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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 28, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NO. 0-19565
GRAND CASINOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
MINNESOTA 41-1689535
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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130 CHESHIRE LANE, MINNETONKA, MINNESOTA 55305
(Address of principal executive offices)
(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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<S> <C>
Common Stock $0.01 par value New York Stock Exchange
10.125% First Mortgage Notes due 2003 New York Stock Exchange
9% Senior Unsecured Notes due 2004 None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
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, 1998, 42,049,443 shares of the Registrant's common stock
were outstanding. The aggregate market value of the Registrant's 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, 1998, was $685,931,539. 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 28, 1997, 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 15,
1998, 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 and
established 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 owns and operates Grand Casino Tunica, the largest dockside
casino in Mississippi and one of the largest casinos in the United States. The
Company is continuing the development of Grand Casino Tunica into a destination
gaming resort featuring four themed casinos. Grand Casino Tunica currently
features two hotels offering an aggregate of 766 rooms, six restaurants and a
live entertainment lounge. Other amenities include a convention center, 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 manages 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. The Company's
management contract for Grand Casinos Mille Lacs will expire in April 1998 and
will not be renewed. 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").
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 that offer the opportunity for
long-term development of related entertainment amenities. The Company's strategy
is 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
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 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.
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Marketing
The Company targets its marketing strategy to attract and retain the repeat
customer. Management believes that the Company's 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.
The casino area features approximately 115,000 square feet of gaming space
containing approximately 2,300 slot machines and 121 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. In 1995,
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. Among the property's unique features is the
Mississippi Long Bar Gambling Hall & Saloon, including a 110-foot bar with food,
live music, and over 300 video slots and table games. Grand Casino Biloxi also
operates a 1,600-seat show theater adjacent to the casino that features a
production/variety show with matinee and evening performances, boxing events,
and other professional entertainment.
In February 1998, the Company opened a second hotel with a 500-room
capacity, a 1,100 space parking garage, a destination spa and salon with a
134,000 square-foot outdoor pool, and a 60,000 square-foot convention center.
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 3,500 parking spaces available for guests. Grand Casino Gulfport also
offers a nightclub/entertainment complex adjacent to the casino that contains
separately themed nightclubs.
The casino area consists of approximately 110,000 square feet of gaming
area containing approximately 2,100 slot machines and 97 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 Gulfport Oasis, the Company's new resort hotel, is currently under
construction at Grand Casino Gulfport and is expected to be completed during
1999. Also under development is an approximately 1,750-acre recreation area
between Gulfport and Biloxi. The Company intends to build an 18-hole
championship golf course on the property, together with a clubhouse and sporting
clays shooting facility. These projects are expected to be completed in mid
1999.
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 756 rooms. Other amenities include a convention
center, a Grand Casino Kids Quest(SM) child care facility, a Grand Arcade, and
valet and self-parking for approximately 7,200 vehicles. Additions currently
under construction include an 18-hole professionally designed championship golf
course and driving range.
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 119 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 an entertainment lounge and
Player's Club.
The 2,000 acre site for Grand Casino Tunica 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 49,000-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 1,900
vehicles.
The Company's management contract for Grand Casino Mille Lacs will expire
on April 2, 1998 and will not be renewed.
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 consists of an
approximately 58,000 square foot casino gaming room containing approximately
2,000 slot machines and 46 blackjack tables. The facility also has a Grand
Casino Kids Quest(SM) child entertainment center, a video arcade, a sports bar
that serves alcoholic beverages, five restaurants, a gift shop, a 222-space
recreational vehicle park, 50 fully furnished rental chalets, an 11,000
square-foot ballroom, and parking for approximately 2,300 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 approximately
$2,451,000 as of December 28, 1997. During 1997, the Mille Lacs Band opened a
281 room hotel adjacent to Grand Casino Hinckley. The property also features an
18-hole golf course with a driving range, clubhouse, pro shop and snack bar.
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. 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.
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. The loan
has been repaid in full. The Company also 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
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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.
The Mille Lacs Band employs approximately 2,400 people at Grand Casinos
Mille Lacs and Grand Casinos Hinckley. 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.
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.
The Mille Lacs Band has not yet advised the Company whether it intends to
renew the restated Hinckley Management Agreement upon its expiration in 1999.
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
1,600 slot machines and 58 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 2,250
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 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 the Tunica-Biloxi Tribe of Louisiana (the
"Tunica-Biloxi Tribe") for a 220 room hotel which opened during 1996 and is
located in proximity to Grand Casino Avoyelles. The Tunica-Biloxi Tribe operates
the hotel as a part of the Grand Casino Avoyelles enterprise. The Company
guarantees $16.5 million of Tunica-Biloxi Tribal indebtedness incurred in
connection with the purchase of the hotel and has subordinated payment of the
Company's management fee and any loan amounts owed by the Tunica-Biloxi Tribe to
the Company to the repayment of such indebtedness. The indebtedness is scheduled
to be fully repaid by April 2000.
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 $10.4 million of such loans remained outstanding
at December 28, 1997. 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 28, 1997, approximately $3.0
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 but will
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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 not less than 180 days prior to November 18, 1999.
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 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
2,300 slot machines and 71 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 $20.9 million
of such loans remained outstanding as of December 28, 1997. The Company arranged
for, and guaranteed payment of, approximately $22.3 million in equipment
financing obtained by the Coushatta Tribe. The equipment financing agreements
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 28, 1997, approximately $3.7 million remained
outstanding on the tribe's equipment financing indebtedness.
The Coushatta Tribe is constructing a hotel on trust land located adjacent
to the casino. The Company guarantees $25.0 million of indebtedness incurred by
the Tribe in connection therewith. Such indebtedness has a repayment term of
approximately four years. The Company has subordinated payment of its management
fee and repayment of any loans outstanding from the Coushatta Tribe to the
repayment of such indebtedness. Advances of $2.7 million have been made to the
Tribe as of March 25, 1998.
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 not less than 180 days prior to November 4, 1999. 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
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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 $10
million. Advances of $.5 million and $1.8 million have been made to
Tunica-Biloxi and Coushatta Tribes, respectively, as of March 25, 1998.
STRATOSPHERE CORPORATION
The Company owns approximately 38 percent of the issued and outstanding
common stock of Stratosphere Corporation. Stratosphere owns and operates the
Stratosphere Tower, Casino & Hotel, a casino/hotel and entertainment complex in
Las Vegas, Nevada. Stratosphere filed for reorganization under Chapter 11 of the
Bankruptcy Code on January 27, 1997. Lyle Berman, Stanley M. Taube and Neil I.
Sell, directors, executive officers or principal shareholders of the Company
resigned as members of the board of directors of Stratosphere on July 31, 1997.
Stratosphere filed a second amended proposed plan of reorganization (the "Second
Amended Plan") with the bankruptcy court on November 7, 1997. Under the Second
Amended Plan, the secured portion of Stratosphere's outstanding first mortgage
notes would be converted into 100 percent of the equity of reorganized
Stratosphere, and all of the current common stock of Stratosphere would be
canceled.
OTHER PROJECTS
The Company continues to pursue gaming opportunities in 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.
Mississippi and Louisiana
The Mississippi and Louisiana markets are expected to be highly
competitive. As of March 16, 1998, twelve casinos were operating on the
Mississippi Gulf Coast and no additional applications were pending. Another
licensed casino, owned by Mirage Resorts, Inc., is expected to open in Biloxi,
Mississippi, during the first quarter of 1999. The Company expects that
competition from this casino and other casino projects that have been publicly
announced will affect Grand Casinos Gulfport and Biloxi. Certain of the other
announced casino projects are in litigation over environmental permitting and
other issues. Recently, the U.S. Army Corps of Engineers announced a new policy
which in effect is a temporary moratorium on casino development in
environmentally sensitive areas of the Mississippi Gulf Coast. It is unknown at
present what effect, if any, such moratorium may have on any of these announced
casino projects or whether the temporary moratorium will be lifted or will
continue.
As of March 16, 1998, nine 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
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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. 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. 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.
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.
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
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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.
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 16, 1998, 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 River 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
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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, directors and employees of the Company and the officers,
directors and certain key 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. In addition, any person having a material relationship or
involvement with the Company may be required to be found suitable, 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 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 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.
Employees associated with gaming must obtain work permits that are subject
to immediate suspension under certain circumstances. The Mississippi Gaming
Commission must refuse to issue a work permit to a person convicted of a felony
and it may refuse to issue a work permit to a gaming employee if the employee
has committed certain misdemeanors or knowingly violated the Mississippi Act or
for any other reasonable cause.
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. Also, any person who becomes a beneficial
owner of more than 10% of the 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
own beneficially up to 10% of a registered 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.
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Any person who fails or refuses to apply for a finding of suitability
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, under the Mississippi Act the Mississippi
Gaming Commission 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 in Mississippi a current stock ledger
with respect to the ownership of their equity securities 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 may not make a public
offering of its securities, but may pledge or mortgage casino facilities, and
the stock of the Gaming Subsidiaries may be pledged if the Company 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
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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 found suitable
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. 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 attempt 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 or (iii) the number of table
games operated by 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 $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.
The Mississippi Gaming Commission adopted two regulations that 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
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facilities that will amount to at least 25% of the casino cost. 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 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
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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, or renew
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 but will automatically renew for additional terms
unless either party delivers to the other prior written notice of non-renewal at
least 180 days prior to the applicable expiration date. 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 "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.
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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 Management 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.
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 was found suitable by the Nevada
Commission as a shareholder and controlling shareholder of Stratosphere
Corporation ("Stratosphere"), which is also a registered corporation. 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 has 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 a Registered Corporation, Stratosphere is 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.
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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. 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 such companies would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company 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 is required to submit detailed financial and operating reports
to the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
Company 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 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. 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
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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 is 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 may
also be required to disclose to the Nevada Commission, 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 bear a legend
indicating that the securities are subject to the Nevada Act, it has not yet
done so.
The Company may not 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
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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.
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 28, 1997, 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 5,900 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 28, 1997, (excluding Stratosphere Corporation) the
Company had total indebtedness of approximately $667 million, including $450
million 10 1/8% First Mortgage Notes due 2003 (the "First Mortgage Notes"), $115
million in 9% Senior Unsecured Notes (the "Senior Unsecured Notes") and $97
million in capital lease obligations. The Company may have additional contingent
obligations with respect to Stratosphere Corporation. The First Mortgage Notes
and and Senior Unsecured 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 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, the Senior Unsecured 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, the Senior
Unsecured Notes and other indebtedness of the Company.
RISK OF INCURRENCE OF ADDITIONAL DEBT
The indentures pursuant to which the First Mortgage Notes and Senior
Unsecured Notes were issued (the "First Mortgage Notes Indenture" and "Senior
Notes Indenture," respectively) permit, under certain circumstances, additional
first mortgage indebtedness which would be collateralized and rank pari passu
with the First Mortgage Notes and the Senior Unsecured Notes. Such incurrence
will also be subject to certain other conditions. In addition, the First
Mortgage Notes Indenture and the Senior Notes Indenture permit 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.
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 restaurants, bars and
hotels; parimutuel betting on horse racing, dog racing and jai-alai; sports
bookmaking; and card rooms. The casinos owned and managed 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.
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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. The Company has been advised by the
Mille Lacs Band that upon the expiration of the Grand Casinos Mille Lacs
management contract on April 2, 1998, it will not be renewed or extended. There
can be no assurance that any of the other management contracts will he renewed
upon expiration or approved by the National Indian Gaming Commission ("NIGC")
upon any such renewal. 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, but will automatically renew for an additional seven
year terms unless either the tribe or the State of Louisiana delivers to the
other written notice of non-renewal at least 180 days prior to the applicable
expiration date. 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.
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 (including management
fees) in favor of other obligations of the tribe to other parties related to the
casino operations. Accordingly, in the event of a default by a tribe under such
obligations, 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.
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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 current and former 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 current and
former officers and directors. Accordingly, the Company will bear the cost of
defending itself and its current and former directors and officers in these
matters and may be obligated to indemnify its current and former officers and
directors for any settlement or judgment of such matters. Although these
lawsuits are in their early stages and the Company plans to vigorously defend
itself, there can be no assurance that the costs of defense and any settlement
or judgment will not have an adverse effect on the Company.
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.
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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 the Company's
subsidiary that operates Grand Casino Gulfport. The initial term of the Port
Lease was five years subject to renewal for three additional five-year terms and
three additional ten-year terms. The first option to renew was exercised in
1997. The Company constructed a 400-room hotel on the Port Site which opened in
October 1995. The annual base rent under the Port Lease is $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 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.
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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 casino 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 will be the greater of (i) the rent during the prior term plus an
increase based on the Consumer Price Index, or (ii) 130% of the beginning rent
for the prior six-year term.
Las Vegas
A subsidiary of the Company leases two parcels of land in Las Vegas,
Nevada. One parcel is leased pursuant to a ground lease that (i) terminates on
July 31, 2046, (ii) includes a purchase option, (iii) provides for a current
annual base rent of approximately $860,000, and (iv) provides for annual base
rent increases. The other parcel is leased pursuant to a ground lease that (i)
terminates in June 2095, (ii) includes a purchase option, (iii) provides for a
current annual base rent of approximately $2,000,000, and (iv) provides for
annual base rent increases. The Company also holds an option to acquire land
contiguous to the leased parcels and owns an interest in a partnership that owns
land contiguous to the leased properties. The Company may ultimately decide to
hold the leasehold and related real property interests or use the land for
future development.
ITEM 3. LEGAL PROCEEDINGS
The Company beneficially owns approximately 38 percent 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
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Ceasar, et al v. Stratosphere Corporation, et al
- -- against Stratosphere Corporation and others, including the Company. The
complaint was filed as a class action, and sought relief on behalf of
Stratosphere shareholders who purchased their stock between December 19, 1995
and July 22, 1996. The complaint included allegations of misrepresentations,
federal securities law violations and various state law claims.
In August through October 1996, several other nearly identical complaints
were filed by various plaintiffs in the U.S. District Court for the District of
Nevada.
The defendants in the actions submitted motions requesting that all of the
actions be consolidated. Those motions were granted in January 1997, and the
consolidated action is entitled In Re: Stratosphere Corporation Securities
Litigation -- Master File No. CV-S-96-00708 PMP (RLH).
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<PAGE> 25
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including the Company and certain current and former
officers and directors of the Company. The amended complaint includes claims
under federal securities laws and Nevada laws based on acts alleged to have
occurred between December 19, 1995 and July 26, 1996.
In February 1997, various defendants, including the Company and the
Company's officers and directors named as defendants, submitted motions to
dismiss the amended complaint. Those motions were made on various grounds,
including the Company's claim that the amended complaint failed to state a valid
cause of action against the Company and the Company's officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal order
did not allow the plaintiffs to further amend their complaint in an attempt to
state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint in an
attempt to state a valid cause of action. In July 1997, the court allowed the
plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including the Company and the
Company's officers and directors named as defendants, submitted a motion to
dismiss the second amended complaint. The motion is based on various grounds,
including the Company's claim that the second amended complaint fails to state a
valid cause of action against the Company and those officers and directors.
As of March 1, 1997, the court has not ruled on the dismissal motion.
STRATOSPHERE SHAREHOLDERS LITIGATION -- NEVADA STATE COURT
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al v. Robert E. Stupak, et al -- Case No.
A363019 -- against various defendants, including the Company. The complaint
seeks relief on behalf of Stratosphere Corporation shareholders who purchased
stock between December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state claims.
The Company and certain defendants submitted motions to dismiss or stay the
state court action pending resolution of the federal court action described
above. The court has stayed further proceedings pending the resolution of In Re:
Stratosphere Securities Litigation.
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Company
shareholders in the U.S. District Court for the District of Minnesota against
the Company and certain of the Company's current and former directors and
officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
The actions have been consolidated as In Re: Grand Casinos, Inc. Securities
Litigation -- Master Filed No. 4-96-890 -- and the plaintiffs filed a
consolidated complaint. The defendants submitted a motion to dismiss the
consolidated complaint, based in part on the Company's claim that the
consolidated complaint failed to properly state a cause of action.
In December 1997, the court granted the Company's motion to dismiss in
part, and denied the motion in part. Thus, the plaintiffs are pursuing the
claims in the consolidated complaint that survived the Company's motion to
dismiss. Discovery in the action has begun.
DERIVATIVE LITIGATION
In February 1997, certain shareholders of the Company brought an action in
the Hennepin County, Minnesota District Court -- Lloyd Drilling, et al v. Lyle
Berman, et al -- Court File No. MC97-002807 --
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<PAGE> 26
against certain current and former officers and directors of the company. The
plaintiffs allege that those officers and directors breached certain fiduciary
duties to the shareholders of the Company as a result of certain transactions
involving the Stratosphere project. Pursuant to Minnesota law, the Company's
Board of Directors appointed an independent special litigation committee to
evaluate whether the Company should pursue the claims made in the action against
the officers and directors. The special litigation committee completed its
evaluation in December 1997, and filed a report with the court recommending that
such claims not be pursued.
The Company is providing the defense for the Company's current and former
officers and directors who are defendants in the action pursuant to the
Company's indemnification obligations to such defendants.
The Company has submitted a motion for summary judgment (dismissal) based
on the special litigation committee's report. The plaintiffs have opposed that
motion. As of March 1, 1998, the court has not ruled on the motion.
COHEN LITIGATION -- STATE ACTION
In August 1995, Harvey Cohen brought an action in the District Court for
Clark County, Nevada -- Harvey J. Cohen, et al v. Stratosphere Corporation, et
al -- Case No. A349985 -- against various defendants, including Grand Casinos
Resorts, Inc., a wholly owned subsidiary of the Company. Cohen alleges
securities law violations and various state law claims in connection with the
initial public offering (the "IPO") for Stratosphere Corporation
("Stratosphere"). Cohen brought the action as a class action, and alleges that
the defendants deprived the plaintiffs of the opportunity to purchase
Stratosphere common stock in the IPO.
The state action was, by agreement of the parties, stayed pending a
decision in a similar action brought by Cohen in 1994 in U.S. District Court for
the District of Nevada. Cohen alleged securities law violations and various
state law claims in the federal action. The federal action was dismissed by the
U.S. District Court, and that dismissal was affirmed by the U.S. Court of
Appeals.
The Company has requested that the state action be dismissed based on the
decision in the federal action.
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including the Company) alleged to operate casinos or be slot
machine manufacturers were named as defendants. The plaintiff sought to have the
action certified as a class action.
A subsequently filed action -- William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH (RJJ).
The plaintiffs' allegations in the Schreier action were similar to those
made by the plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than Poulos or
Ahearn.
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<PAGE> 27
In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE (RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.
In March 1997, various defendants (including the Company) filed motions to
dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. The Company has filed its answer to
the new complaint.
STRATOSPHERE VACATION CLUB LITIGATION
In late April 1997, the Company and Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company, were made defendants in
an action in District Court in Clark County, Nevada -- Richard Duncan, et al v.
Bob and Jane Doe Stupak, et al -- Case No. A370127. The plaintiffs allege that
the defendants, including the Company and Resorts, engaged in acts that
constitute "consumer fraud" under the Nevada law in connection with vacation
packages which the defendants claim to have purchased from Bob Stupak. The
plaintiffs also allege "unjust enrichment," breach of contract and other claims
under Nevada law. The plaintiffs seek to pursue their claims as a class action,
and ask for various remedies including compensatory damages and punitive
damages.
The Company submitted a motion to dismiss the complaint as it pertains to
Company and Resorts. The court denied the motion to dismiss. Discovery has
begun.
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the "Committee") in
the Chapter 11 bankruptcy proceeding for Stratosphere Corporation
("Stratosphere") pending in the U.S. Bankruptcy Court for the District of Nevada
(the "Bankruptcy Court") filed a motion by which the Committee sought Bankruptcy
Court approval for assumption (on behalf of Stratosphere's bankruptcy estate) of
the March 1995 Standby Equity Commitment (the "Standby Equity Commitment")
between Stratosphere and the Company.
In the motion, the Committee sought Bankruptcy Court authorization to
compel the Company to fund up to $60 million in "capital contributions" to
Stratosphere over three years, based on the Committee's claim that such
"contributions" are required by the Standby Equity Commitment.
The Company opposed the Committee's motion. The Company asserted, in its
opposition to the Committee's motion, that the Standby Equity Commitment is not
enforceable in the Stratosphere bankruptcy proceeding as a matter of law.
The Bankruptcy Court held a preliminary hearing on the Committee's motion
in June 1997, and an evidentiary hearing in February 1998 on the issues raised
by the Committee's motion and the Company's opposition to that motion. In
February 1998, the Bankruptcy Court denied the Committee's motion, and
determined that the Standby Equity Commitment cannot be assumed (or enforced) by
Stratosphere under applicable bankruptcy law. The Official Committee has stated
that it will appeal the Bankruptcy Court's determination.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the successor trustee (the "Stratosphere Trustee") under
the indenture pursuant to which Stratosphere Corporation issued Stratosphere
Corporation's first mortgage notes filed a complaint in the U.S. District Court
for the District of Nevada -- IBJ Schroeder Bank & Trust Company, Inc. v. Grand
Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming the Company as
defendant.
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The complaint alleges that the Company failed to perform under the Standby
Equity Commitment entered into between Stratosphere Corporation and the Company
in connection with Stratosphere Corporation's issuance of such first mortgage
notes in March 1995. The complaint seeks an order compelling specific
performance of which the Committee claims are the Company's obligations under
the Standby Equity Commitment. The Stratosphere Trustee filed the complaint in
its alleged capacity as a third party beneficiary under the Standby Equity
Commitment.
The Company has submitted a motion requesting that the district court stay
further proceedings pending resolution of the standby equity commitment issues
pending in the Stratosphere bankruptcy case.
