<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -------- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 1-12962
GRAND CASINOS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1689535
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
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(Address of principal executive offices) (Zip Code)
(612) 449-9092
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of October 30, 1998, there were 42,295,539 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 31
<PAGE> 2
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, constructs and manages land-based and dockside casinos
and related hotel and entertainment facilities in emerging and established
gaming jurisdictions. The Company's revenues are derived from the
Company-owned casinos of Grand Casino Biloxi, Grand Casino Gulfport, and
Grand Casino Tunica, and from management fee income from Grand Casino
Hinckley, Grand Casino Avoyelles, and Grand Casino Coushatta and, prior to
April 2, 1998, Grand Casino Mille Lacs.
Pursuant to the Mille Lacs, Hinckley, Avoyelles, and Coushatta management
contracts, the Company receives a fee based on the net distributable profits
(as defined in the contracts) generated by Grand Casino Mille Lacs, Grand
Casino Hinckley, Grand Casino Avoyelles, and Grand Casino Coushatta. The
management agreement for Grand Casino Mille Lacs expired on April 2, 1998.
The Company believes that the management agreement for Grand Casino
Hinckley, which expires in May 1999, will not be renewed.
The Company commenced operations in August 1990, and opened its
Company-owned casinos, Grand Casino Gulfport, Grand Casino Biloxi and Grand
Casino Tunica in May 1993, January 1994 and June 1996, respectively.
The Company's limited operating history may not be indicative of the
Company's future performance. In addition, a comparison of results from year
to year may not be meaningful due to the opening of new facilities during
each year.
The Company's growth strategy contemplates expanding existing operations and
establishing additional gaming operations. The successful implementation of
this growth strategy is contingent upon the satisfaction of various
conditions and the occurrence of certain events, including obtaining
governmental approvals and increased competition, many of which are beyond
the control of the Company. The Company expects that Grand Casino Biloxi and
Grand Casino Gulfport may be affected by the addition of new competition on
the Mississippi Gulf Coast.
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<PAGE> 3
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
OVERVIEW (CONTINUED)
On October 23, 1998, a notice and Joint Proxy Statement/Prospectus was
mailed containing details concerning the tax-free distribution to holders of
common stock of Grand of all outstanding shares of Lakes Gaming, Inc.
("Lakes"), a wholly owned subsidiary of Grand, which will consist of Grand's
non-Mississippi gaming operations and certain other assets. In addition, the
Joint Proxy Statement/Prospectus describes the proposed merger of the
Company's Mississippi gaming operations with a wholly owned subsidiary of
Park Place Entertainment Corporation ("Park Place"), a new publicly held
company consisting of the gaming operation of Hilton Hotels Corporation
("Hilton"), which is being separately spun off to Hilton stockholders.
A special meeting of shareholders of Grand Casinos, Inc. will be held on
November 24, 1998, at 2:00 p.m. local time to consider and vote upon, among
other things, the tax-free distribution and merger transaction described
above. The transactions are also subject to regulatory approvals and are
expected to be completed by year-end 1998.
Revenues from owned casinos are calculated in accordance with generally
accepted accounting principles and are presented in a manner consistent with
industry practice. Net distributable profits from Grand Casino Mille Lacs,
Grand Casino Hinckley, Grand Casino Avoyelles, and Grand Casino Coushatta
are computed using a modified cash basis of accounting in accordance with
the management contracts. The effect of the use of the modified cash basis
of accounting is to accelerate the write-off of capital equipment and leased
assets, which thereby impacts the timing of net distributable profits.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 28, 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 28, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $1.64 and $1.60,
respectively, for the nine months ended September 27, 1998 before a $.04
extraordinary charge per share related to early extinguishment of debt. This
compares to basic and diluted earnings of $1.31 and $1.28 per common share
for the prior year's comparable period.
Earnings increased $12.5 million to $67.5 million for the nine months ended
September 27, 1998 compared to the same period in the prior year. Net
earnings for the nine months ended September 27, 1998 includes a $1.6
million, net of tax, extraordinary charge relating to early extinguishment
of debt.
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<PAGE> 4
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $385.2 million in gross casino revenue and $102.2 million in gross
hotel, food, beverage, retail and entertainment revenue during the nine
months ended September 27, 1998 as compared to $348.1 million in gross
casino revenue and $85.3 million in gross food, beverage, and retail revenue
for the prior year's comparable period. At Grand Casino Tunica, gross
revenues increased $26.9 million for the nine months ended September 27,
1998 compared to the same period in the prior year. The increase is
attributable to increased hotel occupancy and average daily rate along with
increased guest counts from a full nine months use of the Convention Center,
which opened in July of 1997. Combined gross revenues for Grand Casino
Biloxi and Grand Casino Gulfport increased $26.2 million for the nine months
ended September 27, 1998 compared to the same period in the prior year. The
increase in gross revenues is primarily related to the 500-room Biloxi
Bayview Hotel, which opened during the first quarter of 1998. Management
fees increased $2.3 million to $64.3 million for the nine months ended
September 27, 1998 compared to the same period in the prior year, despite
the fact that the Mille Lacs contract expired April 2, 1998.
