; and James J. Enright, Jr., on October 28, 1996. These complaints purport
to seek relief on behalf of a class of plaintiffs who purchased the Company's
Common Stock during the period from December 19, 1995, through July 22, 1996,
inclusive. The complaints allege that the defendants made misrepresentations
and engaged in other wrongdoings. On January 15, 1997, the court ordered these
eight additional lawsuits to be consolidated with the Caesar lawsuit under the
caption "In re Stratosphere Corporation Securities Litigation."
On February 14, 1997, plaintiffs filed a Consolidated and Amended Class
Action Complaint naming as defendants Grand, Bob Stupak, Lyle A. Berman,
Stanley M. Taube, David R. Wirshing, Thomas A. Lettero, Andrew S. Blumen,
Thomas G. Bell, Bob Stupak Enterprises, BT Securities Corporation and
Montgomery Securities, Inc. The Consolidated and Amended Class Action
Complaint alleges causes of action under the federal securities laws and Nevada
law for purported misrepresentations during the period between December 19,
1995 and July 26, 1996. The litigation is brought on behalf of a putative
class of purchasers of Stratosphere Corporation securities during that time
period. The Consolidated and Amended Class Action Complaint does not name the
Company as a defendant, presumably due to the automatic stay imposed by the
Company's bankruptcy filing. On February 25, 1997, Grand and certain
individual defendants filed a motion to dismiss the complaint. The court has
scheduled a hearing on that motion on April 25, 1997. Discovery and other
proceedings have been stayed pending the court's ruling on that motion.
On March 14, 1997, the plaintiffs in the consolidated federal
litigation discussed above (the "Securities Litigation Claimants") filed a
complaint against the Company in an adversary proceeding in the context of the
Company's bankruptcy proceedings in the United Sates Bankruptcy Court for the
District of Nevada. The Securities Litigation Claimants allege that the
Company made misrepresentations and engaged in other wrongdoings during the
period between December 19, 1995 and July 22, 1996 in violation of the federal
securities laws and Nevada law. These claims are scheduled to be determined in
an estimation proceeding in the bankruptcy court. A hearing in the estimation
proceeding is currently scheduled to begin on May 5, 1997.
On August 16, 1996, a complaint was filed in District Court, Clark
County, Nevada (Victor Opitz, et al. v. Stratosphere Corporation, et al.)
against the Company, Grand, Robert B. Stupak (a former officer and director of
the Company), Lyle A. Berman (an officer and director of the Company and Grand)
and Stanley Taube (a director of the Company and Grand). The complaint purports
to seek relief on behalf of a class of plaintiffs who purchased stock during the
period from December 19, 1995, to July 22, 1996. The complaint alleges the
defendants made misrepresentations and engaged in other wrongdoing. The court
has granted the Company's motion to stay this litigation pending the outcome of
the federal shareholder litigation.
On April 3, 1994, a complaint was filed in the United States District
Court for the District of Nevada (Harvey J. Cohen, et al. v. Stratosphere
Corporation, et al.) against the Company, Mr. Stupak, Lyle Berman, Grand and
others. By Order filed April 10, 1995, the district court dismissed the federal
securities law claims with prejudice and dismissed the common law claims without
prejudice. On May 3, 1995, the plaintiffs filed a notice of appeal of the
district court's order with the United States Court of Appeals for the Ninth
Circuit. The complaint purported to seek relief in connection with the Company's
initial public offering (the "IPO"), each consisting of one share of Common
Stock and one warrant, on behalf of two classes of plaintiffs for unspecified
monetary damages. The complaint alleged that the defendants made
misrepresentations, breached a contract and engaged in other wrongdoing in
connection with the IPO, so that the defendants and their affiliates, associates
and friends could, while avoiding all economic risk, purchase IPO Units in the
IPO rather than one plaintiff class, and that this alleged conduct caused a
second dealer class to lose out on other profits it allegedly deserved. The
Company has asked the Court of Appeals to affirm the district court's order.
On or about August 29, 1995, a complaint was filed in the District Court,
Clark County, Nevada (Harvey J. Cohen, et al. vs. Stratosphere Corporation, et
al.) against the Company, Mr. Stupak, Lyle Berman, Grand and others. The
complaint purports to represent a class of plaintiffs and seeks relief for
misrepresentation, breach of contract and tortious interference with contract
regarding the IPO.
On or about December 20, 1995, a complaint was filed in the District
Court, Clark County, Nevada (Vegas Market Place, Inc. vs. Bob Stupak,
Individually dba Vegas World Hotel and Casinos, et al) against the Company, Mr.
Stupak and others. The complaint seeks damages arising out of a lease executed
between Bob Stupak, dba Vegas World Hotel and Casino and Vegas Market Place,
Inc. Among the causes of action brought in the complaint are quiet title,
breach of contract, specific performance, constructive eviction, declaratory
judgment, breach of implied covenant of good faith and fair dealing, intentional
interference with perspective economic advantage, intentional interference with
contractual relationships, preliminary injunction and permanent injunction. The
Company has filed a motion to dismiss several of the claims for relief brought
in this complaint.
<PAGE> 20
The Company is also a defendent in various pending litigation. In management's
opinion, the ultimate outcome of such litigation will not have a material
effect on the results of operations or financial position of the Company.
On August 19, 1996 the Company engaged a financial advisor to provide services
to related to an overall restructuring of the Company's debt. Pursuant to the
engagement letter the financial advisor would be compensated $2,030,000 upon
the successful restructuring of the Company's debt. The Company has advanced
a non-refundable financial advisory fee of $550,000 as of January 26, 1997 that
would off-set the success fee leaving a contingent claim of $1,480,000. Any
additional payments will require the approval of the United States Bankruptcy
Court.