STRATOSPHERE PLAN OF REORGANIZATION
Stratosphere has filed with the Bankruptcy Court its second amended plan of
reorganization (the "Plan"). The Plan contemplates the formation of a new
limited liability company which will own certain alleged claims and causes of
action that Stratosphere and other persons may have against numerous third-
parties, including the Company. The Plan has not been confirmed or otherwise
approved by the Bankruptcy Court and the Company has not been served with any
such litigation.
STRATOSPHERE PREFERENCE ACTION
Stratosphere has informed the Company that it has filed with the Bankruptcy
Court a Complaint naming the Company and one of its affiliates as defendants.
According to Stratosphere, the Complaint seeks the recovery from the Company and
its affiliate of approximately $5.5 million in payments received by the Company
and its affiliate in October of 1996 as preferential transfers under applicable
bankruptcy law. Neither the Company nor its affiliate have been served with the
Complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
LYLE BERMAN, age 56, has been the Chairman of the Board of Directors of the
Company since October 1991. Mr. Berman served as the Company's Chief Executive
Officer from October 1991 to March 1998. 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"), and Wilsons The Leather Experts
Inc. ("Wilsons"). Mr. Berman is Chairman of the Board and Chief Executive
Officer of Rainforest Cafe, Inc. ("Rainforest"). From July 1994 through October
1996, Mr. Berman served as Stratosphere's Chief Executive Officer. From July
1994 to July 1997, Mr. Berman was a director of Stratosphere, serving as
Chairman of the Board from July 1996 to July 1997. Stratosphere filed for
reorganization under Chapter 11 of the Bankruptcy Code on January 27, 1997.
THOMAS J. BROSIG, age 48, has been President and a director of the Company
since September, 1996. In March 1998, Mr. Brosig was promoted to the position of
Chief Executive Officer. 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 61, served as Executive Vice President and a director
of the Company from its inception through his resignation from such positions in
February 1998. In December 1997, Mr. Taube was appointed President of Grand
Casinos of Nevada I, Inc., a wholly owned subsidiary of the Company. Mr. Taube
resigned as a director of Stratosphere in July 1997.
TIMOTHY J. COPE, age 46, 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 58, 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> 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 33 of the Company's Annual Report to Shareholders for the year ended
December 28, 1997, is 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
Page 3 of the Company's Annual Report to Shareholders for the year ended
December 28, 1997, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 12 through 16 of the Company's Annual Report to Shareholders for the
year ended December 28, 1997, are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Pages 17 through 34 of the Company's Annual Report to Shareholders for the
year ended December 28, 1997, 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 1998 Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's year ended December 28, 1997 and forwarded to stockholders prior
to the Company's 1998 Annual Meeting of Shareholders (the "1998 Proxy
Statement"), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1998 Proxy Statement beginning immediately following
the caption "Executive Compensation" to, but not including, the caption
"Director Compensation," is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1998 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.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 1998 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.
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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 28, 1997. With the exception of the
information specifically incorporated herein by reference, the Annual
Report to Shareholders for the fiscal year ended December 28, 1997 is not
to be deemed "filed" as part of the Annual Report on Form 10-K.
<TABLE>
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GRAND CASINOS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996......................................... 17*
Consolidated Statements of Earnings for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 18*
Consolidated Statements of Shareholders' Equity for the
fiscal years ended December 28, 1997, December 29, 1996
and December 31, 1995..................................... 19*
Consolidated Statements of Cash Flows for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 20*
Notes to Consolidated Financial Statements.................. 21*
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 34*
STRATOSPHERE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996......................................... **
Consolidated Statements of Operations for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. **
Consolidated Statements of Stockholders' Equity for the
period from January 1, 1994 to December 28, 1997.......... **
Consolidated Statements of Cash Flows for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. **
Notes to Consolidated Financial Statements.................. **
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... **
</TABLE>
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* Refers to page of Annual Report to Shareholders for the year ended December
28, 1997, a copy of which is included as Exhibit 13 to this report.
** Data is incorporated by reference from Exhibit 99 to this report.
(a)(2) See (a)(1) and Part II, Item 8.
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(a)(3) Exhibits
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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. (Incorporated herein by reference to Exhibit
4.2 to the Company's Report on Form 10-K for the fiscal year
ended December 29, 1996.)
4.3 Second Amendment to Indenture dated as of September 16,
1997, 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., Mille Lacs Gaming Corporation, Grand
Casinos of Louisiana, Inc. -- Tunica-Biloxi, Grand Casinos
of Louisiana, Inc. -- Coushatta, GCA Acquisition Subsidiary,
Inc., BL Development Corp., BL Resorts I, Inc., GCG Resorts
I, Inc., Grand Casinos Nevada I, Inc. and Firstar Bank of
Minnesota, N.A.
4.4 Third Amendment to Indenture dated as of September 25, 1997,
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., Mille Lacs Gaming Corporation, Grand Casinos
of Louisiana, Inc. -- Tunica-Biloxi, Grand Casinos of
Louisiana, Inc. -- Coushatta, GCA Acquisition Subsidiary,
Inc., BL Development Corp., BL Resorts I, Inc., GCG Resorts
I, Inc., Grand Casinos Nevada I, Inc., BL Resorts I, LLC,
GCG Resorts I, LLC and Firstar Bank of Minnesota, N.A.
4.5 Indenture dated as of October 16, 1997, between Grand
Casinos, Inc., the Guarantors, listed on Schedule I thereto,
and Firstar Bank of Minnesota, N.A. (Incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4, as amended, File No. 333-39009.)
</TABLE>
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4.6 Registration Rights Agreement, dated as of October 16, 1997,
between Grand Casinos, Inc., the Guarantors listed on
Schedule A thereto, and Donaldson, Lufkin & Jenrette
Securities Corporation. (Incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement on Form
S-4, as amended, File No. 333-39009.)
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. (Incorporated
herein by reference to Exhibit 10.3 to the Company's Report
on Form 10-K for the fiscal year ended December 29, 1996.)
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.)
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).)
</TABLE>
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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.
(Incorporated herein by reference to Exhibit 10.13 to the
Company's Report on Form 10-K for the fiscal year ended
December 29, 1996.)
10.14 Not used.
10.15 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).)
10.16 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).)
10.17 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).)
10.18 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).)
10.19 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).)
10.20 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).)
10.21 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).)
10.22 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).)
10.23 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).)
10.24 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).)
10.25 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).)
</TABLE>
35
<PAGE> 36
<TABLE>
<C> <S>
10.26 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).)
10.27 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).)
10.28 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).)
10.29 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).)
10.30 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).)
10.31 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. (Incorporated herein by reference to Exhibit
10.30 to the Company's Report on Form 10-K for the fiscal
year ended December 29, 1996.)
10.32 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)
10.33 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)
10.34 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)
10.35 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)
10.36 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)
10.37 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)
</TABLE>
36
<PAGE> 37
<TABLE>
<C> <S>
10.38 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)
10.39 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)
10.40 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)
10.41 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)
10.42 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)
10.43 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)
10.44 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)
10.45 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)
10.46 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)
10.47 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)
10.48 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)
10.49 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)
10.50 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)
</TABLE>
37
<PAGE> 38
<TABLE>
<C> <S>
10.51 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)
10.52 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 (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)
10.53 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)
10.54 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)
10.55 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)
10.56 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)
10.57 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)
10.58 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)
10.59 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)
10.60 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)
10.61 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)
10.62 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. (Incorporated herein by reference to Exhibit
10.61 to the Company's Report on Form 10-K for the fiscal
year ended December 29, 1996.)
</TABLE>
38
<PAGE> 39
<TABLE>
<C> <S>
10.63 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. (Incorporated herein by reference to Exhibit
10.62 to the Company's Report on Form 10-K for the fiscal
year ended December 29, 1996.)
10.64 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. (Incorporated herein by reference to Exhibit
10.63 to the Company's Report on Form 10-K for the fiscal
year ended December 29, 1996.)
10.65 Amendment No. 1 to Participation Agreement, dated as of
March 28, 1997, among BL Development Corp., a Minnesota
corporation, as Lessee and Construction Agent; Grand
Casinos, Inc., a Minnesota corporation, and certain of its
subsidiaries listed therein as Guarantors; Hancock Bank, not
in its individual capacity, but solely as Lessor, Borrower
and Trustee; the persons listed therein, as Lenders; BANK OF
SCOTLAND, WELLS FARGO BANK, a national association,
(successor by merger to First Interstate Bank of Nevada),
and SOCIETE GENERALE, as Co-Agents; CREDIT LYONNAIS, THE LOS
ANGELES BRANCH, as Lead Manager; and BA LEASING CAPITAL
CORPORATION, a California corporation, as Arranger and
Agent. (Incorporated herein by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the quarter ended
March 30, 1997.)
10.66 Limited Warranty, dated as of March 28, 1997. (Incorporated
herein by reference to Exhibit 10.2 to the Company's Report
on Form 10-Q for the quarter ended March 30, 1997.)
10.67 Participation Agreement, dated as of September 29, 1997, by
and among BL Resorts I, LLC, GCG Resorts I, LLC, Grand
Casinos, Inc. and its Subsidiaries Listed on Schedule I, as
Guarantors, Hancock Bank, the persons listed on Schedule II,
as Lenders, Societe Generale, the Sumitomo Bank, Limited,
and Wells Fargo Bank, a national association, as Co-Agents,
the Mitsubishi Trust and Banking Corporation, as Lead
Manager, and BA Leasing and Capital Corporation, as Arranger
and Administrative Agent, including Appendix. (Incorporated
herein by reference to Exhibit 10.1 to the Company's Report
on Form 10-Q for the quarter ended September 28, 1997.)
10.68 Master Lease Agreement and Deed of Trust, dated as of
September 29, 1997, between Hancock Bank and BL Resorts I,
LLC and GCG Resorts I, LLC. (Incorporated herein by
reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended September 28, 1997.)
10.69 Reducing Revolving Loan Agreement, dated as of September 29,
1997, among Hancock Bank, BA Leasing and Capital
Corporation, Societe Generale, The Sumitomo Bank, Limited,
and Wells Fargo Bank, a national association, the Mitsubishi
Trust and Banking Corporation and the persons named on
Schedule I as Lenders. (Incorporated herein by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the
quarter ended September 28, 1997.)
10.70 Trust Agreement, dated as of September 29, 1997, between BL
Resorts I, LLC and GCG Resorts I, LLC and Hancock Bank.
(Incorporated herein by referenced to Exhibit 10.4 to the
Company's Report on Form 10-Q for the quarter ended
September 28, 1997.)
10.71 Guaranty, dated as of September 29, 1997, of Grand Casinos,
Inc., and its Subsidiaries named therein in favor of the
Beneficiaries named therein. (Incorporated herein by
referenced to Exhibit 10.5 to the Company's Report on Form
10-Q for the quarter ended September 28, 1997.)
10.72 Purchase Agreement, dated as of October 9, 1997, by and
among Grand Casinos, Inc., the Guarantors and Donaldson,
Lufkin & Jenrette Securities Corporation. (Incorporated
herein by referenced to Exhibit 10.1 to the Company's
Registration Statement on Form S-4, as amended, File No.
333-39009.)
10.73 Employment Agreement between Grand Casinos, Inc. and Lyle
Berman, dated November 10, 1997.
10.74 Employment Agreement between Grand Casinos, Inc. and Thomas
J. Brosig, dated November 10, 1997.
</TABLE>
39
<PAGE> 40
<TABLE>
<C> <S>
10.75 Employment Agreement between Grand Casinos Nevada I, Inc.
and Stanley M. Taube, dated December 20, 1997.
10.76 Lease Agreement, dated as of June 17, 1996, by and between
Brooks Family Trust and Nevada Brooks Cook as Landlord and
Cloobeck Enterprises and Grand Casinos Nevada I, Inc. as
Tenants.
10.77 First Amendment to Ground Lease, dated November 25, 1997, by
and between MacGregor Income Properties West I, Inc. and
Grand Casinos Nevada I, Inc.
10.78 Ground Lease, dated July 31, 1996, by and between MacGregor
Income Properties West I, Inc. and Cloobeck Enterprises.
10.79 Indemnification Agreement, dated as of December 31, 1997,
and between Grand Casinos, Inc. and Lyle Berman.
13 Annual Report to Shareholders for the fiscal year ended
December 28, 1997.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen 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 28, 1997.
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 and Chief Executive
Officer
Date: March , 1998
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 , 1997.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ LYLE BERMAN Chairman of the Board of Directors
- ---------------------------------------------------
Lyle Berman
/s/ THOMAS J. BROSIG President, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive Officer)
Thomas J. Brosig
/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
/s/ RONALD KRAMER Director
- ---------------------------------------------------
Ronald Kramer
/s/ TIMOTHY J. COPE Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director (Principal Financial and
Timothy J. Cope Accounting Officer)
</TABLE>
41
<PAGE> 1
EXHIBIT 4.3
SECOND AMENDMENT TO INDENTURE
THIS SECOND AMENDMENT TO INDENTURE (the "Second Amendment") is dated as of
September 16, 1997, 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., 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"), BL RESORTS I, INC., GCG RESORTS I, INC., and GRAND CASINOS
NEVADA I, INC. (collectively the "New Guarantors") and FIRSTAR BANK OF
MINNESOTA, N.A., 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, as amended by First
Amendment to Indenture, dated as of May 10, 1996 (the "Indenture"), providing
for the issuance of the Issuer's 10 1/8% First Mortgage Notes due December 1,
2003 (the "Notes"); and
WHEREAS, pursuant to Section 9.01(a)(v) of the Indenture, the Issuer, the
Guarantors and the Trustee may amend the Indenture without the consent of the
Holders of the Notes to make any change that would provide any additional
rights or benefits to the Holders of the Notes (including providing for
additional Note Guarantees pursuant to the Indenture); and
WHEREAS, pursuant to Article XI of the Indenture, the Issuer has formed
certain additional Subsidiaries respectively identified as follows: BL Resorts
I, Inc., a Minnesota corporation, GCG Resorts I, Inc., a Minnesota corporation
and Grand Casinos Nevada I, Inc., a Minnesota corporation (collectively, the
"New Guarantors"); and
WHEREAS, pursuant to Article XI of the Indenture, the Issuer and each
Guarantor separately, independently and respectively desire to cause each of
the New Guarantors to become "Guarantors" and to amend the Indenture to provide
for the same; 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. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed in the Indenture.
-1-
<PAGE> 2
Section 2. Additional Note Guarantees. Pursuant to Section 11.02 of the
Indenture, the New Guarantors each hereby, on a senior basis, jointly and
severally unconditionally guarantee the Company's obligations under the Note,
the Indenture, and the Note Collateral Documents to the full extent specified
in Article XI of the Indenture as if such New Guarantor was a Guarantor at the
time of execution of the Indenture on November 30, 1995.
Section 3. Representations and Warranties. The Issuer, the Guarantors and
the New Guarantors represent and warrant to the Trustee that this Second
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 4. Entire Agreement; Ratification. This Second 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 5. Governing Law. This Second 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 6. Counterparts. This Second 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 Second Amendment To Indenture is executed as of
the date first above written.
ISSUER:
GRAND CASINOS, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GUARANTORS
GRAND CASINOS RESORTS, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - GULFPORT
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - BILOXI
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS BILOXI THEATER, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
<PAGE> 4
MILLE LACS GAMING CORPORATION
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS OF LOUISIANA, INC. - TUNICA - BILOXI
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS OF LOUISIANA, INC. - COUSHATTA
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GCA ACQUISITION SUBSIDIARY, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
BL DEVELOPMENT CORP.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
NEW GUARANTORS
BL RESORTS I, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
<PAGE> 5
GCG RESORTS I, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
GRAND CASINOS NEVADA I, INC.
BY: /s/ Timothy J. Cope
---------------------------------------
Name: Timothy J. Cope
-----------------------------
Title: CFO
----------------------------
TRUSTEE
FIRSTAR BANK OF MINNESOTA, N.A.
BY: /s/ Frank P. Leslie, III
---------------------------------------
Name: Frank P. Leslie, III
-----------------------------
Title: Vice President
----------------------------
BY: /s/ Angela M. Weidell-LaBathe
---------------------------------------
Name: Angela M. Weidell-LaBathe
-----------------------------
Title: Asst. Vice President
----------------------------
<PAGE> 1
EXHIBIT 4.4
THIRD AMENDMENT TO INDENTURE
THIS THIRD AMENDMENT TO INDENTURE (the "Third Amendment") is dated as of
September 25, 1997, 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., MILLE LACS GAMING CORPORATION, GRAND CASINOS OF LOUISIANA, INC.
- -- TUNICA - BILOXI, GRAND CASINOS OF LOUISIANA, INC. - COUSHATTA, GCA
ACQUISITION SUBSIDIARY, INC., BL DEVELOPMENT CORP., BL RESORTS I, INC., GCG
RESORTS I, INC., and GRAND CASINOS NEVADA I, INC. (collectively, the
"Guarantors"), BL RESORTS I, LLC and GCG RESORTS I, LLC (collectively the "New
Guarantors") and FIRSTAR BANK OF MINNESOTA, N.A., 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, as amended by First
Amendment to Indenture, dated as of May 10, 1996, and as amended by Second
Amendment to Indenture, dated as of September 16, 1997 (collectively, the
"Indenture"), providing for the issuance of the Issuer's 10 1/8% First Mortgage
Notes due December 1, 2003 (the "Notes"); and
WHEREAS, pursuant to Section 9.01(a)(v) of the Indenture, the Issuer, the
Guarantors and the Trustee may amend the Indenture without the consent of the
Holders of the Notes to make any change that would provide any additional
rights or benefits to the Holders of the Notes (including providing for
additional Note Guarantees pursuant to the Indenture); an
WHEREAS, pursuant to Article XI of the Indenture, the Issuer has formed
certain additional Subsidiaries respectively identified as follows: BL Resorts
I, LLC, a Minnesota limited liability company and GCG Resorts I, LLC, a
Minnesota limited liability company (collectively, the "New Guarantors"); and
WHEREAS, pursuant to Article XI of the Indenture, the Issuer and each
Guarantor separately, independently and respectively desire to cause each of
the New Guarantors to become "Guarantors" and to amend the Indenture to provide
for the same; 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:
-1-
<PAGE> 2
Section 1. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed in the Indenture.
Section 2. Additional Note Guarantees. Pursuant to Section 11.02 of the
Indenture, the New Guarantors each hereby, on a senior basis, jointly and
severally unconditionally guarantee the Company's obligations under the Note,
the Indenture, and the Note Collateral Documents to the full extent specified
in Article XI of the Indenture as if such New Guarantor was a Guarantor at the
time of execution of the Indenture on November 30, 1995.
Section 3. Representations and Warranties. The Issuer, the Guarantors and
the New Guarantors represent and warrant to the Trustee that this Third
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 4. Entire Agreement; Ratification. This Third 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 5. Governing Law. This Third 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 6. Counterparts. This Third 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 Third Amendment To Indenture is executed as of
the date first above written.
ISSUER:
GRAND CASINOS, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
------------------------------
Title: CFO
-----------------------------
GUARANTORS
GRAND CASINOS RESORTS, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - GULFPORT
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS OF MISSISSIPPI, INC. - BILOXI
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS BILOXI THEATER, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
<PAGE> 4
MILLE LACS GAMING CORPORATION
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS OF LOUISIANA, INC. -- TUNICA - BILOXI
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS OF LOUISIANA, INC. - COUSHATTA
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GCA ACQUISITION SUBSIDIARY, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
BL DEVELOPMENT CORP.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
BL RESORTS I, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
<PAGE> 5
GCG RESORTS I, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GRAND CASINOS NEVADA I, INC.
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
NEW GUARANTORS
BL RESORTS I, LLC
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
GCG RESORTS I, LLC
BY: /s/ Timothy J. Cope
-----------------------------------
Name: Timothy J. Cope
----------------------------
Title: CFO
---------------------------
TRUSTEE
FIRSTAR BANK OF MINNESOTA, N.A.
BY: /s/ Frank P. Leslie, III
-----------------------------------
Name: Frank P. Leslie, III
----------------------------
Title: Vice President
---------------------------
<PAGE> 1
EXHIBIT 10.73
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective November 10, 1997, by and between Grand
Casinos, Inc., a Minnesota corporation ("Employer"), and Lyle Berman
("Employee").
WHEREAS, Employee is Chairman of the Board of Directors and Chief Executive
Officer of Employer and has extensive experience in and is primarily responsible
for Employer's business; and
WHEREAS, Employer desires to employ Employee as Chief Executive Officer of
Employer pursuant to the terms and conditions of this Agreement; and
WHEREAS, Employee desires to accept such employment pursuant to such terms and
conditions;
NOW, THEREFORE, in consideration of the foregoing and the promises and
agreements stated below, Employer and Employee hereby agree as follows:
1. Employment. Employer shall employ Employee, and Employee hereby accepts such
employment, on the terms and conditions stated in this Agreement.
2. Term. This Agreement shall be for an initial term beginning on November 10,
1997, and ending on the earlier of (i) November 9, 2001, or (ii) the date on
which this Agreement is terminated pursuant to Section 11 below.
3. Base Salary. Employer shall, during the term of this Agreement, pay Employee
an annual base salary in the amount of $600,000, or such higher amount as may
from time-to-time be determined by Employer in its sole discretion. Such salary
shall be paid in equal installments in the manner and at the times as other
employees of Employer are paid.
4. Incentive Compensation. Employee shall, during the term of this Agreement,
participate in Employer's incentive compensation program from time-to-time
established and approved by the Employer's Board of
1
<PAGE> 2
Directors, such participation to be on the same terms and conditions as from
time-to-time apply to senior and executive vice presidents of Employer.
5. Benefits. Employer shall, during the term of this Agreement, provide to
Employee such benefits as are provided by Employer to other senior and executive
vice presidents of Employer. Employee shall pay for the portion of the cost of
such benefits as is from time-to-time established by Employer as the portion of
such cost to be paid by senior and executive vice presidents of Employer.