Costs and Expenses
Total costs and expenses increased $50.5 million from $346.2 million for the
nine months ended September 28, 1997 to $396.6 million for the nine-month
period ended September 27, 1998. Casino expenses were $126.6 million for the
nine-month period ended September 27, 1998 compared to $121.0 million for
the comparable period last year. The increase of $5.5 million relates
primarily to additional casino expenses for Grand Casino Tunica, which had a
$20.3 million increase in casino revenues for the nine month period ended
September 27, 1998. Food and beverage expenses increased $3.0 million to
$28.3 million for the nine-month period ended September 27, 1998.
Depreciation and amortization expense increased $12.3 million to $48.5
million for the nine-month period ended September 27, 1998. The increase
relates to a 600-room hotel, convention center, and other amenities at Grand
Casino Tunica being open all of 1998 and only part of 1997. Also, during
1998, Grand Casino Tunica opened a championship golf course, a RV resort,
and a sporting clays facility. Grand Casino Biloxi opened a 500-room hotel,
convention center, pool area and spa. Additionally, contributing to the
increase was a $5.4 million adjustment to depreciation related to changes in
estimates for recently completed construction projects.
Selling, general, and administrative expenses increased in the amount of
$21.5 million from $133.3 million for the nine months ended September 28,
1997 to $154.8 million for the nine months ended September 27, 1998.
Contributing to this increase were increased selling, general, and
administrative expenses at Grand Casino Tunica of $7.2 million from the nine
months ended September 28, 1997 to the nine months ended September 27, 1998,
relating to the opening of the 600-room hotel and the convention center, and
an increase in employee benefit costs.
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<PAGE> 5
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
In addition, corporate expense increased $12.4 million from the nine months
ended September 28, 1997 to the nine months ended September 27, 1998. This
increase is primarily attributable to reserves relating to the corporate
office relocation, litigation costs, proposed transaction with Hilton, and
an insurance deductible relating to damage due to Hurricane Georges. The
Company is fully insured and doesn't expect any additional effects on
results of operations due to Hurricane Georges.
Other
Interest income decreased slightly from $9.5 million to $8.7 million for the
nine months ended September 27, 1998 over the comparable period last year.
In addition, interest expense decreased by $3.5 million to $30.1 million for
the nine months ended September 27, 1998. The decrease is the result of
additional interest expense relating to the $115.0 million senior unsecured
notes and the capital lease facility which were outstanding during the first
quarter of 1998, offset by an increase in capitalized interest for the
nine-month period ended September 27, 1998. Capitalized interest was $13.9
million and $6.3 million for the nine months ended September 27, 1998 and
September 28, 1997, respectively.
The provision for income taxes for the nine months ended September 27, 1998
was $21.1 million or an effective tax rate of 23.4%. This compares to a
provision for income taxes of $34.5 million or an effective tax rate of
38.5% for the nine months ended September 28, 1997. The decrease relates to
the tax benefit recognized from the previous write-off of a note receivable
from Stratosphere. The result of the recognition of the tax benefit was a
reduction in the provision for income taxes in the amount of $13.1 million.
THREE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 28, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.78 and $.77,
respectively, for the three months ended September 27, 1998. This compares
to basic and diluted earnings of $.53 and $.51 per common share for the
period ended September 28, 1997. Net earnings increased $10.7 million from
the three months ended September 28, 1997 to $32.9 million for the three
months ended September 27, 1998.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $138.0 million in gross casino revenue and $36.2 million in gross
hotel, food, beverage, retail, and entertainment revenue during the three
months ended September 27, 1998. During the same period in the prior year,
Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino Tunica generated
$125.8 million in gross casino revenue and $31.3 million in gross hotel,
food, beverage and retail revenue.