6. Costs and Expenses. Employer and Employee acknowledge that Employee will
incur travel and other expenses while traveling on business for Employer and
performing Employee's duties under this Agreement, and that it will be
inefficient for both Employer and Employee to provide for Employer to reimburse
Employee for such expenses as are not paid directly by Employer.
Accordingly, Employer shall pay to Employee during each calendar month (or
portion thereof) during the term of this Agreement, a monthly travel and expense
fee in the amount of $600, which travel and expense fee shall be full and
complete payment to Employee for all such expenses. Employer and Employee
acknowledge that the actual amount of such expenses incurred by Employee during
any given calendar month may be more or less than the amount of such travel and
expense fee.
In addition, Employee shall have the right to use Employer's aircraft for
Employee's personal purposes at such times as such aircraft is not needed by
Employer for any other purpose; provided, however, that Employee shall pay or
reimburse Employer for (i) all pilot meal, transportation and lodging costs
(whether or not such pilots are employees of Employer), and (ii) all costs of
providing pilots other than pilots which are employees of Employer, which costs
are incurred by Employer during Employee's use of such aircraft for personal
purposes.
7. Duties. The duties to be performed by Employee during the term of this
Agreement shall be designated from time-to-time by the Board of Directors of
Employer and will include the primary responsibility for Employer's business.
2
<PAGE> 3
8. Confidentiality. Except to the extent required by law, Employee shall keep
confidential and shall not, without Employer's prior written consent, disclose
to any third-party, other than as reasonably necessary or appropriate in
connection with Employee's performance of his duties under this Agreement, any
information regarding Employer and its affiliates, subsidiaries, business,
methods of operation, employees, projects, plans and prospects, which
information has not been released to the public by Employer. The provisions of
this Section 8 shall remain in effect after the expiration or any termination of
this Agreement.
9. Termination. This Agreement shall terminate as follows:
(a) at the end of the term hereof;
(b) upon the death of Employee;
(c) upon the determination by the Board of Directors of Employer
to terminate this Agreement after Employee becomes disabled to
the extent that the Employee cannot perform the essential
duties and responsibilities described in this Agreement and
such disability continues for more than 60 days;
(d) upon at least 30 days' prior written notice of termination
given for any or no reason by Employee to Employer; or
(e) upon at least 30 days' prior written notice of termination
(for cause or not for cause) given by Employer's Board of
Directors to Employee.
10. Benefits After Termination. Upon termination of this Agreement under Section
9 above, Employee's rights to pay, compensation and benefits under this
Agreement shall, except to the extent earned, accrued or vested prior to the
date of termination, cease on the date on which Employee's employment under this
Agreement terminates, except as follows:
(a) if such termination is under Section 9(c) above, Employee
shall be entitled, during the period of such disability, to
such disability, medical and life insurance and other benefits
as are provided by Employer at the time of Employee's
disability to senior and executive vice presidents of
Employer; or
3
<PAGE> 4
(b) if such termination is under Section 9(e) above and is not for
cause (as defined in the following paragraph) and Section 11
below does not apply, Employer shall:
(i) pay to Employee, in a lump sum within 10 days after
the effective date of such termination, the amount of
Employee's then current base salary pursuant to
Section 3 above for a period of 365 days;
(ii) provide to Employee benefits to which Employee would
have been entitled if this Agreement had remained in
effect for 365 days after the effective date of such
termination; and
(iii) pay to Employee the portions of the incentive
compensation for the year of such termination which
are (a) determined by objective measurement standards
under Employer's incentive compensation program
applicable to senior and executive vice presidents of
Employer, and (b) would have been paid to Employee
had Employer been continuously employed under this
Agreement through the end of both such years. Payment
of such portions of incentive compensation, if any,
shall be made to Employee within 10 business days
after the date, if any, on which senior and executive
vice presidents of Employer receive payment of their
incentive compensation under such incentive
compensation program.
For the purposes of this Section 10(b), "cause" shall mean the
(i) commission of a felony, (ii) the theft or embezzlement of
property of Employer or the commission of any similar act
involving moral turpitude, (iii) the failure of Employee to
substantially perform his material duties and responsibilities
under this Agreement for any reason other than Employee's
disability, which failure is not cured within 30 days (or if
such cure is commenced within such 30-day period and
thereafter diligently pursued, such longer period not to
exceed 90 days as is reasonably required to cure such
failure), after written notice
4
<PAGE> 5
of such failure from Employer's Board of Directors specifying
the failure, or (iv) the revocation of any gaming license
issued by any governmental entity to Employee as a result of
any act or omission by Employee. Any lump sum payment made by
Employer to Employee pursuant to this Section 10(b) shall be
subject to withholding as required by applicable law, but such
withholding shall, to the extent permitted by applicable law,
be calculated in the same manner as for a lump-sum bonus or
incentive compensation payment.
11. Change of Control. For the purposes of this Section 11, the term "Change of
Control" shall mean:
(a) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) directly or indirectly
becoming the "beneficial owner" (as defined in Rule 13d-3
promulgated pursuant to such Securities Exchange Act) of 25%
or more of the combined voting power of Employer's then
outstanding securities; or
(b) the occurrence within any 12-month period of a change in the
membership of Employer's Board of Directors such that the
Incumbent Members (as defined in the following sentence) do
not constitute a majority of the members of such Board of
Directors. "Incumbent Members" shall mean, with respect to any
given 12-month period, the members of such Board of Directors
on the date immediately preceding the commencement of such
given 12-month period; provided, however, that any person who
becomes a member of such Board of Directors during such given
12-month period whose election or appointment to such Board of
Directors was approved by a vote of a majority of the members
of such Board of Directors who, on the date of such election
or nomination, comprised the Incumbent Members on the date of
such vote shall be considered one of the Incumbent Members
with respect to such 12-month period.
If after a Change of Control Employee gives written notice to
Employer that Employee resigns from his employment by
5
<PAGE> 6
Employer, Employer shall (in lieu of and in not in addition to
the payments and benefits described in Section 10(b) above):
(i) pay to Employee, in a lump sum within 10 days after
the effective date of such termination, the amount of
Employee's then current base salary pursuant to
Section 3 above for a period of the greater of (i)
730 days, or (ii) the remaining number of days in the
term of this Agreement;
(ii) provide to Employee benefits to which Employee would
have been entitled if this Agreement had remained in
effect for 365 days after the effective date of such
termination; and
(iii) pay to Employee the portions of the incentive
compensation for the year of such termination which
are (a) determined by objective measurement standards
under Employer's incentive compensation program
applicable to senior and executive vice presidents of
Employer, and (b) would have been paid to Employee
had Employer been continuously employed under this
Agreement through the end of both such years. Payment
of such portions of incentive compensation, if any,
shall be made to Employee within 10 business days
after the date, if any, on which senior and executive
vice presidents of Employer receive payment of their
incentive compensation under such incentive
compensation program.
The provisions of this paragraph shall apply following any Change of Control
notwithstanding any provision otherwise in any stock option agreement between
Employer and Employee which provides for the grant to Employee of the right to
purchase shares of stock of Employer. If, after any Change of Control, employee
ceases to be employed by Employer, for any reason or no reason, with or without
cause, Employee or his legal representative shall have until the later of (i)
the date which is six months after the date on which the Employee ceases to be
employed by Employer, or (ii) November 9, 2001 to exercise Employee's right to
purchase shares of
6
<PAGE> 7
stock of Employer under such option agreements (whether entered into before or
after the date of this Agreement).
12. Amendment. This Agreement may be amended only in writing signed by both
Employer and Employee.
13. Entire Agreement. Except for the provisions the stock option or purchase
agreements (each, a "Stock Agreement") between Employer and Employee, copies of
which are attached hereto as Exhibit A, this Agreement contains the entire
understanding of Employer and Employee with respect to all matters described
herein, and there are no other agreements, conditions or representations, oral
or written, express or implied with respect thereto. Except for the Stock
Agreements, this Agreement supersedes all prior agreements relating to
Employer's employment of Employee.
14. Successors and Assigns. Employee shall not assign this Agreement without the
prior written consent of Employer's Board of Directors. This Agreement shall be
binding upon, and shall inure to the benefit of Employee and his heirs and
personal representatives, and to Employer and its successors and assigns.
15. Notices. All notices or other communications to be given under this
Agreement shall be personally delivered or sent by courier service to the
following addresses:
if to Employer
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: President
with a copy to
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: General Counsel
7
<PAGE> 8
if to Employee
Lyle Berman
130 Bushaway Road
Wayzata, Minnesota 55391
or to such other addresses either party may provide to the other by written
notice given in the manner provided in this Section 15.
16. Waiver. Any waiver by any party to this Agreement with respect to any
provision or incident shall not operate or be construed as a waiver of any other
provision of this Agreement or any other incident.
17. Governing Law. This Agreement will be interpreted and enforced in accordance
with the laws of the State of Minnesota, without giving effect to conflict of
law issues.
18. Agreement Not To Compete. Employee hereby agrees to not, without the prior
written consent of Employer's Board of Directors, directly or indirectly engage
in any of the following actions on or before the date that is two years after
the date on which Employee's employment under this Agreement is terminated for
any reason:
(a) own any interest in, manage, operate, join, control, lend
money or render other financial assistance to, participate or
be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, any entity whose
products or services are offered in the State of Louisiana or
the State of Mississippi and could be considered part of the
gaming industry; provided, however, that nothing in this
Section 18(a) shall preclude Employee from holding less than
twenty percent of the outstanding capital stock of any
corporation whose products or services are offered in either
or both of such states and could be considered part of such
industry and which is required to file periodic reports with
the U.S Securities and Exchange Commission under Section 13 or
15(d) of the Securities Exchange Act of 1934 (as amended), the
securities of which corporation are listed on any securities
exchange, quoted on the
8
<PAGE> 9
National Association of Securities Dealers Automated Quotation
System or traded in the over-the-counter market; or
(b) solicit for employment, endeavor to entice away from Employer
or otherwise interfere with Employer's relationship with any
person who is employed by or otherwise engaged to perform
services for Employer, whether for Employee's own account or
for the account of any other individual, partnership, firm,
corporation or other business entity.
If the scope of Employee's agreement under this Section 18 is determined by any
court of competent jurisdiction to be too broad to permit the enforcement of all
of the provisions of this Section to their fullest extent, then the provisions
of this Section 18 shall be construed (and each of the parties hereto hereby
confirm that its intent is that such provisions be so construed) to be
enforceable to the fullest extent permitted by applicable law. To the maximum
extent permitted by applicable law, Employee hereby consents to the judicial
modification of the provisions of this Section 18 in any proceeding brought to
enforce such provisions in such a manner that renders such provisions
enforceable to the maximum extent permitted by applicable law.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement effective
as of the date first stated above.
EMPLOYER:
Grand Casinos, Inc.
By: /s/ Thomas J. Brosig
--------------------------
Thomas J. Brosig
President
EMPLOYEE:
Lyle Berman
/s/ Lyle Berman
- -----------------------------
9
<PAGE> 1
EXHIBIT 10.74
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective November 10, 1997, by and between Grand
Casinos, Inc., a Minnesota corporation ("Employer"), and Thomas J. Brosig
("Employee").
WHEREAS, Employee is President of Employer and has extensive experience in and
is primarily responsible for the operation of Employer's day to day business
activities; and
WHEREAS, Employer desires to employ Employee as President of Employer pursuant
to the terms and conditions of this Agreement; and
WHEREAS, Employee desires to accept such employment pursuant to such terms and
conditions;
NOW, THEREFORE, in consideration of the foregoing and the promises and
agreements stated below, Employer and Employee hereby agree as follows:
1. Employment. Employer shall employ Employee, and Employee hereby accepts such
employment, on the terms and conditions stated in this Agreement.
2. Term. This Agreement shall be for an initial term beginning on November 10,
1997, and ending on the earlier of (i) November 9, 2001, or (ii) the date on
which this Agreement is terminated pursuant to Section 11 below.
3. Base Salary. Employer shall, during the term of this Agreement, pay Employee
an annual base salary in the amount of $450,000, or such higher amount as may
from time-to-time be determined by Employer in its sole discretion. Such salary
shall be paid in equal installments in the manner and at the times as other
employees of Employer are paid.
4. Incentive Compensation. Employee shall, during the term of this Agreement,
participate in Employer's incentive compensation program from time-to-time
established and approved by the Employer's Board of Directors, such
participation to be on the same terms and conditions as from time-to-time apply
to senior and executive vice presidents of Employer.
1
<PAGE> 2
5. Benefits. Employer shall, during the term of this Agreement, provide to
Employee such benefits as are provided by Employer to other senior and executive
vice presidents of Employer. Employee shall pay for the portion of the cost of
such benefits as is from time-to-time established by Employer as the portion of
such cost to be paid by senior and executive vice presidents of Employer.
6. Costs and Expenses. Employer and Employee acknowledge that Employee will
incur travel and other expenses while traveling on business for Employer and
performing Employee's duties under this Agreement, and that it will be
inefficient for both Employer and Employee to provide for Employer to reimburse
Employee for such expenses as are not paid directly by Employer.
Accordingly, Employer shall pay to Employee during each calendar month (or
portion thereof) during the term of this Agreement, a monthly travel and expense
fee in the amount of $600, which travel and expense fee shall be full and
complete payment to Employee for all such expenses. Employer and Employee
acknowledge that the actual amount of such expenses incurred by Employee during
any given calendar month may be more or less than the amount of such travel and
expense fee.
In addition, Employee shall have the right to use Employer's aircraft for
Employee's personal purposes at such times as such aircraft is not needed by
Employer for any other purpose; provided, however, that Employee shall pay or
reimburse Employer for (i) all pilot meal, transportation and lodging costs
(whether or not such pilots are employees of Employer), and (ii) all costs of
providing pilots other than pilots which are employees of Employer, which costs
are incurred by Employer during Employee's use of such aircraft for personal
purposes..
7. Duties. The duties to be performed by Employee during the term of this
Agreement shall be designated from time-to-time by the Board of Directors of
Employer and will include the primary responsibility for operating Employer's
business.
8. Confidentiality. Except to the extent required by law, Employee shall keep
confidential and shall not, without Employer's prior written consent, disclose
to any third-party, other than as reasonably necessary or appropriate in
connection with Employee's performance of his duties under this Agreement, any
information regarding Employer and its affiliates,
2
<PAGE> 3
subsidiaries, business, methods of operation, employees, projects, plans and
prospects, which information has not been released to the public by Employer.
The provisions of this Section 8 shall remain in effect after the expiration or
any termination of this Agreement.
9. Termination. This Agreement shall terminate as follows:
(a) at the end of the term hereof;
(b) upon the death of Employee;
(c) upon the determination by the Board of Directors of Employer
to terminate this Agreement after Employee becomes disabled to
the extent that the Employee cannot perform the essential
duties and responsibilities described in this Agreement and
such disability continues for more than 60 days;
(d) upon at least 30 days' prior written notice of termination
given for any or no reason by Employee to Employer; or
(e) upon at least 30 days' prior written notice of termination
(for cause or not for cause) given by the Chair of Employer's
Board of Directors to Employee.
10. Benefits After Termination. Upon termination of this Agreement under Section
9 above, Employee's rights to pay, compensation and benefits under this
Agreement shall, except to the extent earned, accrued or vested prior to the
date of termination, cease on the date on which Employee's employment under this
Agreement terminates, except as follows:
(a) if such termination is under Section 9(c) above, Employee
shall be entitled, during the period of such disability, to
such disability, medical and life insurance and other benefits
as are provided by Employer at the time of Employee's
disability to senior and executive vice presidents of
Employer; or
(b) if such termination is under Section 9(e) above and is not for
cause (as defined in the following paragraph) and Section 11
below does not apply, Employer shall:
3
<PAGE> 4
(i) pay to Employee, in a lump sum within 10 days after
the effective date of such termination, the amount of
Employee's then current base salary amount pursuant
to Section 3 above for a period of 365 days;
(ii) provide to Employee benefits to which Employee would
have been entitled if this Agreement had remained in
effect for 365 days after the effective date of such
termination; and
(iii) pay to Employee the portions of the incentive
compensation for the year of such termination which
are (a) determined by objective measurement standards
under Employer's incentive compensation program
applicable to senior and executive vice presidents of
Employer, and (b) would have been paid to Employee
had Employer been continuously employed under this
Agreement through the end of both such years. Payment
of such portions of incentive compensation, if any,
shall be made to Employee within 10 business days
after the date, if any, on which senior and executive
vice presidents of Employer receive payment of their
incentive compensation under such incentive
compensation program.
For the purposes of this Section 10(b), "cause" shall mean the
(i) commission of a felony, (ii) the theft or embezzlement of
property of Employer or the commission of any similar act
involving moral turpitude, (iii) the failure of Employee to
substantially perform his material duties and responsibilities
under this Agreement for any reason other than Employee's
disability, which failure is not cured within 30 days (or if
such cure is commenced within such 30-day period and
thereafter diligently pursued, such longer period not to
exceed 90 days as is reasonably required to cure such
failure), after written notice of such failure from the
Employer's Board of Directors specifying the failure, or (iv)
the revocation of any gaming license issued by any
governmental entity to Employee as a result of any act or
omission by Employee. Any lump sum payment made by Employer to
Employee pursuant to this Section 10(b) shall be subject to
withholding as required by
4
<PAGE> 5
applicable law, but such withholding shall, to the extent
permitted by applicable law, be calculated in the same manner
as for a lump-sum bonus or incentive compensation payment.
11. Change of Control. For the purposes of this Section 11, the term "Change of
Control" shall mean:
(a) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) directly or indirectly
becoming the "beneficial owner" (as defined in Rule 13d-3
promulgated pursuant to such Securities Exchange Act) of 25%
or more of the combined voting power of Employer's then
outstanding securities; or
(b) the occurrence within any 12-month period of a change in the
membership of Employer's Board of Directors such that the
Incumbent Members (as defined in the following sentence) do
not constitute a majority of the members of such Board of
Directors. "Incumbent Members" shall mean, with respect to any
given 12-month period, the members of such Board of Directors
on the date immediately preceding the commencement of such
given 12-month period; provided, however, that any person who
becomes a member of such Board of Directors during such given
12-month period whose election or appointment to such Board of
Directors was approved by a vote of a majority of the members
of such Board of Directors who, on the date of such election
or nomination, comprised the Incumbent Members on the date of
such vote shall be considered one of the Incumbent Members
with respect to such 12-month period.
If after a Change of Control Employee gives written notice to
Employer that Employee resigns from his employment by
Employer, Employer shall (in lieu of and in not in addition to
the payments and benefits described in Section 10(b) above):
(i) pay to Employee, in a lump sum within 10 days after
the effective date of such termination, the amount of
Employee's then current base salary pursuant to
Section 3 above for a period of the greater of (i)
730 days, or (ii)
5
<PAGE> 6
the remaining number of days in the term of this
Agreement;
(ii) provide to Employee benefits to which Employee would
have been entitled if this Agreement had remained in
effect for 365 days after the effective date of such
termination; and
(iii) pay to Employee the portions of the incentive
compensation for the year of such termination which
are (a) determined by objective measurement standards
under Employer's incentive compensation program
applicable to senior and executive vice presidents of
Employer, and (b) would have been paid to Employee
had Employer been continuously employed under this
Agreement through the end of both such years. Payment
of such portions of incentive compensation, if any,
shall be made to Employee within 10 business days
after the date, if any, on which senior and executive
vice presidents of Employer receive payment of their
incentive compensation under such incentive
compensation program.
The provisions of this paragraph shall apply following any Change of Control
notwithstanding any provision otherwise in any stock option agreement between
Employer and Employee which provides for the grant to Employee of the right to
purchase shares of stock of Employer. If, after any Change of Control, employee
ceases to be employed by Employer, for any reason or no reason, with or without
cause, Employee or his legal representative shall have until the later of (i)
the date which is six months after the date on which the Employee ceases to be
employed by Employer, or (ii) November 9, 2001 to exercise Employee's right to
purchase shares of stock of Employer under such option agreements (whether
entered into before or after the date of this Agreement).
12. Amendment. This Agreement may be amended only in writing signed by both
Employer and Employee.
13. Entire Agreement. Except for the provisions the stock option or purchase
agreements (each, a "Stock Agreement") between Employer and Employee, copies of
which are attached hereto as Exhibit A, this Agreement
6
<PAGE> 7
contains the entire understanding of Employer and Employee with respect to all
matters described herein, and there are no other agreements, conditions or
representations, oral or written, express or implied with respect thereto.
Except for the Stock Agreements, this Agreement supersedes all prior agreements
relating to Employer's employment of Employee.
14. Successors and Assigns. Employee shall not assign this Agreement without the
prior written consent of the Chair of Employer's Board of Directors. This
Agreement shall be binding upon, and shall inure to the benefit of Employee and
his heirs and personal representatives, and to Employer and its successors and
assigns.
15. Notices. All notices or other communications to be given under this
Agreement shall be personally delivered or sent by courier service to the
following addresses:
if to Employer
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: Chairman
with a copy to
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: General Counsel
if to Employee
Thomas J. Brosig
4695 Forestview Lane
Plymouth, MN 55442
or to such other addresses either party may provide to the other by written
notice given in the manner provided in this Section 15.
7
<PAGE> 8
16. Waiver. Any waiver by any party to this Agreement with respect to any
provision or incident shall not operate or be construed as a waiver of any other
provision of this Agreement or any other incident.
17. Governing Law. This Agreement will be interpreted and enforced in accordance
with the laws of the State of Minnesota, without giving effect to conflict of
law issues.
18. Agreement Not To Compete. Employee hereby agrees to not, without the prior
written consent of Employer's Board of Directors, directly or indirectly engage
in any of the following actions on or before the date that is two years after
the date on which Employee's employment under this Agreement is terminated for
any reason:
(a) own any interest in, manage, operate, join, control, lend
money or render other financial assistance to, participate or
be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, any entity whose
products or services are offered in the State of Louisiana or
the State of Mississippi and could be considered part of the
gaming industry; provided, however, that nothing in this
Section 18(a) shall preclude Employee from holding less than
twenty percent of the outstanding capital stock of any
corporation whose products or services are offered in either
or both of such states and could be considered part of such
industry and which is required to file periodic reports with
the U.S Securities and Exchange Commission under Section 13 or
15(d) of the Securities Exchange Act of 1934 (as amended), the
securities of which corporation are listed on any securities
exchange, quoted on theNational Association of Securities
Dealers Automated Quotation System or traded in the
over-the-counter market; or
(b) solicit for employment, endeavor to entice away from Employer
or otherwise interfere with Employer's relationship with any
person who is employed by or otherwise engaged to perform
services for Employer, whether for Employee's own account or
for the account of any other individual, partnership, firm,
corporation or other business entity.
If the scope of Employee's agreement under this Section 18 is determined by any
court of competent jurisdiction to be too broad to permit the
8
<PAGE> 9
enforcement of all of the provisions of this Section 18 to their fullest extent,
then the provisions of this Section 18 shall be construed (and each of the
parties hereto hereby confirm that its intent is that such provisions be so
construed) to be enforceable to the fullest extent permitted by applicable law.
To the maximum extent permitted by applicable law, Employee hereby consents in
any proceeding brought to enforce such provisions to the judicial modification
of the provisions of this Section 18 in such a manner that renders such
provisions enforceable to the maximum extent permitted by applicable law.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement effective
as of the date first stated above.
EMPLOYER:
Grand Casinos, Inc.
By: /s/ Lyle Berman
---------------------------------
Lyle Berman
Chairman of the Board
EMPLOYEE:
Thomas J. Brosig
/s/ Thomas J. Brosig
- -------------------------
9
<PAGE> 1
EXHIBIT 10.75
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective December 20, 1997, by and between Grand Casinos
of Nevada I, Inc., a Minnesota corporation ("Employer"), and Stanley M. Taube
("Employee").
WHEREAS, Employer is a wholly-owned subsidiary of Grand Casinos, Inc. ("GCI");
and
WHEREAS, Employee is a founder, Executive Vice President and employee of GCI,
and has extensive experience in and has been primarily responsible for locating,
evaluating and obtaining new business opportunities for GCI and its subsidiaries
(including Employer); and
WHEREAS, Employer has assembled a site in Las Vegas, Nevada for the purpose of
developing a hotel and casino (the "Property"); and
WHEREAS, Employer desires to receive the benefits of Employee's experience and
expertise on a part-time basis; and
WHEREAS, Employer believes that the most likely source of business opportunities
for Employer for future years will be in the State of Nevada; and
WHEREAS, Employer desires to employ employee as President pursuant to the terms
and conditions of this Agreement, with primary responsibility for pursuing new
business opportunities for Employer and its affiliates (including GCI) in the
State of Nevada and assisting Employer in developing the Property and
WHEREAS, Employee desires to be employed by Employer pursuant to such terms and
conditions;
NOW, THEREFORE, in consideration of the foregoing and the promises and
agreements stated below, Employer and Employee hereby agree as follows:
1. Employment. Employer shall employ Employee, and Employee hereby accepts such
employment, on the terms and conditions stated in this Agreement.
1
<PAGE> 2
2. Term. This Agreement shall be for a term commencing on January 1, 1998, and
terminating on the earlier of (i) December 31, 2000, or (ii) the date on which
this Agreement is terminated pursuant to Section 11 below.
3. Base Salary. Employer shall, during the term of this Agreement, pay Employee
an annual base salary in the amount of $150,000. Such salary shall be paid in
equal installments in the manner and at the times as other employees of Employer
(or if Employer has no other employees, then in such manner and at the times as
employees of GCI).
4. Incentive Compensation. If the Property is developed by Employer (or any
affiliate of Employer) and opens for business on or before December 31, 2001,
then Employer shall pay Employee a one-time bonus in the amount of $250,000.
Such one-time bonus shall be paid within 30 days after the date on which the
Property opens for business. Except for termination of this Agreement pursuant
to Sections 11(d), 11(e) or 13 below (in which case such bonus shall not
thereafter be paid to Employee), the requirement that Employer pay such one-time
bonus shall survive the expiration of the term or other termination of this
Agreement.
5. Benefits. Employer shall, during the term of this Agreement, provide to
Employee such health, dental, disability and life insurance as are provided by
Employer to other executives of Employer (or if Employer has no other employees,
then Employer shall provide such insurance as is provided by GCI to its
executives). Employee shall pay for the portion of the cost of such insurance as
is from time-to-time established by Employer as the portion of such cost to be
paid by executives of Employer.
6. Costs and Expenses. Employer shall either pay directly or reimburse Employee
for all reasonable travel expenses incurred by Employee while traveling on
business for Employer, and for all other reasonable expenses incurred by
Employee in performing the duties described in this Agreement.
7. Duties. The duties to be performed by Employee during the term of this
Agreement shall be designated from time-to-time by Employer and will include,
but not be limited to, the following:
(a) assuming primary responsibility for locating, evaluating and
obtaining gaming and gaming-related opportunities for Employer
and its affiliates in the State of Nevada;
2
<PAGE> 3
(b) assisting other employees of Employer in evaluating new
business opportunities outside of the State of Nevada for
affiliates of Employer;
(c) assisting Employer in the development and subsequent
improvements of the Property; and
(d) performing such other duties and responsibilities as are from
time-to-time designated by Employer under this Agreement.
8. Commitment; Exclusivity. Employee hereby commits to make himself available to
perform the duties and responsibilities described in this Agreement 80 hours per
month during the term of this Agreement. Employee hereby agrees that, so long as
this Agreement remains in effect, Employee will not perform similar duties and
responsibilities for any other person or entity (other than affiliates of
Employer) engaged or contemplating engaging in the casino gaming business.
9. Employee's Primary Residence; Offices. Employer and Employee acknowledge that
because Employee's primary duties and responsibilities under this Agreement will
be performed mostly in the State of Nevada, the efficient performance of those
duties and responsibilities requires that Employee reside within commuting
distance of Las Vegas, Nevada. Accordingly, Employee shall, during the term of
this Agreement, maintain his primary residence within 50 miles of the Property.
Employer shall provide to Employee, during the term of this Agreement, a
furnished office and support staff and facilities at a location to be from
time-to-time determined by Employer and located within 50 miles of the Property.
Employer shall also cause GCI to provide to Employee the use of a furnished
office and support staff and facilities during such times during the term of
this Agreement as Employee is visiting or using GCI's principal office.
10. Confidentiality. Except to the extent required by law, Employee shall keep
confidential and shall not, without Employer's prior written consent, disclose
to any third-party, other than as reasonably necessary or appropriate in
connection with Employee's performance of his duties under this Agreement, any
information regarding Employer and its affiliates, subsidiaries, business,
methods of operation, employees, projects, plans and
3
<PAGE> 4
prospects, which information has not been released to the public by Employer or
any of Employer's affiliates. The provisions of this Section 10 shall remain in
effect after the expiration or any termination of this Agreement.
11. Termination. This Agreement shall terminate as follows:
(a) upon expiration of the term of this Agreement as stated in
Section 2 above;
(b) upon the death of Employee;
(c) upon the determination by the Board of Directors of Employer
to terminate this Agreement after Employee becomes disabled to
the extent that the Employee cannot perform the essential
duties and responsibilities described in this Agreement and
such disability continues for more than 60 days;
(d) upon at least 30 days' prior written notice of termination
given for any or no reason by Employee to Employer; or
(e) upon prior written notice of termination (for cause or not for
cause) given by the Employer's Board of Directors to Employee.
12. Benefits After Termination. Upon termination of this Agreement under Section
11 above, Employee's rights to pay, compensation and benefits under this
Agreement shall, except to the extent earned, accrued or vested prior to the
date of termination, cease on the date on which Employee's employment under this
Agreement terminates, except as follows:
(a) if such termination is under Section 11(c) above, Employee
shall be entitled, during the period of such disability, to
such health, dental, disability and life insurance as are then
provided by Employer to other executives of Employer (or if
Employer has no other executives, then Employer shall provide
such insurance as is provided by GCI to its executives); or
(b) if such termination is under Section 11(e) above and is not
for cause (as defined in the following sentence) and Section
13
4
<PAGE> 5
below does not apply, Employer shall continue, for a period
ending on December 31, 2000, to pay to Employee the Base
Salary and provide benefits to which Employee would have been
entitled if this Agreement had remained in effect until
December 31, 2000.
For the purposes of this Section 12(b), "cause" shall mean the
(i) commission of a felony, (ii) the theft or embezzlement of
property of Employer or any affiliate of Employer or the
commission of any similar act involving moral turpitude, (iii)
failure of Employee to substantially perform his material
duties and responsibilities under this Agreement for any
reason other than Employee's disability, which failure is not
cured within 30 days (or if such cure is commenced within such
30-day period and thereafter diligently pursued, such longer
period not to exceed 90 days as is reasonably required to cure
such failure), after written notice of such failure from the
Chairman Employer's Board of Directors specifying such
failure.
13. Change of Control. For the purposes of this Section 13, the term "Change of
Control" shall mean:
(a) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934) directly or indirectly
becoming the "beneficial owner" (as defined in Rule 13d-3
promulgated pursuant to such Securities Exchange Act) of 25%
or more of the combined voting power of Employer's then
outstanding securities; or
(b) the occurrence within any 12-month period of a change in the
membership of Employer's Board of Directors such that the
Incumbent Members (as defined in the following sentence) do
not constitute a majority of the members of such Board of
Directors. "Incumbent Members" shall mean, with respect to any
given 12-month period, the members of such Board of Directors
on the date immediately preceding the commencement of such
given 12-month period; provided, however, that any person who
becomes a member of such Board of Directors during such given
12-month period whose election or appointment to such Board
of Directors was approved by a vote of a majority of the
members of such Board
5
<PAGE> 6
of Directors on the date immediately preceding the
commencement of such given 12-month period; provided, however,
that any person who becomes a member of such Board of
Directors during such given 12-month period whose election or
appointment to such Board of Directors was approved by a vote
of a majority of the members of such Board of Directors who,
on the date of such election or nomination, comprised the
Incumbent Members on the date of such vote shall be considered
one of the Incumbent Members with respect to such 12-month
period.
If after a Change of Control Employee gives written notice to Employer that
Employee resigns from his employment by Employer, Employer shall (in lieu of and
in not in addition to the payments and benefits described in Section 11(b)
above):
(i) pay to Employee, in a lump sum within 10 days after the
effective date of such termination, the amount of Employee's
then current base salary pursuant to Section 3 above for a
period of the remaining number of days in the term of this
Agreement; and
(ii) provide to Employee benefits to which Employee would have been
entitled if this Agreement had remained in effect for 365 days
after the effective date of such termination.
The provisions of this paragraph shall apply following any Change of Control
notwithstanding any provision otherwise in any stock option agreement between
Employer and Employee which provides for the grant to Employee of the right to
purchase shares of stock of Employer. If, after any Change of Control, employee
ceases to be employed by Employer, for any reason or no reason, with or without
cause, Employee or his legal representative shall have until the date which is
six months after the date on which the Employee ceases to be employed by
Employer to exercise Employee's right to purchase shares of stock of Employer
under such option agreements (whether entered into before or after the date of
this Agreement).
14. Amendment. This Agreement may be amended only in writing signed by both
Employer and Employee.
15. Entire Agreement. This Agreement contains the entire understanding of
Employer and Employee with respect to all matters described herein. There are no
other agreements, conditions or representations, oral or written, express or
implied with respect thereto. This Agreement supersedes all prior agreements
relating to Employer's employment of Employee.
6
<PAGE> 7
16. Successors and Assigns. Employee shall not assign this Agreement without the
prior written consent of the Chair of Employer's Board of Directors. This
Agreement shall be binding upon, and shall inure to the benefit of Employee and
his heirs and personal representatives, and to Employer and its successors and
assigns.
17. Notices. All notices or other communications to be given under this
Agreement shall be personally delivered or sent by courier service to the
following addresses:
if to Employer
Grand Casinos of Nevada I, Inc.
130 Cheshire Lane
Minnetonka, MN 55305
Attn: Chairman
with a copy to
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, MN 55305
Attn: General Counsel
if to Employee
Stanley M. Taube
17 Cascade Creek Lane
Las Vegas, Nevada 89113
or to such other addresses either party may provide to the other by written
notice given in the manner provided in this Section 17.
18. Waiver. Any waiver by any party to this Agreement with respect to any
provision or incident shall not operate or be construed as a waiver of any other
provision of this Agreement or any other incident.
7
<PAGE> 8
19. Governing Law. This Agreement will be interpreted and enforced in accordance
with the laws of the State of Minnesota, without giving effect to conflict of
law issues.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement effective
as of the date first stated above.
EMPLOYER:
Grand Casinos, Inc.
By: /s/ Lyle Berman
----------------------------
Lyle Berman
Chairman of the Board
EMPLOYEE:
Stanley M. Taube
/s/ Stanley M. Taube
- -------------------------
8
<PAGE> 1
EXHIBIT 10.76
LEASE AGREEMENT
By and Between
BROOKS FAMILY TRUST
AND
NEVADA BROOKS COOK
as
Landlord
and
CLOOBECK ENTERPRISES
AND
GRAND CASINOS NEVADA I, INC.
as
Tenant
<PAGE> 2
TABLE OF CONTENTS
1. PREMISES AND TERM................................................... -1-
1.1. Premises ...................................................... -1-
1.2. Term .......................................................... -2-
1.3. No Representations ............................................ -2-
2. CONSTRUCTION........................................................ -2-
2.1. Approval of Plans and Specifications........................... -2-
2.2. Landlord's Improvement Work ................................... -2-
2.3. Supervising Architect and General Contractor................... -3-
2.4. Completion Bond ............................................... -3-
2.5. Commencement of Tenant's Construction ......................... -3-
2.6. Liability ..................................................... -4-
2.7. Insurance...................................................... -4-
2.8. No subordination of Landlord's Fee Title ...................... -4-
2.9. Notice of Non-Responsibility .................................. -4-
2.10.Liens and Fees ................................................ -5-
2.11.Ownership of Improvements ..................................... -5-
2.12.Land Use Matters .............................................. -5-
3. RENT AND SECURITY DEPOSIT........................................... -6-
3.1. Base Rent...................................................... -6-
3.2. Increase in Base Rent.......................................... -6-
3.3. Place of Payment............................................... -7-
3.4. Security Deposit............................................... -7-
3.5. Interest on Tenant's Obligations; Late Charges................. -8-
4. HOLDING OVER BY TENANT.............................................. -9-
5. FEASIBILITY PERIOD.................................................. -9-
6. USES................................................................ -10-
6.1. Permitted Use.................................................. -10-
6.2. Prohibited Uses................................................ -10-
7. REPRESENTATIONS AND CONVENANTS OF LANDLORD.......................... -10-
7.1. Title.......................................................... -10-
7.2. Condemnation................................................... -10-
7.3. Legal Proceedings.............................................. -11-
7.4. Special Assessments............................................ -11-
7.5. Binding Obligation............................................. -11-
7.6. No Violation of Law............................................ -11-
-i-
<PAGE> 3
7.7. Environmental Matters ........................................ -11-
7.8. Existing Leases .............................................. -11-
7.9. Gaming ....................................................... -11-
8. UTILITIES........................................................... -11-
9. TAXES .............................................................. -12-
9.1. Payment....................................................... -12-
9.2. Contest ...................................................... -12-
9.3. Substitute Taxes ............................................. -13-
9.4. Installment Payments.......................................... -13-
10. INSURANCE........................................................... -13-
10.1. Fire Insurance ............................................... -13-
10.2. Liability Insurance .......................................... -13-
10.3. Worker's Compensation ........................................ -14-
10.4. Policy Requirements .......................................... -14-
11. REPAIRS............................................................. -14-
12. ALTERATIONS ........................................................ -15-
12.1. Landlord Consent.............................................. -15-
12.2. Permits ...................................................... -15-
12.3. Tenant's Architect ........................................... -15-
12.4. Construction ................................................. -15-
12.5. Inspection ................................................... -15-
12.6. Liens ........................................................ -16-
12.7. Insurance .................................................... -16-
13. EQUIPMENT, FIXTURES AND SIGNS....................................... -16-
13.1. Equipment and Fixtures ....................................... -16-
13.2. Permitted Signage ............................................ -16-
14. DAMAGE BY FIRE OR OTHER CASUALTY.................................... -17-
14.1. Restoration .................................................. -17-
14.2. Use of Insurance Proceeds .................................... -17-
14.3. Additional Cost of Restoration ............................... -17-
14.4. No Rent Abatement ............................................ -18-
15. CONDEMNATION........................................................ -18-
15.1. Termination .................................................. -18-
15.2. Partial Condemnation.......................................... -18-
15.3. Payment of Award.............................................. -18-
15.4. Harmon Avenue ................................................ -19-
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<PAGE> 4
16. LIABILITY AND INDEMNIFICATION....................................... -19-
16.1. Tenant Indemnity ............................................. -19-
16.2. Notice of Indemnity .......................................... -19-
16.3. Survival ..................................................... -20-
17. RIGHT OF INSPECTION ................................................ -20-
18. WARRANTY OF TITLE AND QUIET ENJOYMENT............................... -20-
18.1. Ouiet Enjoyment............................................... -20-
18.2. Encumbrances.................................................. -20-
18.3. Transfer by Landlord.......................................... -21-
19. WAIVER OF SUBROGATION............................................... -22-
20. FORCE MAJEURE....................................................... -22-
21. NO BROKERS.......................................................... -23-
22. LANDLORD-TENANT RELATIONSHIP ....................................... -23-
23. ASSIGNMENT AND SUBLETTING........................................... -23-
23.1. Assignment and Subletting .................................... -23-
23.2. Assignment to Affiliate ...................................... -23-
23.3. No Release or Novation ....................................... -23-
23.4. Encumbrance or Assignment as Security......................... -24-
24. NOTICES AND PAYMENTS ............................................... -31-
25. DEFAULT............................................................. -33-
25.1. Events of Default ............................................ -33-
25.2. Landlord's Remedies........................................... -34-
26. HAZARDOUS MATERIALS ................................................ -35-
26.1. Covenant...................................................... -35-
26.2. Right of Entry................................................ -36-
26.3. Indemnity..................................................... -36-
26.4. Hazardous Substances Defined.................................. -36-
26.5. Landlord's Legal Obligations.................................. -37-
27. MISCELLANEOUS....................................................... -37-
27.1. Termination................................................... -37-
27.2. Captions...................................................... -37-
27.3. Meanings...................................................... -37-
- iii -
<PAGE> 5
27.4. Successors and Assigns Entire Agreement .................... -37-
27.5. Entire Agreement............................................ -38-
27.6. Time........................................................ -38-
27.7. Severability................................................ -38-
27.8. Counterparts................................................ -38-
27.9. Attorney's Fees............................................. -38-
27.10. Memorandum of Lease......................................... -38-
27.11. Governing Law............................................... -38-
28. GAMING PROVISION................................................... -38-
28.1 Cooperation and Compliance by Landlord...................... -38-
28.2 Denial...................................................... -39-
28.3 Purchase Right.............................................. -39-
29. ARBITRATION........................................................ -40-
30. GUARANTY........................................................... -42-
31. LANDLORD'S SECURITY INTEREST....................................... -42-
31.1. Grant of Security Interests in Project Parcels.............. -42-
31.2. Grant of Security Interests in Furniture, Fixtures and
Equipment................................................... -43-
31.3 Perfection and Priority..................................... -44-
31.5 Further Assurances.......................................... -45-
32. TENANT'S OPTION TO PURCHASE THE LEASED PREMISES.................... -45-
33. BINDING OBLIGATION................................................. -46-
-iv-
<PAGE> 6
TABLE OF EXHIBITS
Exhibit A The Land
Exhibit B Tenant's Renderings
Exhibit C Title Exceptions
Exhibit D Permitted Conditions
Exhibit E Guaranty
- v -
<PAGE> 7
LEASE AGREEMENT
This Lease Agreement (the "LEASE") is made and entered into by and between
BROOKS FAMILY TRUST and NEVADA BROOKS COOK (collectively, "LANDLORD"), and
CLOOBECK ENTERPRISES, a California corporation, and GRAND CASINOS NEVADA
I, INC., a Minnesota corporation (collectively, "TENANT") as of this 17th day of
June, 1996 (hereinafter, THE "EFFECTIVE DATE")
WITNESSETH:
1. PREMISES AND TERM.
1.1 Premises. In consideration of the obligation of Tenant to pay rent as
hereinafter provided and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant
hereby takes from Landlord, those certain tracts or parcels of land located in
the County of Clark, State of Nevada, and more particularly described on
Exhibit A attached hereto and made a part hereof (the "Land"), together with
any buildings and other improvements erected or to be erected thereon, and
together with all rights, privileges, easements and appurtenances belonging or
in any way pertaining to the Land (all of the foregoing hereinafter
collectively referred to as the "LEASED PREMISES").
The Leased Premises is now the subject of two existing leases -- (i) a
lease dated May 1, 1987 between the Brooks Family Trust and Travelodge
International Incorporated (the "TRAVELODGE LEASE") and (ii) a lease dated May
1, 1992 between the Brooks Family Trust and Moving Forward, Inc. (the "MOVING
FORWARD LEASE"). Subject to the following terms of this paragraph, Landlord
hereby assigns its rights and obligations under the Travelodge Lease and the
Moving Forward Lease (collectively, the "EXISTING LEASES") to Tenant. Tenant
will indemnify and hold Landlord harmless from any claims arising out of any
breach of the Existing Leases by Tenant. All rents accruing and received under
the Existing Leases from and after the Effective Date during the term of this
Lease shall be paid to Tenant; provided, however, that rents received by Tenant
pursuant to the Existing Leases shall first be applied against any rents which
became due and payable during the thirty (30) day period preceding the
Effective Date, and the same shall be paid to Landlord. Concurrently herewith,
Landlord shall provide Tenant with a certificate showing any delinquent or past
due rents under the Existing Leases. During the Feasibility Period, as defined
below, it is anticipated that Tenant will attempt to reach an agreement with
the tenants under the Existing Leases allowing Tenant to terminate such leases.