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<PAGE> 6
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues (Continued)
The increase in gross revenues is attributable to increased revenue at Grand
Casino Biloxi and Grand Casino Tunica. Grand Casino Tunica's gross revenues
increased $7.8 million to $62.4 million, an increase of 14.2%, for the three
months ended September 27, 1998. Contributing to this increase at Grand
Casino Tunica was the Convention Center, which opened during the third
quarter of 1997, but was open the entire third quarter of 1998, and the golf
course being open during the third quarter of 1998 and not in the third
quarter of 1997. In addition, other new amenities added in the Tunica market
appear to have increased the overall Tunica market capacity. Combined gross
revenues for Grand Casino Biloxi and Grand Casino Gulfport increased $9.3
million for the three months ended September 27, 1998, compared to the same
period in the prior year. Contributing to this increase was the opening of a
500-room hotel at Grand Casino Biloxi in mid-February 1998. The Company's
management fees from Indian-owned casinos decreased only $1.6 million to
$21.6 million for the three months ended September 27, 1998, compared to the
same period in the prior year, despite the expiration of the Grand Casino
Mille Lacs contract on April 2, 1998.
Costs and Expenses
Total costs and expenses increased $18.2 million, from $123.0 million for
the three months ended September 28, 1997, to $141.2 million for the three
months ended September 27, 1998. Casino expenses were $44.6 million for the
three-month period ended September 27, 1998, compared to $43.0 million for
the comparable period in 1997. This increase of $1.6 million relates to
additional operating expenses to produce a $12.2 million increase in casino
revenue for such three-month period, compared to the same period in the
prior year. Food and beverage expenses increased $1.0 million to $9.8
million for the three-month period ended September 27, 1998.
Depreciation and amortization expense increased $8.3 million to $20.5
million for the three-month period ended September 27, 1998. The increase
relates to a convention center, a championship golf course, a RV resort, and
a sporting clays facility at Grand Casino Tunica being opened since the
third quarter of 1997, or open during part of the third quarter in 1998.
Grand Casino Biloxi also opened a 500-room hotel, a convention center, a
pool area and spa in the spring of 1998. Additionally, contributing to the
increase was a $5.4 million adjustment to depreciation related to changes in
estimates for recently completed construction projects.
Selling, general, and administrative expenses increased $3.6 million from
$48.4 million for the three months ended September 28, 1997, to $52.0
million for the three months ended September 27, 1998. Grand Casino Tunica's
selling, general, and administrative expenses increased $1.2 million, as a
result of the opening of the golf course and the convention center being
open the entire quarter.
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<PAGE> 7
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
Combined selling, general, and administrative expenses for Grand Casino
Biloxi and Grand Casino Gulfport were constant as compared to the prior
year. Corporate expenses for the three months ended September 27, 1998
increased $3.0 million from the same period in 1997. The increase in
corporate expenses is primarily related to costs associated with the merger
transaction with Hilton Hotels, the write-off of expenses associated with
development projects, and an insurance deductible related to damage from
Hurricane Georges. The Company is fully insured and doesn't expect any
additional effects on results of operations due to Hurricane Georges.
Other
Interest income decreased $1.0 million to $1.9 million for the three months
ended September 27, 1998 compared to the same period for the prior year.
Interest expense decreased by $2.7 million to $8.2 million for the three
months ended September 27, 1998. The decrease in expense is the result of an
increase in capitalized interest. Capitalized interest was $5.7 million and
$2.6 million for the three months ended September 27, 1998 and September 28,
1997, respectively.
The provision for incomes taxes for the three months ended September 27,
1998 was ($0.2) million. This compares to a provision for income taxes of
$13.8 million or an effective tax rate of 38.4% for the three months ended
September 28, 1997. The decrease relates to the tax benefit recognized from
the previous write-off of a note receivable from Stratosphere. The result of
the recognition of the tax benefit was a reduction in the provision for
income taxes in the amount of $13.1 million.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At September 27, 1998, the Company had $119.7 million in cash and cash
equivalents. On March 31, 1998, $94.6 million was used to pay off an
existing capital lease facility and related interest resulting in an
extraordinary charge of $.04 per share.
Net cash provided by operating activities totaled $145.0 million for the
nine-month period ended September 27, 1998, compared with $105.4 million for
the nine-month period ended September 28, 1997. During the nine-month
periods ended September 27, 1998 and September 28, 1997, the Company's
capital expenditures totaled $167.8 and $144.1 million, respectively.
Capital expenditures related primarily to constructing new 600-room hotels
at Grand Casino Tunica and Grand Casino Gulfport, and completion of a new
500-room hotel and championship golf course at Grand Casino Biloxi and Grand
Casino Tunica, respectively.
At September 27, 1998, the Company's long-term debt included 10.125% first
mortgage notes due 2003 in the amount of $450.0 million and 9% senior
unsecured notes in the amount of $115.0 million due 2004 (which the Company
incurred in connection with the refinancing of an existing capital lease
facility). The first mortgage notes are redeemable on December 1, 1999, or
thereafter based on a stated premium that declines ratably to par value.
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<PAGE> 8
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY (CONTINUED)
The senior unsecured notes are redeemable on October 15, 2001, or thereafter
based on a stated premium that declines ratably to par value.