Any buyout amounts or other costs of negotiating such agreements and/or
terminating such leases shall be paid by Tenant. Tenant acknowledges that
Article XXII of the Travelodge Lease grants a right of first refusal to the
tenant thereunder. Unless such right of first refusal is waived by the tenant
under the Travelodge Lease, Landlord shall, promptly after execution of this
Lease, offer the Leased Premises to such tenant in accordance with such right
of first refusal. If such offer is accepted, this Lease shall automatically
terminate and the remaining portion of the Security Deposit, as defined below,
shall be returned to Tenant. Tenant acknowledges that the
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Travelodge Lease contains an early termination provision and that Landlord
has entered into a letter agreement, dated January 3, 1995, with the tenant
under such lease providing for the reimbursement of certain of such tenant's
refurbishment costs in the event of early termination. Any amounts payable
under such lease provision or side letter shall likewise be due and payable by
Tenant. Similarly, Tenant acknowledges that the Travelodge Lease provides for a
maintenance reserve (the "TRAVELODGE RESERVE") which is to be paid to Landlord
upon termination of the Travelodge Lease. All funds held in or payable to the
Travelodge Reserve as of the Effective Date, which the parties agree to be Four
Hundred Thirty-Nine Thousand Four Hundred Forty-Four Dollars and Ninety Cents
($439,440.90), (the "EXISTING RESERVE AMOUNT") shall be the sole and exclusive
property of Landlord, and Tenant shall have no interest therein. Any amounts
added to the Travelodge Reserve after the Effective Date shall be the sole and
exclusive property of the Tenant. In no event shall Tenant terminate either of
the Existing Leases until Tenant's right of termination set forth in Paragraph
5 below expires or is waived by Tenant, and in no event shall Tenant terminate
the Travelodge Lease unless the tenant thereunder releases the Existing Reserve
Amount to Landlord promptly upon such termination.
1.2. Term. The term of this Lease shall commence upon the Effective Date
and shall continue, unless sooner terminated pursuant to the provisions of this
Lease, for ninety-nine (99) years (the "LEASE TERM").
1.3. No Representations. Landlord makes no representations or warranties
concerning the Leased Premises or any matters with respect thereto, except as
expressly stated herein. Except for such representations, Tenant is entering
into this Lease based on its own investigation and analysis of the Leased
Premises.
2. CONSTRUCTION.
2.1. Approval of Plans and Specifications. Landlord has had the
opportunity to review, and Landlord has approved a preliminary site plan and
rendering prepared by Paul Steelman, Ltd. for the hotel/casino and other
related improvements which Tenant intends to be constructed on the Land
(collectively, the "IMPROVEMENTS"). Reductions of such Tenant's Renderings are
attached to this Lease as Exhibit "B" and incorporated herein by this
reference. For purposes of this Lease, "TENANT'S RENDERINGS" means the
above-referenced site plan and rendering and any modifications thereof which
either do not require Landlord's approval or which have been approved or deemed
approved by Landlord in accordance with the terms of this Lease. Tenant shall
deliver to Landlord for approval any material modification of Tenant's
Renderings. Within a period of fifteen (15) days from the date of delivery of
such modified Tenant's Renderings, Landlord shall either approve the same
(which approval shall not be unreasonably withheld, delayed or conditioned and
shall be conclusively presumed if Landlord fails to specify its objections and
reasons therefor within such fifteen (15) day period) or specify its objections
thereto and reasons therefor in detail by written notice delivered to Tenant on
or before the end of said fifteen (15) day period. In the event Landlord shall
specify objections to any modification of Tenant's Renderings hereunder during
the Feasibility Period (as defined in Article 5 below), and if Landlord and
Tenant are unable to resolve such objections by mutual agreement within a
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period of ten (10) days from the date of Tenant's receipt of written
notice of such objections, tenant, at its sole option, may terminate this Lease
by written notice to Landlord within five (5) days after the expiration of such
ten (10) day period, in which event any remaining Security Deposit, as defined
in Section 3.4 below, shall be released to Tenant. If Landlord specifies
objections to a modification of Tenant's Renderings within the Feasibility
Period, and if Tenant does not terminate this Lease pursuant to the preceding
sentence, then Tenant shall promptly revise Tenant's Renderings to fully
accommodate and conform to Landlord's written objections, subject to the terms
of any written agreements between Landlord and Tenant as to the manner in which
any of such objections may be accommodated to the mutual satisfaction of
Landlord and Tenant. Any revision of Tenant's Renderings which is approved by
Landlord shall be signed by Landlord and Tenant and shall be deemed a part
hereof. Notwithstanding the foregoing provisions of this Section 2.1, if
Landlord acts unreasonably or in bad faith in disapproving any modification of
Tenant's Renderings during the Feasibility Period, then, upon termination by
Tenant hereunder, Landlord shall refund to Tenant any Base Rent paid by Tenant
pursuant to Section 3.1 prior to such termination. If Landlord disapproves a
proposed modification of Tenant's Renderings after the Feasibility Period has
expired, and if Tenant claims that Landlord has acted unreasonably in doing so,
Tenant may submit such dispute to binding arbitration pursuant to Article 29
below. Within one hundred eighty (180) days after completion of the
Improvements, Tenant shall deliver a complete set of the as-built plans for the
Improvements to Landlord.
2.2. Landlord's Improvement Work. Landlord shall have no obligation
whatsoever to improve or alter the Land nor to demolish any improvements which
may now be located upon the Land.
2.3. Supervising Architect and General Contractor. Selection of a
supervising architect and general contractor shall be made by Tenant. The
supervising architect shall be a member in good standing of the American
Institute of Architects or any generally recognized similar organization and,
if applicable, the general contractor's financial condition and responsibility
shall be such as to enable Tenant to obtain the completion bond required by the
following Section 2.4.
2.4. Completion Bond. Prior to undertaking any demolition or construction
upon the Leased Premises, Tenant shall provide Landlord with a completion bond
acceptable to Landlord in the amount of the projected costs of constructing the
proposed Improvements, and the amount of such bond shall be increased from
time to time to reflect any increases in the projected costs of such
construction. Tenant shall have the right to name any Leasehold Mortgagee as
co-obligee on any such bond. Similarly, Tenant shall, upon request from
Landlord, name Landlord's assignee and/or lender, if any, as co-obligee on any
such bond. In lieu of such completion bond, Tenant may present to Landlord a
binding written commitment to finance the costs of constructing the Improvements
from a lender which would qualify as a Leasehold Mortgagee under the provisions
of Section 23.4.
2.5. Commencement of Tenant's Construction. Within ninety (90) days after
any material portion of the improvements which are the subject of the Existing
Leases has been
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demolished (other than as a result of fire or other casualty), Tenant
shall commence the construction of the Improvements and thereafter proceed with
such construction substantially in accordance with Tenant's Renderings with all
reasonable diligence and in a good and workmanlike manner.
2.6. Liability. Tenant covenants and agrees that the Improvements shall be
constructed, operated, repaired and maintained without cost or expense to
Landlord and in accordance with the requirements of all laws, ordinances,
codes, orders, rules and regulations of all governmental authorities having
jurisdiction over the Leased Premises and in a good and workmanlike manner.
Tenant agrees to defend, indemnify and hold Landlord, its trustees,
beneficiaries, heirs, successors, assigns, agents, employees and attorneys
harmless from and against any and all cost, liability, expense, damage or
injury resulting from or arising in connection with the construction,
operation, repair and maintenance of the Improvements.
2.7. Insurance. Prior to commencing any demolition or construction on the
Leased Premises, Tenant, its subcontractors and agents, without cost to
Landlord, shall obtain Builder's Risk Insurance covering such project and
improvements to the full extent of the insurable value thereof, and Tenant
shall cause its contractor to obtain or cause to be obtained Workers'
Compensation Insurance covering all persons employed in connection with such
demolition or construction and with respect to whom death or bodily injury
claims could be asserted against Landlord, Tenant or the Leased Premises.
Tenant shall also obtain General Liability Insurance naming both Landlord and
Tenant as co-insureds for the mutual benefit of Landlord, Tenant and the Leased
Premises. All of the aforementioned policies shall be in the form and shall
contain the liability limits specified in Article 10 hereof. Tenant and its
contractors and subcontractors shall have the right, however, to self-insure
with respect to its workers' compensation insurance obligations to the extent
permitted by applicable law.
2.8. No subordination of Landlord's Fee Title. Landlord shall not be
required to subordinate Landlord's fee interest in the Leased Premises or its
reversionary interest in the buildings and improvements to be constructed
thereon to any lien securing Tenant's construction loan or other financing.
2.9. Notice of Non-Responsibility. Landlord may, at Landlord's is sole
discretion, record a Notice of Non-Responsibility to assure that Landlord's
interest in the Leased Premises cannot be encumbered by mechanics' liens or
materialmen's liens arising from Tenant's activity upon the Leased Premises.
Further, with respect to any work after Tenant's initial construction which
costs in excess of One Million Dollars ($1,000,000) (which amount shall
increase annually during the Lease Term by the same percentage as Base Rent is
increased pursuant to Section 3.2 below), at least ten (10) days before any
such work is commenced (or such additional time as may be reasonably required
by Landlord in the future to reflect changes in the law with respect to posting
and/or recording notices of non-responsibility), Tenant shall notify Landlord
of Tenant's intention to commence any such work.
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2.10. Liens and Fees. Tenant shall at all times indemnify, save and
hold harmless Landlord and Landlord's trustees, beneficiaries, heirs,
successors, assigns, agents, employees and representatives and the Leased
Premises against all liens or claims which may ripen into liens, and against all
attorneys' fees and other costs and expenses, growing out of or incurred by
reason of or with respect to any demolition or construction done by or for
Tenant on the Leased Premises. Should Tenant fail to fully discharge any such
lien or claim, or in the alternative fail to post a bond sufficient to discharge
such lien or claim within thirty (30) days after written request therefor by
Landlord, then Landlord, at its option, may pay the same or any part thereof.
Landlord shall be the sole judge of the legality of such lien or claim and the
sufficiency of any bond. All amounts so paid by Landlord, together with interest
thereon at the rate of fifteen percent (15%) per annum from the time of payment
until repayment, shall be repaid by Tenant as additional rent on the next rent
payment date after notice of payment by Landlord.
2.11. Ownership of Improvements. During the term of this Lease all
movable trade fixtures and equipment (collectively, "TENANT'S PERSONAL
PROPERLY") shall remain and continue to be the property of Tenant and may be
replaced at any time and from time to time during the term of this Lease.
Tenant's Personal Property may be removed at the expiration or earlier
termination of this Lease if Tenant repairs any damage to the Improvements
caused by such removal and the removal does not affect or in any way weaken the
structural integrity of the Improvements; provided that no such repair shall be
required, and the structural integrity of the Improvements may be affected or
weakened, if Landlord requires that the Improvements be removed from the Land,
and if Tenant removes the Improvements as provided in this Section 2.11. Title
to the Improvements constructed on the Leased Premises shall be vested in
Tenant. All such Improvements shall remain on the Leased Premises and
automatically become the property of Landlord upon the expiration or earlier
termination of this Lease unless Landlord gives written notice to Tenant that
any or all such Improvements are to be removed, in which case Tenant shall
remove the same and regrade the Land to a finish grade in accordance with
Landlord's reasonable requirements, at Tenant's sole cost and expense, within
sixty (60) days of the expiration or earlier termination of this Lease or notice
from Landlord, whichever is later, as to that portion of the Leased Premises
upon which such Improvement to be removed is situated. If Tenant fails to remove
any Improvement, as required by this Paragraph 2.11, then Landlord may undertake
and complete such removal, and the cost of such removal, together with interest
thereon at the rate of fifteen percent (15%) per annum, shall be payable on
demand from Tenant to Landlord.
2.12. Land Use Matters. Provided Landlord's written consent has first
been obtained (which consent will not be withheld if Tenant demonstrates to
Landlord's reasonable satisfaction that the matters described in or contemplated
by this paragraph would not at any time materially adversely affect Landlord's
use or development of the Leased Premises upon the expiration or earlier
termination of this Lease and which consent will be conclusively presumed if
Landlord fails to specify its objections and reasons therefor within thirty (30)
days after Landlord's receipt of a written request therefor from Tenant), and
provided, further, that no Event of Default then exists, Tenant, at its sole
expense and without cost or expense to Landlord, may enter into any agreement
(including without limitation any reciprocal easement agreement and lot tie
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agreements) restricting the use or alienation of the Leased Premises or granting
easements over the Leased Premises and may apply for and obtain subdivisions,
parcel maps, use permits or zoning changes or variances with respect to the
Leased Premises. Subject to such requirement of prior written consent, and
subject to Landlord's right, at Landlord's cost, to have Landlord's planning and
zoning counsel participate with Tenant in all such matters, Landlord shall, upon
notice of request by Tenant, join with Tenant as necessary in any reciprocal
easement agreement or lot tie agreements and in applications to obtain such
subdivisions, parcel maps, use permits or use or zoning changes or variances,
all at Tenant's expense and without cost or expense to Landlord. Subject to the
conditions set forth in the preceding sentence, Landlord shall cooperate with
Tenant's efforts to obtain entitlements for the development of Tenant's
Improvements provided that such cooperation is without additional cost or
expense to Landlord. Landlord specifically agrees to make such usual and
customary dedications of land to Clark County as may be required as a condition
to the approval of Tenant's project; provided that no such dedication shall
result in a reduction in rent payable by Tenant hereunder.
3. RENT AND SECURITY DEPOSIT.
3.1. Base Rent.
3.1.1. Phase I. For the period beginning upon the Effective Date
and ending upon the date which immediately precedes the earlier of (i) the date
which is eighteen (18) months after the Effective Date, or (ii) the date upon
which a certificate of occupancy is issued with respect to the hotel/casino
project which Tenant intends to construct upon the Leased Premises (the
"Project"), or (iii) October 31, 1997 (the earlier of such three (3) dates being
sometimes referred to herein as the "PHASE II COMMENCEMENT DATE"), Tenant
shall pay a base rent of NINE HUNDRED FORTY-FIVE THOUSAND AND NO/100 DOLLARS
($945,000.00) per annum ($78,750.00 per month) (the "PHASE I BASE RENT").
3.1.2. Phase II. For the period beginning upon the Phase II
Commencement Date and continuing until an adjustment is made pursuant to Section
3.2 below, Tenant shall pay a base rent of TWO MILLION AND N0/100 DOLLARS
($2,000,000.00) per annum ($166,667.00 per month) (the "PHASE II BASE RENT").
The Phase I Base Rent and the Phase II Base Rent are sometimes referred to
herein collectively as "BASE RENT".
Base Rent shall be paid to Landlord in lawful money of the United States on the
first day of each calendar month during the Term of this Lease, without any
other reduction, deduction or setoff, provided that the first installment of
Base Rent shall be due and payable upon the Effective Date. Base Rent for any
partial calendar month during which the Term commences or terminates shall be
prorated based on the actual number of days in such month.
3.2. Increases in Base Rent. Beginning on the first day of the calendar
month in which the first annual anniversary of the Phase II Commencement Date
occurs, and upon the same day of each year thereafter during the Lease Term
(hereinafter, an "ADJUSTMENT DATE"), the Base Rent shall be increased to an
amount equal to the product of the Base Rent payable during the
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immediately preceding calendar month multiplied by the Cost of Living Factor.
The "COST OF LIVING FACTOR" for any Adjustment Date during the Term of this
Lease shall be a fraction whose numerator is the index figure stated as the
Consumer Price Index for All Urban Consumers (CPI-U; U.S. City Average; All
Items 1982-84=100) published by the Bureau of Statistics of the United States
Department of Labor (the "INDEX") for the month in which the Adjustment Date
occurs (or the most recent available Index if the Index for the month in which
the Adjustment Date occurs is not available) and whose denominator is the Index
in effect on the Phase II Commencement Date, in the case of the first adjustment
hereunder, or the Index used for the immediately preceding Adjustment Date, in
the case of all adjustments after the first adjustment hereunder. Regardless of
the actual Cost of Living Factor, however, the Base Rent shall be increased each
year hereunder by not less than three percent of the Base Rent payable during
the immediately preceding year but not by more than five percent of such Base
Rent. If the Index is discontinued, the Cost of Living Factor shall be based on
comparable statistics on changes in the purchasing power of the consumer dollar
for the applicable periods, as published by a responsible financial periodical
report of a recognized governmental or private authority then generally
recognized for such purposes, all as selected by Landlord.
3.3. Place of Payment. All payments of Base Rent and other sums due
from Tenant to Landlord pursuant to this Lease (sometimes collectively referred
to herein as "RENT") shall be made to Landlord as the same shall become due in
lawful money of the United States of America at the address specified in Section
24 of this Lease, or to such other party or at such other address as hereinafter
may be designated by Landlord by written notice delivered to Tenant at least ten
(10) days prior to the next ensuing monthly rental payment date.
3.4. Security Deposit. Concurrently with the execution of the Lease,
Tenant shall deposit the total sum of ONE MILLION NINE HUNDRED SEVENTEEN
THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($1,917,500.00) as a "SECURITY
DEPOSIT". ONE MILLION FOUR HUNDRED SEVENTEEN THOUSAND FIVE HUNDRED AND N0/100
DOLLARS ($1,417,500.00) of such sum (together with interest thereon, the
"PHASE I SECURITY DEPOSIT") may be deposited in the form of cash or an
irrevocable standby letter of credit which is reasonably acceptable to
Landlord, or any combination thereof as Tenant may elect in its sole
discretion, and Tenant shall have the right from time to time to substitute
one such form of deposit for the other. To the extent that the Phase I
Security Deposit is paid in cash, the same shall be deposited with and held by
Nevada Title Insurance Company (the "ESCROW AGENT"). The Escrow Agent shall
invest such funds in U.S. Government Money Market Funds as instructed by Tenant
(so long as such funds remain readily available for disbursement in accordance
with this Lease) with the interest being reinvested, and monthly sums equal to
the Phase I Base Rent shall be disbursed to Landlord by the Escrow Agent from
the Phase I Security Deposit as such Base Rent payments come due. To the extent
that the Phase I Security Deposit is in the form of a letter of credit, the
same shall be delivered to Landlord; provided that Landlord shall not draw upon
the Letter of Credit to pay rent due under this Lease unless the same is
delinquent and is not paid to Landlord within five (5) days after written
notice of such delinquency is given to Tenant. Any cash portion of the Phase I
Security Deposit remaining in the escrow account upon the Phase II Commencement
Date which is not required to be paid to Landlord shall be released
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to Tenant. Similarly, if Tenant has delivered a letter of credit to Landlord in
satisfaction of its obligations with respect to the Phase I Security Deposit,
and if Tenant has not defaulted in the performance of its obligations under this
Lease, the same shall be returned to Tenant promptly following the Phase II
Commencement Date. The remaining portion of the Security Deposit, being FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00)(the "PHASE II SECURITY
DEPOSIT") shall be deposited with Landlord by cashier's check or by wire
transfer to Landlord's account. Landlord shall have no obligation to pay
interest with respect to such funds (except as provided in the following
sentence) nor to segregate such funds from its other accounts and assets. The
Phase II Security Deposit, together with interest thereon in the amount of Five
Hundred Thousand Dollars ($500,000) (for a total amount of One Million Dollars
($1,000,000), shall be credited against one-half of each monthly payment of Base
Rent coming due during the eleventh (11th) year after the Phase II
Commencement Date and thereafter until such amount has been fully credited.
If there exists an Event of Default under this Lease, including but not
limited to the provisions relating to the payment of rent, Landlord may, but
shall not be required to, use, apply or retain all or any part of the Security
Deposit for the payment of any rent or any other sum in default, or for the
payment of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default or to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default,
including without limitation, reasonable costs and attorneys' fees incurred by
Landlord to recover possession of the Leased Premises upon a default by Tenant
hereunder. If any portion of said deposit is so used or applied, Tenant shall,
upon demand therefor, deposit cash with the Escrow Agent, or, in the case of the
Phase I Security Deposit, a letter of credit with Landlord in an amount
sufficient to restore the security deposit to its original amount and Tenant's
failure to do so shall constitute a default hereunder by Tenant. Tenant shall
have no obligation, however, to replace that portion of the Phase I Security
Deposit which is disbursed by the Escrow Agent to Landlord as payment for Base
Rent pursuant to the preceding paragraph.
3.5. Interest on Tenant's Obligations; Late Charges.
3.5.1. Interest. Any amount due from Tenant to Landlord which is
not paid within ten (10) days after the date due shall bear interest at fifteen
percent (15%) from the date such payment is due until paid, but the payment of
such interest shall not excuse or cure any default by Tenant under this Lease.
3.5.2. Late Charge. In the event Tenant is more than fifteen
(15) days late in paying any installment of rent due under this Lease,
Tenant shall pay Landlord a late charge equal to five percent (5%) of the
delinquent installment of rent. The parties agree that the amount of such late
charge represents a reasonable estimate of the cost and expense that would be
incurred by Landlord in processing each delinquent payment of rent by Tenant,
but the payment of such late charge shall not excuse or cure any default by
Tenant under this Lease. The parties further agree that the payment of late
charges and the payment of interest provided for in this Section 3.5 are
distinct and separate from one another in that the payment of interest is
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to compensate Landlord for the use of Landlord's money by Tenant, while the
payment of a late charge is to compensate Landlord for the additional
administrative expense incurred by Landlord in handling and processing
delinquent payments.
4. HOLDING OVER BY TENANT. Should Tenant or any assignee, sublessee or
licensee of Tenant fail to vacate the Leased Premises or any part thereof
after the expiration or earlier termination of the Lease Term, unless otherwise
agreed in writing, such failure to vacate shall constitute and be construed as
a tenancy from month-to-month upon the same terms and conditions as set forth
in this Lease; provided, however, that Tenant shall pay as Base Rent during any
holding over period, an amount equal to one and 50/100 (1.50) times the Base
Rent payable immediately preceding the expiration of the Lease Term. Nothing
contained in this Article 4 shall be construed as a consent by Landlord to any
holding over by Tenant, and Landlord expressly reserves the right to require
Tenant to surrender possession of the Leased Premises upon the expiration of
the Lease Term or upon the earlier termination hereof and to assert any remedy
in law or equity to evict Tenant and/or collect damages in connection with such
holding over.
5. FEASIBILITY PERIOD. Tenant shall have the right to terminate the Lease
at any time during the first ninety (90) days after the Effective Date (the
"FEASIBILITY PERIOD"), by written notice to Landlord, if Tenant, acting
reasonably and in good faith, determines that (i) the physical condition of the
Leased Premises is not suitable for the construction and operation of Tenant's
proposed Project, including, but not limited to, unsatisfactory environmental
conditions; (ii) Tenant will be unable, despite Tenant's best efforts, to obtain
the zoning and other governmental entitlements which are necessary for the
construction and use of Tenant's proposed Project; (iii) Tenant is unable,
despite Tenant's best efforts, to reach an agreement with the tenant under the
Moving Forward Lease on terms which are satisfactory to Tenant, which will allow
Tenant to terminate such lease in a timely manner; or (iv) Tenant is unable,
despite Tenant's best efforts, to obtain a leasehold title insurance policy
through Escrow Agent insuring Tenant's interest in the Leased Premises subject
only to standard title policy exceptions and to other title exceptions to which
Tenant does not reasonably object (hereinafter, "PERMITTED EXCEPTIONS"); or (v)
Tenant is unable to obtain estoppel certificates from the tenants under the
Existing Leases; or (vi) the Leased Premises is determined to be located in a
flood hazard area. Any notice of termination hereunder shall set forth in detail
the reasons for such termination. Upon any termination hereunder and payment of
Base Rent owing through and including the date of Tenant's termination. Tenant
shall assign the existing Leases to Landlord, Landlord shall return the Phase II
Security Deposit and any Phase I Security Deposit letter of credit to Tenant and
instruct the Escrow Agent to return the remaining cash portion of the Phase
I Security Deposit to Tenant, and all other obligations accruing under the Lease
after the date of termination shall be of no further force or effect. Tenant may
also terminate this Lease during the Feasibility Period for any other reason,
but, upon any termination by Tenant prior to the expiration of the Feasibility
Period for a reason other than those listed in items (i) through (vi) above,
Tenant shall assign the Existing Leases to Landlord, the Escrow Agent shall
immediately disburse the remaining portion of the Phase I Security Deposit to
Landlord (or, if the Phase I Security Deposit is in the form of a letter of
credit and if Tenant does not replace such letter of credit by cash paid to
Landlord, Landlord shall draw the remaining amount of the Phase I Security
Deposit), Landlord shall retain the Phase
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II security deposit and all other obligations accruing under the Lease after the
date of termination shall be of no further force or effect.
6. USES.
6.1. Permitted Use. Tenant shall have the right to develop the Leased
Premises for any lawful use. Landlord specifically agrees that Tenant may
develop and use a portion of the Leased Premises as a "Right to Use Time Share"
project. Tenant shall have the right to use and develop the Leased Premises in
conjunction with adjoining property, subject to Article 31 below. If any
governmental license or permit is required for the lawful conduct of any
business or other activity carried on by Tenant in the Leased Premises, and if
the failure to obtain such license or permit would affect Landlord, Tenant shall
procure and maintain such license or permit so long as the same is so required,
make such license or permit available for inspection, if practicable, by
Landlord and comply at all times with all terms and conditions thereof
6.2. Prohibited Uses. Tenant covenants and agrees that it will not use
or suffer or permit any person or persons to use the Leased Premises or any part
thereof for any use or purpose in violation of the laws of the United States of
America or the laws, ordinances, regulations and requirements of the State of
Nevada, Clark County or other lawful authorities having jurisdiction. Nothing
contained herein shall be deemed to prevent Tenant from contesting the
application or interpretation of such laws or the determinations of any such
lawful authority so long as (i) Landlord is given written notice thereof prior
to the commencement of any such contest; (ii) such contest is prosecuted by
Tenant with all reasonable diligence; and (iii) Tenant provides Landlord with
such assurances or security as Landlord may reasonably require so that neither
the Leased Premises nor Landlord's rights under this Lease may be adversely
affected by such contest.
Tenant shall promptly upon demand by Landlord reimburse Landlord for
any additional premium charged for any insurance policy by reason of Tenant's
failure to comply with the provisions of this Article 6 and for any other costs
reasonably incurred by Landlord in enforcing the provisions of this Section.
7. REPRESENTATIONS AND COVENANTS OF LANDLORD. As of the Effective
Date of this Lease, Landlord represents, warrants and covenants to Tenant as
follows:
7.1. Title. That Landlord has good and marketable fee simple title to
the Leased Premises, subject to those exceptions which are set forth in Exhibit
"C" and such other matters as would be disclosed by an ALTA survey of the Leased
Premises, possesses full power and authority to deal therewith in all respects
and no other party has any right or option thereto or in connection therewith;
7.2. Condemnation. That, except as provided in Section 15.4, there
are no pending or, to the knowledge of Landlord, threatened condemnation
proceedings or actions affecting the Leased Premises;
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7.3. Legal Proceedings. That there are no pending or, to the knowledge
of Landlord, threatened actions or legal proceedings which could adversely
affect the Leased Premises or Tenant's rights under this Lease (Landlord has
disclosed to Tenant that a personal injury action has been filed against
Landlord and the tenant under the Travelodge Lease with respect to a
slip-and-fall type accident which is alleged to have occurred on public property
adjacent to the Travelodge premises and Landlord shall hold Tenant harmless from
any liability or expense in connection with such action);
7.4. Special Assessments.
(a) With the exception of Assessment Districts 97A and 97B
which are described in Article 9 below, that there are no unpaid special
assessments for sewer, sidewalk, water, paving, electrical or power improvements
or other capital expenditures or improvements, matured or unmatured;
(b) Landlord is not delinquent in the payment of assessments due
with respect to Assessment Districts 97A and 97B.
7.5. Binding Obligation. That this lease and the consummation of the
transactions contemplated hereby is valid and binding upon Landlord (and the
individuals executing this Lease on behalf of Landlord represent and warrant
that they are authorized to so act) and does not constitute a default (or an
event which with notice or passage of time or both will constitute default)
under any contract to which Landlord is a party or by which Landlord is bound;
7.6. No Violation of Law. That Landlord has not received notice nor has
Landlord any knowledge of any violation of any law, regulation, ordinance, order
or other requirement of any governmental authority having jurisdiction over or
affecting any part of the Leased Premises;
7.7. Environmental Matters. Landlord has no actual knowledge of any
noncompliance or violation of local, state or federal environmental laws related
to the Leased Premises;
7.8. Existing Leases. The copies of the Existing Leases furnished to
Tenant by Landlord are true, correct and complete copies of such leases, and
Landlord is not aware of any default by Landlord or by either of the tenants
under the Existing Leases; and
7.9. Gaming. Neither Landlord nor, to the best of Landlord's knowledge
(without investigation), any person or entity associated with Landlord has ever
engaged in any conduct or practices which any of the foregoing persons should
reasonably believe would cause Landlord to be denied any gaming or other
governmental approval which may be required for Tenant to operate its business
upon the Leased Premises.
8. UTILITIES. Tenant shall pay all charges incurred for the use of
utility services at the Leased Premises including, without limitation, gas,
electricity, water, sanitary sewer, storm sewer, cable television, and
telephone. If any of such charges are not separately assessed against the
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Leased Premises, Tenant shall pay its pro rata share of such charges, as
reasonably determined by Landlord, within ten (10) days after receipt of written
demand therefor from Landlord. Tenant shall pay all utility connection charges,
including, without limitation, any sewer "hook-up" fees and similar charges.
Tenant shall be entitled to any credit against such fees and charges which may
be allowed by the utility provider for existing sewer "equivalent residential
units" ("ERU's") at the Leased Premises.
9. TAXES, ASSESSMENTS AND OTHER GOVERNMENTAL IMPOSITIONS.
9.1. Payment. Subject to the following sentence, Tenant shall pay,
within thirty (30) days after written demand from Landlord, all real estate
taxes, assessments (both general and special) and other governmental impositions
which are levied against the Leased Premises, specifically including, without
limitation, all payments due with respect to the Las Vegas Strip beautification
project Assessment District Nos. 97A and B; provided that Tenant shall have no
obligation to pay any of such taxes, assessments and impositions more than ten
(10) days prior to the date the same are due to the taxing authority, and
provided, further, that to the extent the tenants under the Existing Leases are
required to pay the same, compliance with such leases shall constitute
compliance hereunder. Tenant's obligations under this Section 9.1 shall extend
only to taxes, assessments and impositions which are properly allocable to the
Lease Term. Any such tax, assessment, imposition or other similar expense which
is properly allocable to any period prior to the Effective Date shall be the
obligation of the tenants under the Existing Leases.
9.2. Contest. Tenant may, if it shall so desire, contest the validity
or amount of any tax or assessment against the Leased Premises, in which event
Tenant may defer the payment thereof during the pendency of such contest if
applicable law so permits; provided, however, that Tenant shall not allow any
tax lien to be foreclosed on the Leased Premises, and, unless such tax is paid
under protest, not later than ten (10) days prior to the date the same shall
become delinquent, Tenant shall have (i) deposited with a bank or trust company
acceptable to Landlord, an amount sufficient to pay such contested item(s)
together with the interest and penalties thereon (as reasonably estimated by
Landlord) with written instructions to said bank or trust company to apply such
amount to the payment of such item(s) when the amount thereof shall be finally
fixed and determined (with the remainder to be paid to Tenant), or (ii) provided
Landlord with other reasonably acceptable security. Landlord will, at the
request of Tenant, cooperate with Tenant in contesting any such taxes or
assessments; provided, however, there shall be no expense to Landlord in such
cooperation. In the event Landlord is required by law to join in any action or
proceeding taken by Tenant to contest any such taxes or assessments, Tenant
shall indemnify, defend and hold Landlord and Landlord's trustees,
beneficiaries, heirs, successors, assigns, agents, employees and representatives
harmless from any and all costs, fees (including, but not limited to reasonable
attorneys' fees), expenses, claims, judgments, orders, liabilities, losses or
damage arising out of such action or proceeding.
If, at any time, in the judgment of Landlord reasonably exercised, it
shall become necessary so to do, Landlord, after written notice to Tenant, may,
under protest if so requested by Tenant, pay such monies as may be required to
prevent the transfer of the Leased Premises
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to the Clark County Treasurer or the sale of the Leased Premises or any part
thereof, or foreclosure of the lien created thereon by such item, and such
amount shall become immediately due and payable by Tenant to Landlord, together
with interest thereon at the rate of fifteen percent (15%) per annum, and shall
constitute additional rent hereunder, or at Tenant's option and at Tenant's sole
cost and expense, in lieu thereof, Tenant shall obtain lien release bonds in
amounts equal to the claims of any such liens or as otherwise required by
applicable law to obtain the full release of such liens.
9.3. Substitute Taxes. Notwithstanding anything herein to the contrary,
if at any time during the Lease Term there shall be levied or assessed in
substitution of real estate taxes, in whole or in part, a tax, assessment or
governmental imposition (other than a general gross receipts or income tax) on
the rents received from the Leased Premises or the rents reserved herein, and
said tax, assessment or governmental imposition shall be imposed upon Landlord,
Tenant shall pay same as hereinabove provided, but only to the extent that such
new tax, assessment or governmental imposition is a substitute for real estate
taxes previously imposed.
9.4. Installment Payments. Notwithstanding anything herein to the
contrary, if at any time during the Lease Term any assessment (either general or
special) is levied upon or assessed against the Leased Premises or any part
thereof, and such assessment may be paid in installments, and if Tenant elects
to pay such assessment in installments, Tenant's obligation under this paragraph
to pay such assessment shall be limited to the amount of such installments (plus
applicable interest thereon charged by the taxing authority, if any) which
become due during the Lease Term.
10. INSURANCE.
10.1. Fire Insurance. Tenant shall maintain so called "all risk" fire
and extended coverage insurance (including vandalism and malicious mischief
insurance, earthquake insurance and flood insurance) on the Improvements, with a
limit of or in an amount not less than one hundred percent (100%) of the
replacement value thereof, less the cost of excavations, foundation, footings
and underground tanks, conduits, pipes, pilings and other underground items.
Payments for losses shall be made to a third party escrow or construction
control account which is reasonably acceptable to Landlord and Tenant (and, if
applicable, any Leasehold Mortgagee named as loss payee hereunder), and shall be
disbursed from such account to Tenant and Tenant's contractors to pay for the
restoration of the Improvements in accordance with the provisions of this Lease.
Tenant may include the holder of any Leasehold Mortgage as a loss payee provided
that the proceeds of such insurance required hereunder shall be used for the
repair and reconstruction of the Improvements, subject only to conditions
permitted pursuant to Section 23.4. Any such Leasehold Mortgagee which is named
as loss payee shall be deemed an acceptable construction control escrow for
purposes of this Section 10.1.
The full replacement value of the items to be insured under this
Section 10.1 shall be determined by the company issuing the insurance policy at
the time the policy is initially obtained. Not more frequently than once every
year, Landlord shall have the right to notify
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Tenant that it elects to have the replacement value redetermined by the
insurance company. The redetermination shall be made promptly and in accordance
with the rules and practices of the Board of Fire Underwriters or a like board
recognized and generally accepted by the insurance company, and each party shall
be promptly notified of the results by the company. The insurance policy shall
be adjusted according to the redetermination.
10.2. Liability Insurance. Tenant shall also insure against property
damage and public liability arising by reason of occurrences on or about the
Leased Premises by maintaining a policy or policies of commercial general
liability insurance including contractual liability coverage insuring against
the tort liabilities assumed under this Lease, on an "occurrence" basis, with a
primary liability limit of not less than ONE MILLION AND NO/100 DOLLARS
($1,000,000.00), and an excess coverage limit of not less than FORTY-NINE
MILLION DOLLARS ($49,000,000). Not more frequently than once each two (2) years,
if, in the opinion of Landlord's lender or of the insurance broker retained by
Landlord, the amount of public liability and property damage insurance coverage
at that time is not adequate, Tenant shall increase the insurance coverage as
required by Landlord's lender or as may be reasonably required by Landlord's
insurance broker.
10.3. Worker's Compensation. Tenant shall maintain (at its sole cost
and expense) workers' compensation and employers' liability insurance covering
all of its employees as required of the laws of the State of Nevada. Tenant
shall have the right to self-insure with respect to such required coverage to
the extent permitted by applicable law.
10.4. Policy Requirements. Except for workers' compensation insurance,
all insurance policies required to be maintained by Tenant hereunder shall be
with responsible insurance companies, authorized to do business in the State of
Nevada if required by law, and, except for workers' compensation policies, shall
name Landlord as an additional insured or, with respect to property insurance to
be maintained pursuant to Section 10. 1 above, loss payee, as its interests may
appear, and shall provide for cancellation only upon thirty (30) days prior
written notice to Landlord. Except for workers' compensation insurance, Tenant
shall evidence all insurance coverage by delivering to Landlord, prior to taking
possession of the Land, and thereafter from time to time upon request by
Landlord, certificates issued by the insurance companies, if any, underwriting
such risks. Except for workers' compensation insurance, Tenant shall, at least
ten (10) days prior to the expiration of any such policy, furnish Landlord with
renewals or "binders" thereof or certificates evidencing the same, or Landlord
may order such insurance and charge the cost thereof to Tenant, which amount
shall be payable by Tenant upon demand as additional rent, together with
interest thereon at the rate of fifteen percent (15%) per annum. With respect to
workers' compensation insurance, Tenant shall furnish Landlord with reasonable
evidence that Tenant has complied with its obligations under this Lease.
11. REPAIRS. Tenant shall take good care of the Leased Premises (including
the Improvements constructed by Tenant) during the Lease Term and shall maintain
the same in a first class condition and state of repair, including repairs to
the interior, exterior and structure, it being understood that Landlord shall
not be required to make any repairs to the Leased
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Premises during the Lease Term. At the end or other termination of this Lease,
and subject to Section 2.11 and Section 14.1 of this Lease, Tenant shall deliver
up the Land with the Improvements thereon, in good repair and condition,
ordinary wear and tear, depreciation and obsolescence being excepted.
12. ALTERATIONS. Tenant shall have the right to make, at its sole
cost and expense, additions, alterations and changes (hereinafter referred to as
"ALTERATIONS") in or to the Improvements, provided Tenant shall not then be in
default in the performance of any of Tenant's covenants or agreements in this
Lease, and subject to the following conditions:
12.1. Landlord Consent. No Alterations of any kind which would cause
the Improvements to materially deviate from Tenant's Renderings approved by
Landlord shall be made without the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed and shall be conclusively
presumed to have been given if objections and reasons therefor are not given by
Landlord within fifteen (15) days after written request from Tenant. Landlord's
review and approval of Tenant's plans and specifications shall be limited to the
effect of the subject Alteration on the exterior appearance and site plan of the
Improvements.
12.2. Permits. No Alterations shall be undertaken until Tenant shall
have procured and paid for, so far as the same may be required, from time to
time, all required permits and authorizations of Clark County and other
governmental authorities having jurisdiction.
12.3. Tenant's Architect. Any structural Alteration which costs in
excess of One Million Dollars ($1,000,000) (which amount shall increase annually
during the Lease Term by the same percentage as Base Rent is increased pursuant
to Section 3.2 above) shall be conducted under the supervision of an architect
(otherwise qualified under Section 2.3 above) or engineer selected by Tenant and
no such Alteration shall be made except in accordance with detailed plans and
specifications prepared and approved in writing by such architect or engineer.
Any and all such Alterations shall conform, in all material respects, to the
Tenant Renderings approved by Landlord.
12.4. Construction. All Alterations shall be pursued promptly to
completion and shall be done in a good and workmanlike manner and in compliance
with all applicable permits and authorizations and building and zoning laws and
with all other laws, ordinances, orders, rules, regulations and requirements of
all federal, state and local governments, departments, commissions, boards and
officers.
12.5. Inspection. During construction of the Improvements, and subject
to applicable laws and to Tenant's security policies, Landlord shall have the
right to go upon and inspect the Improvements at all reasonable times and upon
reasonable notice and shall have the right to post and keep posted thereon
notices of non-responsibility or such other notices which Landlord may deem to
be proper for the protection of Landlord's interest in the Leased Premises in
such a manner as not to interfere with Tenant's construction.
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12.6. Liens. Tenant shall indemnify, defend, satisfy and hold harmless
Landlord and Landlord's trustees, beneficiaries, heirs, successors, assigns,
agents, employees and representatives from and against all claims, reasonable
attorneys' fees and other costs and expenses growing out of or incurred by
reason of or with respect to liens for labor or materials supplied or claimed to
be supplied in connection with Alterations done by or for Tenant. Should Tenant
fail to fully discharge any such lien or claim, or in the alternative fail to
post a bond sufficient to discharge such lien or claim within thirty (30) days
after written request therefor by Landlord, then Landlord, at its option, may
pay the same or any part thereof and shall be the full judge of the legality of
such lien or claim and the sufficiency of any bond. All amounts paid by
Landlord, together with interest thereon at the rate of fifteen percent (15%)
per annum from the time of payment until repayment, shall be repaid by Tenant as
additional rent on the next rent payment date after notice of payment by
Landlord.
12.7. Insurance. Prior to making any material Alterations to any
building or work of improvement, Tenant and Tenant's subcontractors and agents
shall obtain Workers' Compensation and Builder's Risk and Liability Insurance in
such amounts and form as required by Section 2.7 hereof.
13. EQUIPMENT, FIXTURES AND SIGNS.
13.1. Equipment and Fixtures. Tenant shall have the right to erect,
install, maintain and operate on the Leased Premises such equipment, trade and
business fixtures, and other personal property as Tenant may deem necessary or
appropriate, and such shall not be deemed to be part of the Leased Premises, but
shall remain the property of Tenant, as provided in Section 2.11 above. Any such
installations shall not materially injure or deface the Improvements. At any
time during the Lease Term and within thirty (30) days after termination hereof,
Tenant shall have the right to remove its equipment, fixtures, signs and other
personal property from the Leased Premises provided that Tenant is not then in
default. Tenant's Personal Property may be removed at the expiration or earlier
termination of this Lease if Tenant repairs any damage to the Improvements
caused by such removal and the removal does not affect or in any way weaken the
structural integrity of the Improvements; provided that such repair shall not be
required and the structural integrity of the Improvements may be affected or
weakened, if Landlord requires that the Improvements be removed from the Land,
and if Tenant removes the Improvements pursuant to Section 2.11 above. The
foregoing provisions of this Section 13.1 are subject to Landlord's security
interest in Tenant's "FF&E," as provided in Article 31 below; provided that
nothing herein shall be deemed to limit Tenant's right to dispose of items of
Tenant's Personal Property in the ordinary course of Tenant's business, so long
as Tenant maintains Personal Property which is at all times sufficient for the
operation of the Improvements.
13.2. Permitted Signage. Tenant shall be entitled to such signage as
may be permitted under applicable law. Tenant's rights under this Section 13.2
are subject to Tenant's receipt of any and all necessary governmental approvals,
permits and consents.
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14. DAMAGE BY FIRE OR OTHER CASUALLY.