At March 29, 1998, $93.9 million remained outstanding on the capital lease
facility and was classified as a current liability on the March 29, 1998
balance sheet. The balance was paid in full on March 31, 1998 using proceeds
from the $115.0 million senior unsecured notes. The Company also has
available a $100.0 million revolving capital lease facility for continued
development of Grand Casino Gulfport and Grand Casino Tunica. As of
September 27, 1998, no advances relating to this financing had been made.
Pursuant to the Company's covenants related to the 10.125% first mortgage
notes and the 9% senior unsecured 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.
YEAR 2000
The Company is currently working to fully determine and resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by its computerized information systems and components. The Year
2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company has a Year 2000 program, the objective of which is to determine
and assess the risks of the Year 2000 issue, and plan and institute
mitigating actions to minimize those risks. Pursuant to the Company's Year
2000 program, the Company hired a Year 2000 consultant and has established
an internal review team to monitor and facilitate efficient Year 2000
compliance. The Company is currently in the process of upgrading its
financial reporting systems, IT based and otherwise, to ensure that they are
Year 2000 compliant. The Company's vendors and consultants have represented
to management that the new financial systems meet Year 2000 requirements.
The Company's standard for compliance requires that for a computer system or
business process to be Year 2000 compliant, it must be designed to operate
without error in dates and date-related data prior to, on and after January
1, 2000. Between now and the Year 2000, the Company will proceed through its
various phases of assessment, detailed planning, implementation, testing and
management. The Company expects to be fully Year 2000 compliant by mid-1999.
Generally, the Company is confident that the implementation of its Year 2000
program in conjunction with the engagement of a consultant and the
replacement of all of the Company's financial reporting systems will resolve
any IT system compliance issues. The Company has not currently identified
any material non-IT system Year 2000 issues.
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<PAGE> 9
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
YEAR 2000 (CONTINUED)
During the remainder of 1998 and in 1999, the Company will continually
review its progress against its Year 2000 plans and determine what
contingency plans are feasible and appropriate to reduce its exposure to
Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing potential
problems are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, the historical and estimated costs relating to the
resolution of the Company's Year 2000 compliance issues cannot be fully and
finally determined at this time. If significant customers or vendors
identify Year 2000 issues in the future and are unable to resolve such
issues in a timely manner, it could result in a material financial risk. The
Company plans to initiate formal communications with all of its material
suppliers to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failures to resolve their own Year
2000 issues. The Company plans to devote the necessary resources to resolve
all significant Year 2000 issues in a timely manner.
While the Company fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000, there are certain risks which exist with respect
to the Company's business and the Year 2000. Those risks range from slight
delays and inefficiencies in processing data and carrying out accounting and
financial functions to, in a most reasonably likely worst case scenario,
extensive and costly inability to process data, provide vital accounting
functions and communicate with customers and suppliers. Until the Company
substantially completes its Year 2000 program, it is uncertain if there will
be any material effect on the Company's results of operations, liquidity or
financial condition. As of the date of this filing, the Company has not
finalized a contingency plan to address the failure to be Year 2000
compliant.
FORWARD-LOOKING STATEMENTS
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements
made or to be made by the Company) contains statements that are
"forward-looking" as defined under the Federal Private Securities Litigation
Reform Act of 1995.
Forward-looking statements are those which include statements regarding
projections, plans and objectives, and future economic performance, together
with statements regarding any assumptions pertaining to such projections,
plans and objectives, and future economic performance. While these
forward-looking statements reflect the best judgment of the Company, based
on information available on the date when such statements are made, such
statements are all subject to risks and uncertainties that could cause
actual results to vary from the forward-looking statements made. Those
variances could be significant.
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<PAGE> 10
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FORWARD-LOOKING STATEMENTS (CONTINUED)
Such forward-looking statements involve risks and uncertainties that could
significantly affect future results, and accordingly, such results may
differ from those expressed in any forward-looking statements made by or on
behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service (including sensitivity to fluctuations
in interest rates), changes in competitive conditions, domestic or global
economic conditions, changes in federal or state tax laws or the
administration of such laws and changes in gaming laws or regulations
(including the legalization of gaming in certain jurisdictions). In addition
to any specific risks and uncertainties mentioned or discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's
annual report on Form 10-K for the year ended December 28, 1997, provide
information which should be considered in evaluating any of the Company's
forward-looking statements. In addition, you should be aware that the facts
and circumstances which exist when any forward-looking statements are made
and on which those forward-looking statements are based may significantly
change in the future, thereby rendering obsolete the forward-looking
statements on which such facts and circumstances were based.
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<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 6, 1998 GRAND CASINOS, INC.
-------------------
Registrant
/ S / TIMOTHY J. COPE
---------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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