14.1. Restoration. Except as otherwise provided in this Section 14.1,
Tenant shall repair, at Tenant's cost, any damage to Improvements (including
any damage for which no insurance coverage was obtained or obtainable). In the
event all or any substantial portion of the Improvements shall be damaged or
destroyed in whole or in part by fire or any other casualty such that the cost
to repair and restore the Improvement exceeds ten percent (10%) of the
replacement cost of the Improvements, Tenant shall, at Tenant's option either
(i) proceed diligently to repair or rebuild the Improvements as nearly as
possible to the value, condition, quality and character immediately prior to
such damage or destruction, subject to Tenant's right to alter the same in
accordance with Article 12; or (ii) demolish the Improvements and regrade the
Land to finish grade in accordance with Landlord's reasonable requirements. If
Tenant elects to proceed with option (ii), Tenant shall deliver to Landlord,
prior to such demolition, a cash security deposit in the amount of the annual
Base Rent then payable pursuant to Section 3.1 and 3.2 above (the "ADDITIONAL
SECURITY DEPOSIT"), and the Guaranty described in Article 30 below shall,
notwithstanding any contrary provision thereof, be reinstated and continue in
full force and effect for the remainder of the Lease Term. Any remaining Phase
II Security Deposit paid to Landlord pursuant to Section 3.4 above and not
previously applied by Landlord as a result of a Tenant Event of Default pursuant
to such Section 3.4, shall be credited against the amount of the Additional
Security Deposit required hereunder provided that such credited amount shall
not include or bear interest nor be credited against Base Rent pursuant to such
Section 3.4. Landlord shall have no obligation to pay interest on the Additional
Security Deposit nor to segregate such funds from its other accounts and assets.
If there exists an Event of Default under this Lease, including but
not limited to the provisions relating to the payment of rent, Landlord may, but
shall not be required to, use, apply or retain all or any part of the Additional
Security Deposit for the payment of any rent or any other sum in default, or for
the payment of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant's default, including
without limitation, reasonable costs and attorneys' fees incurred by Landlord to
recover possession of the Leased Premises upon a default by Tenant hereunder. If
any portion of said deposit is so used or applied, Tenant shall, upon demand
therefor, deposit cash with Landlord in an amount sufficient to restore the
Additional Security Deposit to its original amount and Tenant's failure to do so
shall constitute a default hereunder by Tenant. After the expiration of the
Lease Term, any remaining balance of the Additional Security Deposit shall be
returned to Tenant.
14.2. Use of Insurance Proceeds. All insurance proceeds with respect
to the Improvements which are paid to Tenant shall, if Tenant elects to rebuild
the Improvements pursuant to Section 14.1, be deposited by Tenant into a third
party escrow or construction control account which is reasonably acceptable to
Landlord and Tenant (and, if applicable, any Leasehold Mortgagee named as loss
payee with respect to such insurance pursuant to Section 10.1), and shall be
disbursed from such account to Tenant and Tenant's contractor for the payment of
the costs of the repair and restoration of the Improvements. Any such Leasehold
Mortgagee which
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is named as loss payee shall be an acceptable construction control account for
purposes of this Section 14.2. Notwithstanding the foregoing, if Tenant elects
to demolish the Improvements pursuant to option (ii) of Section 14.1, all such
insurance proceeds which are not required to be paid to a Leasehold Mortgagee
shall be allocated between and distributed to Landlord and Tenant based upon the
remaining unexpired Lease Term as of the date of the distribution as follows:
(i) Tenant shall receive that portion of such proceeds which is derived by
multiplying the amount of available insurance proceeds by a fraction, the
numerator of which is the length of the remaining unexpired Lease Term
(expressed in years) and the denominator of which is ninety-nine (99); and (ii)
Landlord shall receive the remaining portion of such proceeds.
14.3. Additional Cost of Restoration. If Tenant elects to rebuild the
Improvements pursuant to Section 14.1, and if the insurance proceeds received
by or for the account of Tenant shall be insufficient to pay the entire cost of
such repairs and restoration, Tenant shall supply the amount of any such
deficiency and shall apply the same to the payment of the cost of such repair
and restoration. Under no circumstances shall Landlord be obligated to make any
payment or contribution towards the cost of any repairs and restoration.
14.4. No Rent Abatement. There shall be no abatement of rent as a
result of any casualty, including without limitation, during the period of
repair and rebuilding of the Leased Premises.
15. CONDEMNATION.
15.1. Termination. If all of the Leased Premises (or if less than
all, but the remaining portion will not permit Tenant to operate its business on
the Leased Premises, with sufficient parking therefor), shall be acquired by the
right of condemnation or eminent domain for any public or quasi-public use or
purpose, or sold to a condemning authority under threat of condemnation or in
lieu thereof, then the Lease Term shall cease and terminate as of the date of
title vesting in such proceeding (or sale) and all rent shall be paid up to that
date.
15.2. Partial Condemnation. In the event of a partial taking or
condemnation which takes less than a substantial portion of the Leased Premises
and if the remaining portion will permit Tenant to operate its business on the
Leased Premises, with sufficient parking therefor, then Tenant, at Tenant's sole
cost and expense, shall proceed with reasonable diligence to restore the Leased
Premises to a condition, to the extent practicable, comparable to its condition
at the time of such condemnation less the portion lost in the taking, and this
Lease shall continue in full force and effect but, subject to Section 15.4
below, with a pro rata reduction of rent.
15.3. Payment of Award. In the event of any condemnation, taking or
sale as aforesaid, whether whole or partial, Landlord shall be entitled to the
entire award for the Land. Any award which is paid for the Improvements and
which is not required to be paid to a Leasehold Mortgagee shall be allocated
between and distributed to Landlord and Tenant based upon the remaining
unexpired Lease Term as of the date of the distribution as follows: (i) Tenant
shall receive that portion of such award which is derived by multiplying the
amount of available
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proceeds by a fraction, the numerator of which is the length of the remaining
unexpired Lease Term (expressed in years) and the denominator of which is
ninety-nine (99); and (ii) Landlord shall receive the remaining portion of such
award. However, if the Leased Premises shall be restored by Tenant as herein
provided, Tenant shall first be entitled to recover the costs and expenses
incurred in such restoration out of any such award. Nothing contained in this
Section 15.3 shall be deemed to prevent Tenant from seeking a separate award
from the taking authority for the taking of Tenant's personal property and
fixtures or for relocation and business interruption expenses incurred by Tenant
as a result of the taking.
15.4. Harmon Avenue. The parties specifically acknowledge that a
portion of the Leased Premises may be condemned to allow for the widening of
Harmon Avenue and that the rent payable under this Lease has been agreed upon in
anticipation of that condemnation. Accordingly, notwithstanding Section 15.2
above, rent shall not be reduced, and this Lease shall continue in full force
and effect, notwithstanding any such condemnation or taking for Harmon Avenue,
provided that not more than thirty (30) feet of the Leased Premises is so taken
(i.e., not more than thirty (30) feet of depth at any point along the length of
the Leased Premises which is contiguous to Harmon Avenue). However, if the
widening of Harmon Avenue results in a taking of more than such thirty (30) feet
of the Leased Premises, the Base Rent shall be reduced pro rata to reflect the
reduction of the size of the Leased Premises (considering only the reduction
in excess of such thirty (30) feet) and proceeds of the award for the taking in
excess of such thirty (30) feet shall be allocated as provided in Section 15.3.
16. LIABILITY AND INDEMNIFICATION.
16.1. Tenant Indemnity. Landlord shall not be liable to Tenant or
Tenant's trustees, beneficiaries, heirs, successors, assigns, employees, agents,
patrons or invitees, or any person whomsoever, for any injury to person or
damage to property caused by or arising as a result of the negligence or
misconduct of Tenant, its employees or agents, or of any other person (other
than Landlord or Landlord's employees or agents) entering upon the Leased
Premises under express or implied invitation of Tenant, as well as any such
damage or injury which is caused by or which arises as a result of Tenant's
breach of this Lease, and Tenant agrees to indemnify, defend and hold Landlord
and Landlord's trustees, beneficiaries, heirs, successors, assigns, members,
agents, employees and representatives harmless from any liability, loss, claim,
damage, cost or expense suffered or incurred by Landlord by reason of any such
damage or injury.
16.2. Notice of Indemnity. Landlord shall provide Tenant notice of any
such claims of liability for which Landlord may seek indemnification pursuant to
Section 16.1 with reasonable promptness and Tenant, at its election, shall have
the right of defense in such proceedings, by counsel of its own choosing, at
Tenant's expense. Landlord shall cooperate fully in all respects with Tenant in
any such defense, including, without limitation, by making available to Tenant
all pertinent information under the control of Landlord. If Tenant does not
notify Landlord within ten (10) days of Landlord's notice to Tenant of a
potential claim that Tenant will defend the same, or should Tenant fail to file
any answer or other pleading at least five (5) days before the same is due,
Landlord may defend or settle such claim or action in such manner as Landlord
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deems appropriate, in its sole discretion but, to the extent such claim is
properly subject to indemnity pursuant to Section 16.1 above, at Tenant's sole
cost and expense. If Tenant so notifies Landlord concurrently with Tenant's
notice of election to defend, Tenant may defend, but not settle, a claim without
waiving its right to assert that such claim is not subject to the indemnity
agreement in this Article 16. If Tenant elects to defend a claim, Landlord may,
at Landlord's expense, participate in such matter with counsel of Landlord's own
choosing.
16.3. Survival. The provisions of this Article 16 shall survive the
termination of this Lease.
17. RIGHT OF INSPECTION. Subject to applicable laws and Tenant's
reasonable security policies, Landlord and its agents and representatives shall
be entitled to enter upon and inspect the Leased Premises at any time during
normal business hours upon prior reasonable notice (or, in the case of an
emergency, at any time and with or without notice), provided only that such
inspection shall not unreasonably interfere with Tenant's business.
18. WARRANTY OF TITLE AND QUIET ENJOYMENT.
18.1. Quiet Enjoyment. Landlord represents and warrants that it is the
owner in fee simple of the Land, and that it alone will have full right to lease
the Leased Premises for the Lease Term set out herein. Landlord further
represents and warrants that Tenant, on paying the rent and performing its
obligations hereunder, shall peaceably and quietly hold and enjoy the Leased
Premises for the Lease Term without any hindrance, molestation or ejection by
Landlord, its successors or assigns, or those claiming by, through, or under
them or anyone claiming under paramount title to Landlord.
18.2. Encumbrances. Landlord represents and warrants that, with the
exception of exceptions shown on Exhibit "C," it has not granted nor created and
covenants that it will not grant, create or suffer any claim, lien, encumbrance,
easement, restriction or other charge or exception to title to the Leased
Premises which would have any material adverse effect upon Tenant's rights or
obligations under this Lease; provided, however, that it is expressly agreed
that Landlord may subject its interest in the Leased Premises to mortgage loans
if its lender shall agree for itself, its successors and assigns: (i) to be
bound by the terms of this Lease; (ii) not to disturb Tenant's use or possession
of the Leased Premises in the event of a foreclosure of such lien or encumbrance
so long as Tenant is not in default hereunder; (iii) not to join Tenant as a
party defendant in any foreclosure proceeding relating to the Project or any
part thereof except as may be required under applicable law. If Landlord's
interest in the Land or in this Lease is sold or conveyed upon the exercise of
any remedy provided for in any such mortgage loan, or otherwise by operation of
law, this Lease will not be affected in any way, and Tenant will attorn to and
recognize the new owner as Tenant's Landlord under this Lease. Tenant will
confirm such attornment in writing within ten (10) days after Tenant's receipt
of a written request for attornment.
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18.3. Transfer by Landlord.
18.3.1 Right of First Offer. If Landlord wishes to sell
the Leased Premises but has not received an offer for the Leased Premises which
it wishes to accept, Landlord shall notify Tenant of its desire to sell. Within
ten (10) days after such notice, Landlord and Tenant shall each appoint a
qualified MAI appraiser, and such appraisers shall determine the value of the
Leased Premises, giving effect to this Lease (and including Landlord's
reversionary interest in the Improvements), within thirty (30) days after being
so appointed. If the values determined by such appraisers do not differ by more
than five percent (5%) of the lower appraisal, then the "APPRAISED VALUE," as
used herein, shall mean the arithmetic average of such two (2) appraisals. If
the two (2) appraisals differ by more than five percent of the lower appraisal,
then the two appointed appraisers shall agree upon a third qualified MAI
appraiser who shall be given a copy of the two (2) previous appraisals and who
shall then determine the Appraised Value, provided that such final Appraised
Value shall not be greater than the higher of the two previous appraisals nor
less than the lower of the two previous appraisals. Landlord and Tenant shall
each bear the cost of their own appraiser and shall share equally the cost of
the third appraiser.
Tenant shall have the right to purchase the Leased Premises at the
Appraised Value provided that it exercises such right by written notice to
Landlord within ten (10) days after the Appraised Value has been determined
pursuant to the preceding paragraph. If Tenant so elects to purchase the Leased
Premises, the Appraised Value shall be paid by cash or cash equivalent and the
closing shall occur within thirty (30) days after Tenant's notice of its
election to purchase the Leased Premises. If Tenant does not so elect to
purchase the Leased Premises, Tenant's right to purchase the Leased Premises
shall expire and have no further force or effect except as provided in the
following Section 18.3.2. However, Tenant's option described in Article 32 shall
remain in full force and effect.
18.3.2. Right of First Refusal. Tenant shall have a right of
first refusal to purchase the Leased Premises in the event that Landlord shall
desire to sell said property and shall have a bona fide offer to purchase the
Leased Premises, whether directly or indirectly, such as by sale of stock in a
corporate Landlord, from a qualified purchaser which Landlord wishes to accept.
No offer to purchase the Leased Premises shall include any other property and
the only consideration shall be cash or a promise to pay cash. Any such offer
shall provide for a closing no earlier than thirty (30) days after expiration of
the thirty (30) day period (or, if applicable, the ten (10) day period) referred
to below. In the event of any such offer, Landlord shall notify Tenant and
provide Tenant with a copy of that offer (except that Landlord shall have no
obligation to disclose the identity of the offeror). Tenant shall then have a
thirty (30) day period of time after receipt of such notice and copy within
which to exercise its right of first refusal, provided that such thirty (30) day
period shall be reduced to ten (10) days if Landlord has, within three hundred
sixty-five (365) days prior to giving notice to Tenant of an offer pursuant to
this Section 18.3.2, offered the Leased Premises to Tenant pursuant to the
preceding Section 18.3.1. In the event Tenant exercises its right of first
refusal, Tenant shall purchase the Leased Premises on the same terms and
conditions and at the same price specified in such offer, including the time for
closing set forth therein. If Tenant does not exercise a right of first refusal
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with respect to a transaction and that transaction is not finalized on the terms
presented to Tenant within one (1) year after the expiration of Tenant's right
of first refusal, the right of first refusal shall be reinstated as to that
proposed purchase. If Tenant does not exercise this right of first refusal with
respect to a transaction and that transaction is finalized within such one (1)
year period, the transferee shall take free of Tenant's right of first refusal,
and free of Tenant's right of first offer under the preceding Section 18.3.1,
which shall not apply to any other proposed sales. However, Tenant's option
described in Article 32 shall remain in full force and effect.
18.3.3. Landlord's Right to Participate in 1031 Exchange.
Notwithstanding the foregoing provisions of Section 18.3.1 and 18.3.2, if Tenant
elects to purchase the Leased Premises, Landlord may elect to participate in a
tax-free exchange under Section 1031 of the Internal Revenue Code. Tenant agrees
to cooperate with such an exchange by Landlord so long as such cooperation is
without cost to Tenant and does not materially affect Tenant's rights hereunder.
Tenant specifically agrees to allow Landlord to postpone the closing of
Tenant's purchase to allow Landlord a reasonable period of time to locate
replacement property.
18.3.4. Sale by Landlord. Landlord has the absolute right to
transfer all or a part of its interest in this Lease to any successor subject to
Section 18.3.1, 18.3.2 and 18.3.3 above. In the event of any sale or other
transfer of all of Landlord's interest in the Leased Premises, including but not
limited to any security deposit, other than a transfer for security purposes
only, Landlord shall automatically be relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer, provided that the transferee acknowledges in writing that such
transferee assumes the terms and conditions of this Lease.
19. WAIVER OF SUBROGATION. Landlord and Tenant severally waive any and
every claim which arises or may arise in its favor and against the other during
the Lease Term for any and all loss of, or damage to, any of its property
located within or upon, or constituting a part of, the Leased Premises, which
loss or damage is coveted by valid and collectible fire and extended coverage,
general liability, liquor liability or worker's compensation insurance policies,
to the extent that such loss or damage is recoverable thereunder. Inasmuch as
the above mutual waivers will preclude the assignment of any aforesaid claim by
way of subrogation (or otherwise) to an insurance company (or any other person),
Landlord and Tenant severally agree immediately to give to each insurance
company which has issued to it policies of insurance, written notice of the
terms of said mutual waivers, and to have said insurance policies properly
endorsed, if necessary, to prevent the invalidation of said insurance coverages
by reason of said waivers.
20. FORCE MAJEURE. The time for performance by Landlord or Tenant of any
term, provision or covenant of this Lease, other than the payment of amounts due
under this Lease, shall be deemed extended by time lost due to delays resulting
from acts of God, strikes, unavailability of building materials, civil riots,
floods, material or labor restrictions by governmental authority, and any other
cause not within the control of Landlord or Tenant, as the case may be.
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21. NO BROKERS. Tenant warrants that it has not had any contact or
dealings with any person or real estate broker which would give rise to the
payment of any finders' fee or brokerage commission by Landlord in connection
with this Lease, and Tenant shall indemnify, hold harmless and defend Landlord
from and against any liability with respect to any finder's fee or brokerage
commission arising out of any act or omission of Tenant. Landlord warrants that
it has not had any contact with any person or real estate broker which would
give rise to the payment of any finders' fee or brokerage commission by Tenant
in connection with this Lease, and Landlord shall indemnify, hold harmless and
defend Tenant from and against any liability with respect to any finders' fee or
brokerage commission arising out of any act or omission of Landlord.
22. LANDLORD-TENANT RELATIONSHIP. It is further understood and agreed
that the Landlord shall in no event be construed or held to be a partner, joint
venturer or associate of Tenant in the conduct of Tenant's business, nor shall
Landlord be liable for any debts incurred by Tenant in Tenant's business; but it
is understood and agreed that the relationship is and at all times shall remain
that of landlord and tenant.
23. ASSIGNMENT AND SUBLETTING.
23.1. Assignment and Subletting. Tenant shall not assign this Lease
or sublet the whole or any part of the Leased Premises without the prior written
consent of Landlord, which consent Landlord shall not unreasonably withhold,
condition or delay, and shall be conclusively presumed to have been given if
Landlord fails to specify its objections and reasons therefor within fifteen
(15) days after written request from Tenant, provided (i) no Tenant Event of
Default (hereinafter defined) has occurred and is continuing at the time of the
request for consent to the assignment or sublease; (ii) the use to be made of
the Leased Premises by the assignee or subtenant shall be permitted by Article 6
hereof; (iii) the assignee or subtenant, in the case a sublease for all or
substantially all of the Leased Premises, is solvent and financially able to
meet the projected costs of the obligations to be assumed for the unexpired
portion bf the Lease Term as they come due; (iv) any assignee shall assume in
writing the performance of all of the terms, provisions and covenants of this
Lease on the part of Tenant to be kept and performed; (v) Tenant shall deliver
to Landlord within fifteen (15) days (or as soon thereafter as is reasonably
practicable) after the assignment or subletting an executed duplicate of such
agreement, together with a duly executed assumption agreement. Notwithstanding
the foregoing, Tenant shall have the right to sublet portions of the Leased
Premises to Tenant's concessionaires without Landlord's prior consent so long as
such concessionaires, in the aggregate, occupy less than twenty-five percent
(25%) of the Leased Premises.
23.2. Assignment to Affiliate. Tenant shall have the right to assign
this Lease, without Landlord's consent, to assignee which controls or is
controlled by or under common control with Tenant, or either of them.
23.3. No Release or Novation. No assignment or subletting or collection
of rent from the assignee or subtenant (including, without limitation, any
assignment pursuant to the preceding
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Section 23.2) shall be deemed to constitute a novation or in any way release
Tenant from further performance of its obligations under this Lease, and Tenant
shall continue to be liable under this Lease for the balance of the Lease Term
with the same force and effect as if no such assignment had been made.
Notwithstanding the foregoing, Cloobeck Enterprises shall be relieved from all
further liability arising under this Lease from and after the date upon which
Tenant notifies Landlord that Cloobeck Enterprises has assigned all of its
right title and interest in and to this Lease to Grand Casinos Nevada I, Inc.
or to any entity which controls or which is controlled by or under common
control with Grand Casinos Nevada I, Inc.
23.4. Encumbrance or Assignment as Security.
23.4.1. Definitions.
23.4.1.1. The term "LEASEHOLD MORTGAGE" as used in this
Lease shall mean a first mortgage, a first deed of trust, a sale - leaseback
(wherein the leaseback is prior to all other security interests in Tenant's
leasehold estate) or other first priority security instrument or device by which
Tenant's leasehold estate is mortgaged, conveyed, assigned, or otherwise
transferred, to secure a debt or other obligation.
23.4.1.2. The term "LEASEHOLD MORTGAGEE' as used in
this Lease shall refer to an institutional lender (i.e., a savings bank, savings
and loan association, commercial bank, trust company, credit union, insurance
company, college, university, real estate investment trust or pension fund or
any other institution which is recognized nationally or regionally as being in
the business of lending money or serving as the trustee for persons investing in
such debt) which is not affiliated with Tenant and which is the holder of a
Leasehold Mortgage (which in the case of a deed of trust is the beneficiary
thereof and in the case of a sale-leaseback is the lessor) in respect to which
the notice provided for by Section 23.4.3 has been given and received and as to
which the provisions of this Section 23.4 are applicable.
23.4.2. Tenant's Right to Mortgage its Leasehold Interest.
Notwithstanding any other provision contained in this Lease, for the purpose of
financing construction or reconstruction permitted by this Lease or refinancing
any such financing, Tenant shall have the right to encumber or assign its
interest in this Lease or assign its interest in any sublease hereunder by
mortgage or deed of trust (hereinafter, collectively, "MORTGAGE") (or by
foreclosure or assignment in lieu of foreclosure under such Mortgage) to any
institutional lender or other lender reasonably acceptable to Landlord as
mortgagee and if such Mortgage is a deed of trust, foreclosure may be had
thereunder by the exercise of a power of sale in accordance with the provisions
of Chapter 107 of the Nevada Revised Statutes. There may be more than one
Mortgage on Tenant's interest in the Improvements and this Lease except that
there may be only one Mortgage at any given time constituting a first lien
thereon (other than as provided in the following sentence) and only one
Leasehold Mortgagee at any given time (which Leasehold Mortgagee may consist of
more than one person or entity so long as such multiple persons or entities act
through one collateral agent). Notwithstanding the foregoing, beneficiaries of
two (2) separate Mortgages may act collectively as a Leasehold Mortgagee, so
long as (i) such
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beneficiaries act through one (1) collateral agent; and (ii) such Leasehold
Mortgages are, by virtue of an intercreditor or similar agreement between such
beneficiaries (a copy of which shall be provided to Landlord), of equal first
priority. All obligations imposed hereunder on any Mortgage or Mortgagee shall
bind all such Mortgages and Mortgagees but except for a Mortgage constituting a
first lien on Tenant's interest in the Improvements and this Lease and otherwise
complying with the requirements contained herein for a Leasehold Mortgage, no
Mortgage, nor any Mortgagee thereunder, shall be entitled to the benefits of any
provision of this Lease except as set forth in this Section 23.4.2.
23.4.3. Notice to Landlord. Upon execution of a Mortgage
otherwise entitled to the benefits of a Leasehold Mortgage (or any amendment,
supplement or modification thereto) and in order to be entitled to such benefits
a photostatic copy of such instrument and the obligation secured thereby shall
be promptly delivered to Landlord together with a certification by Tenant and
the Leasehold Mortgagee confirming that the photostatic copy is a true copy of
the Leasehold Mortgage and giving written notice of the name and mailing address
of the Leasehold Mortgagee (which shall be deemed such Leasehold Mortgagee's
address hereunder until changed by notice to Landlord and Tenant as provided in
Article 24), that the Leasehold Mortgage was recorded in the Official Records of
Clark County, Nevada, the date of recording or filing of record thereof and
recorder's instrument number and book reference or other recorder's index
reference, and that such Mortgage is a first lien on Tenant's interest in the
Improvements and this Lease. Until such true copies and certificate are
delivered to Landlord, any such instrument shall have no force or effect
whatsoever on the enforcement by Landlord of any provisions of this Lease or any
rights or remedies hereunder.
23.4.4. Cancellation, Surrender and Modification. No
cancellation, surrender or modification of this Lease shall be effective as to
any Leasehold Mortgagee unless consented to in writing by such Leasehold
Mortgagee.
23.4.5. Notice of Default and Right to Cure. Landlord, upon
providing Tenant any notice of: (i) default under this Lease, (ii) a termination
of this Lease, or (iii) a matter on which Landlord may predicate or claim a
default, shall at the same time provide a copy of such notice to any Leasehold
Mortgagee. No such notice by Landlord to Tenant shall be deemed to have been
duly given unless and until a copy thereof has been so provided to any Leasehold
Mortgagee. From and after such notice has been given to a Leasehold Mortgagee,
such Leasehold Mortgagee shall have the same period, after the giving of such
notice, for remedying any default or acts or omissions which are the subject
matter of such notice or causing the same to be remedied, as is given Tenant
after the giving of such notice to Tenant, plus in each instance, the additional
periods of time specified in Sections 23.4.6 and 23.4.7, to remedy, commence
remedying or cause to be remedied the defaults or acts or omissions which are
the subject matter of such notice specified in any such notice. Landlord shall
accept such performance by or at the instigation of such Leasehold Mortgagee as
if the same had been done by Tenant. Tenant authorizes each Leasehold Mortgagee
to take any such action at such Leasehold Mortgagee's option and does hereby
authorize entry upon the Leased Premises by the Leasehold Mortgagee for such
purpose.
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23.4.6. Termination for Tenant Default. Anything contained in this
Lease to the contrary notwithstanding, if any default shall occur which entitles
Landlord to terminate this Lease, Landlord shall have no right to terminate this
Lease unless, following the expiration of the period of time given Tenant to
cure such default or the act or omission which gave rise to such default,
Landlord shall notify any Leasehold Mortgagee of Landlord's intent to so
terminate at least thirty (30) days in advance of the proposed effective date of
such termination, if such default is capable of being cured by the payment of
money, and at least forty-five (45) days in advance of the proposed effective
date of such termination if such default is not capable of being cured by the
payment of money. The provisions of Section 23.4.7 below shall apply if, during
such thirty (30) or forty-five (45) day cure period, any Leasehold Mortgagee
shall:
(a) notify Landlord of such Leasehold Mortgagee's desire to avoid
any termination of this Lease by Landlord; and
(b) pay or cause to be paid all rent and other payments then due
and in arrears as specified in the notice to such Leasehold
Mortgagee and which may become due during such thirty (30) or
forty-five (45) day cure period; and
(c) comply, or in good faith and with reasonable diligence
commence to comply, with all nonmonetary requirements of this
Lease then in default and reasonably susceptible of being complied
with by such Leasehold Mortgagee (provided, however, that such
Leasehold Mortgagee shall not be required during such period to
cure or commence to cure any default consisting of Tenant's
failure to satisfy and discharge any lien, charge or encumbrance
against Tenant's interest in this Lease or the Leased Premises
junior in priority to the lien of the Leasehold Mortgage held by
such Leasehold Mortgagee, so long as such lien, charge or
encumbrance does not also encumber or threaten Landlord's interest
in the Land or the Leased Premises);
23.4.7. Procedure of Default.
23.4.7.1. If Landlord shall elect to terminate this Lease by
reason of any default of Tenant, and if a Leasehold Mortgagee shall have
proceeded in the manner provided for by Section 23.4.6, the specified date for
the termination of this Lease as fixed by Landlord in its termination notice
shall be extended for a period of six (6) months provided that such Leasehold
Mortgagee shall, during such six (6) month period:
(a) Pay or cause to be paid the rent, additional rent and other
monetary obligations of Tenant under this Lease as the same become
due, and continue its good faith efforts to perform all of
Tenant's other obligations under this Lease, excepting (A)
obligations of Tenant to satisfy or otherwise discharge any lien,
charge or encumbrance against Tenant's interest in this Lease or
the Leased Premises junior in priority to the lien of the
Leasehold Mortgage held by such Leasehold Mortgagee, so long as
such lien, charge or encumbrance does not also
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encumber or threaten Landlord's interest in the Land or the Leased
Premises and (B) past nonmonetary obligations then in default and
not reasonably susceptible of being cured by such Leasehold
Mortgagee; and
(b) If not enjoined or stayed, take steps to acquire or sell
Tenant's interest in this Lease by foreclosure of the Leasehold
Mortgage or other appropriate means and prosecute the same to
completion with due diligence.
23.4.7.2. If at the end of such six (6) month period such
Leasehold Mortgagee is complying with Section 23.4.7.1, this Lease shall not
then terminate, and the time for completion by such Leasehold Mortgagee of its
proceedings shall continue so long as such Leasehold Mortgagee is enjoined or
stayed and thereafter for so long as such Leasehold Mortgagee proceeds to
complete steps to acquire or sell Tenant's interest in this Lease by foreclosure
of the Leasehold Mortgage or by other appropriate means with reasonable
diligence and continuity. Nothing in this Section 23.4.7, however, shall be
construed to extend this Lease beyond the Lease Term, nor to require a Leasehold
Mortgagee to continue such foreclosure proceedings after the subject Tenant
default has been cured. If the default shall be cured and the Leasehold
Mortgagee shall discontinue such foreclosure proceedings, this Lease shall
continue in full force and effect as if Tenant had not defaulted under this
Lease.
23.4.7.3. If a Leasehold Mortgagee is complying with Section
23.4.7.1, upon the acquisition of Tenant's leasehold estate herein by such
Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale
or otherwise, and upon the discharge of any lien, charge or encumbrance against
the Tenant's interest in this Lease or the Leased Premises which is junior in
priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee
and which the Tenant is obligated to satisfy and discharge by reason of the
terms of this Lease, this Lease shall continue in full force and effect as if
Tenant had not defaulted under this Lease.
23.4.7.4. The making of a Leasehold Mortgage shall not be
deemed to constitute an assignment or transfer of this Lease or of the
leasehold estate hereby created, nor shall any Leasehold Mortgagee, as such, be
deemed to be an assignee or transferee of this Lease or of the leasehold estate
hereby created so as to require such Leasehold Mortgagee, as such, to assume
the performance of any of the terms, covenants or conditions on the part of
Tenant to be performed hereunder, but the purchaser at any sale of this Lease
and of the leasehold estate hereby created in any proceedings for the
foreclosure of any Leasehold Mortgage, or the assignee or transferee of this
Lease and of the leasehold estate hereby created under any instrument of
assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage,
shall be deemed to be an assignee or transferee within the meaning of this
Lease, and shall be deemed to have agreed to perform all of the terms,
covenants and conditions on the part of Tenant to be performed hereunder from
and after the date of such purchase and assignment.
23.4.7.5. Any Leasehold Mortgagee or other acquirer of the
leasehold estate of Tenant pursuant to foreclosure, assignment in lieu of
foreclosure or other proceedings
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may, upon acquiring Tenant's leasehold estate, without further consent of
Landlord, sell and assign the leasehold estate on such terms and to such persons
and entities as are acceptable to such Mortgagee or acquirer and thereafter be
relieved of all obligations under this Lease, provided that such assignee is
solvent and financially and legally able to perform the obligations of Tenant
for the unexpired Lease Term. No other or further assignment shall be made
except in accordance with the provisions of Article 23 of this Lease. Upon
execution of any assignment permitted to be made to or by the Leasehold
Mortgagee a fully executed copy thereof, together with a written statement of
the place of recording or filing of record, if any, and a copy of the assumption
agreement, if applicable, shall be delivered promptly to Landlord; and until
such delivery to Landlord such assignment shall have no force or effect
whatsoever on the enforcement by Landlord of any provisions of this Lease or any
rights or remedies hereunder.
23.4.7.6. Notwithstanding any other provisions of this
Lease, any sale of this Lease and of the leasehold estate hereby created in any
proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or
transfer or this Lease and of the leasehold estate hereby created in lieu of the
foreclosure of any Leasehold Mortgage shall be deemed to be a permitted sale,
transfer or assignment of this Lease and of the leasehold estate hereby created.
23.4.7.7. Nothing in this Section 23.4 shall limit Landlord's
ability to enforce this Lease by any means (including, but not limited to, an
action for specific performance and/or injunction) other than termination,
reentry or taking possession after expiration of the cure periods, if any,
provided in Section 25.1.
23.4.8. New Lease. In the event of the termination of this Lease as a
result of Tenant's default, Landlord shall, in addition to providing the notices
of default and termination as required above, provide any Leasehold Mortgagee
with written notice that this Lease has been terminated, together with a
statement of all sums which would at that time be due under this Lease but for
such termination, and of all other defaults, if any, then known to Landlord.
Landlord agrees to enter into a new lease ("NEW LEASE") of the Leased Premises
with such Leasehold Mortgagee or its designee for the remainder of the Lease
Term, effective as of the date of termination, at the rent, and upon the terms,
covenants and conditions (but excluding requirements which are not applicable or
which have already been fulfilled) of this Lease, provided:
(a) Such Leasehold Mortgagee shall make written request upon Landlord
for such New Lease within sixty (60) days after the date such Leasehold
Mortgagee receives Landlord's notice of termination or actual
termination, if later, of this Lease given pursuant to this Section
23.4.8.
(b) Such Leasehold Mortgagee or its designee shall pay or cause to be
paid to Landlord at the time of the execution and delivery of such New
Lease, any and all sums which would at the time of execution and
delivery thereof be due pursuant to this Lease but for such termination
and, in addition thereto, all reasonable expenses, including reasonable
attorney's fees, which Landlord shall
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have incurred by reason of such termination and the execution and
delivery of the New Lease, and which have not otherwise been received
by Landlord from Tenant or other party in interest under Tenant. Upon
the execution of such New Lease, Landlord shall allow to the tenant
named therein as an offset against the sums otherwise due under this
Section 23.4.8(b) or under the New Lease, an amount equal to the net
income, if any, derived by Landlord from the Leased Premises during the
period from the date of termination of this Lease to the date of the
beginning of the lease term of such New Lease. In the event of a
controversy as to the amount to be paid to Landlord pursuant to this
Paragraph (b), the payment obligation shall be satisfied if Landlord
shall be paid the amount not in controversy, and the Leasehold Mortgage
or its designee shall agree to pay any additional sum ultimately
determined to be due plus interest at the rate of fifteen percent (15%)
and such obligation shall be adequately secured. For purposes of this
Section 23.4.8(b), NET INCOME shall mean gross revenue derived by
Landlord from the Leased Premises during the period from the date of
termination of this Lease to the date of the beginning of the lease
term of such New Lease, less all operating expenses, real and personal
property taxes and debt service payments (with respect to debt incurred
to own, operate, alter or manage the Improvements) incurred or paid by
Landlord during such period.
(c) Such Leasehold Mortgagee or its designee shall agree to cure any of
Tenant's defaults of which said Leasehold Mortgagee was notified by
Landlord's notice of termination and which are reasonably susceptible
of being so cured by Leasehold Mortgagee or its designee.
(d) Any New Lease made pursuant to this Section 23.4.8 shall be prior
to any mortgage or other lien, charge or encumbrance on the fee of the
Leased Premises and the tenant under such New Lease shall have the same
right, title and interest in and to the Leased Premises and the
buildings and improvements thereon as Tenant had under this Lease.
(e) The tenant under any New Lease shall, upon an assignment of such
leasehold estate, be relieved and discharged from the obligations
imposed on the tenant by such New Lease, provided that the assignee of
such leasehold estate is solvent and financially and legally able to
perform the obligations of the tenant for the unexpired term of the New
Lease.
23.4.9. Leasehold Mortgagee Need Not Cure Specified Defects. Nothing
herein contained shall require any Leasehold Mortgagee or its designee as a
condition to its exercise of rights hereunder to cure any default of Tenant not
reasonably susceptible of being cured by such Leasehold Mortgagee or its
designee, including, but not limited to, the defaults referred to in Section
25.1.3, 25.1.4, 25.1.5 and 25.1.6, in order to comply with the provisions of
this Section 23.4.
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23.4.10. Casualty and Condemnation Loss. Any Mortgage must be
consistent with and not interfere with Landlord's rights hereunder with respect
to insurance, casualty and condemnation, except that a Leasehold Mortgage may
provide that casualty insurance proceeds with respect to the Leased Premises and
condemnation awards payable with respect to the buildings and other improvements
on the Leased Premises shall only be disbursed for repair, reconstruction or
restoration upon satisfaction of specified conditions. Such conditions shall be
subject to Landlord's approval, which shall not be unreasonably withheld;
provided that those conditions set forth in Exhibit "D" attached hereto shall be
deemed to be reasonable. The Leasehold Mortgage shall provide that Landlord
shall have a reasonable period of time after Tenant's failure to satisfy such
conditions in which to satisfy the same and that thereupon such proceeds or
condemnation awards shall be made available for repair, reconstruction, and
restoration as herein provided. The failure of any Leasehold Mortgagee to make
such proceeds or condemnation awards available shall not relieve Tenant of any
obligation hereunder and any failure of Tenant to repair, reconstruct or restore
as provided in this Lease shall constitute a default. Any Mortgage must provide
that Landlord will be notified of any default thereunder and provided a
reasonable opportunity to cure the same.
23.4.11. Arbitration. Landlord shall give any Leasehold Mortgagee
prompt notice of any arbitration or legal proceedings between Landlord and
Tenant involving obligations under this Lease. Any Leasehold Mortgagee shall
have the right to intervene in any such proceedings and be made a party to such
proceedings at its or Tenant's cost, and the parties hereto do hereby consent
to such intervention. In the event that any Leasehold Mortgagee shall not elect
to intervene or become a party to any such proceedings, Landlord shall give the
Leasehold Mortgagee notice of, and a copy of, any award or decision made in any
such proceedings. In the event Tenant shall fail to appoint an arbitrator after
notice from Landlord, as provided in Article 29 hereof, a Leasehold Mortgagee
shall have an additional period of thirty (30) days, after notice by Landlord
that Tenant has failed to appoint such arbitrator, to make such appointment, and
the arbitrator so appointed shall thereupon be recognized in all respects as if
he had been appointed by Tenant.
23.4.12. No Merger. So long as any Leasehold Mortgage is in existence,
unless any Leasehold Mortgagee shall otherwise expressly consent in writing, the
fee title to the Leased Premises and the leasehold estate of Tenant therein
created by this Lease shall not merge but shall remain separate and distinct,
notwithstanding the acquisition of said fee title and said leasehold estate by
Landlord or by Tenant or by a third party, by purchase or otherwise.
23.4.13. Future Amendments. In the event Tenant hereafter seeks to
encumber its leasehold estate, Landlord agrees to amend this Lease from time to
time to the extent reasonably requested by a prospective Leasehold Mortgagee,
provided that such proposed amendments do not materially and adversely affect
the rights of Landlord or its interest in the Leased Premises. All reasonable
expenses incurred by Landlord in connection with any such amendment shall be
paid by Tenant.
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23.4.14. Security Deposit. If any Leasehold Mortgagee, its designee or
other purchaser has acquired the leasehold estate of Tenant pursuant to
foreclosure, conveyance in lieu of foreclosure or other proceedings, or has
entered into a New Lease with Landlord in accordance with Section 23.4.8, such
Leasehold Mortgagee, its designee or other purchaser shall succeed to the rights
of Tenant, if any, in and to any security deposits paid by Tenant pursuant to
this Lease. In such event, Tenant shall no longer have any rights to such
security deposits, and Landlord shall hold such security deposits for and on
behalf of such Leasehold Mortgagee, its designee or other purchaser.
23.4.15. Estoppel. Landlord shall, without charge, at any time and from
time to time hereafter, but not more frequently than twice in any one-year
period, within ten (10) days after written request from Tenant to do so, certify
by written instrument duly executed and acknowledged to any Leasehold Mortgagee
or purchaser, or proposed Leasehold Mortgagee or proposed purchaser, or any
other person or entity specified in such request: (a) as to whether this Lease
has been supplemented or amended, and if so, the substance and manner of such
supplement or amendment; (b) as to the validity and force and effect of this
Lease, in accordance with its tenor; (c) as to the existence of any default
hereunder; (d) as to the existence of any offsets, counterclaims or defenses
hereto on the part of Tenant; (e) as to the commencement and expiration dates of
the Lease Term; and (f) as to any other matters as may be reasonably so
requested. Any such certificate may be relied upon by Tenant and any other
person or entity to whom the same may be exhibited or delivered, and the
contents of such certificate shall be binding on the Landlord.
23.4.16. Notices. Notices from Landlord to the Leasehold Mortgagee
shall be mailed to the address furnished Landlord pursuant to Section 23.4.3,
and those from the Leasehold Mortgagee to Landlord shall be mailed to the
address designated pursuant to the provisions of Article 24 hereof. Such
notices, demands and requests shall be given in the manner described in Article
24 and shall in all respects be governed by and shall be deemed to be effective
in accordance with the provisions of that Article.
23.4.17. Erroneous Payments. No payment made to Landlord by a Leasehold
Mortgagee shall constitute agreement that such payment was, in fact due under
the terms of this Lease; and a Leasehold Mortgagee having made any payment to
Landlord pursuant to Landlord's wrongful, improper or mistaken notice or demand
shall be entitled to the return of any such payment or portion thereof.
23.4.18. No subordination of Landlord's Fee Title. Landlord shall not
be required to subordinate Landlord's fee interest in the Leased Premises or its
reversionary interest in the buildings and improvements to be constructed
thereon to any lien securing Tenant's construction loan or other financing.
24. NOTICES AND PAYMENTS. Any notice or document required or permitted to
be delivered hereunder or by law shall be deemed to be delivered, whether
actually received or not, (a) when delivered in person, (b) upon confirmed
receipt (or the first business day thereafter if
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receipt does not occur during business hours on a business day) if such item is
sent by facsimile transmission to the appropriate party at its fax number set
forth below or at such other number as it shall have thereafter specified by
written notice delivered in accordance with this Article 24 (provided that a
copy of such notice is also sent by another method permitted hereunder within
one (1) business day after the same is transmitted by facsimile), (c) four (4)
business days after such item is deposited in the United States mail, postage
prepaid, certified or registered, return receipt requested, (d) one (1) business
day after such item is deposited with Federal Express or other nationally
recognized overnight courier, shipping charges prepaid, addressed to the
appropriate party hereto at its address set out below, or at such other address
as it shall have theretofore specified by written notice delivered in accordance
herewith:
LANDLORD
BROOKS FAMELY TRUST
c/o Wayne Williams
8360 Turtle Creek Circle
Las Vegas, Nevada 89113
Telefax: (702)367-9646
Nevada Brooks Cook
13701 Sunset Boulevard
Pacific Palisades, California 90272
Telefax: (310)459-2530
with a copy to:
JONES, JONES, CLOSE & BROWN, CHARTERED
3773 Howard Hughes Parkway
Third Floor South
Las Vegas, Nevada 89109
Attn: Stephen M. Rice, Esq.
Telefax: (702)734-2722
TENANT
CLOOBECK ENTERPRISES
Polo Towers
3745 Las Vegas Boulevard, South
Las Vegas, Nevada 89109
Attn: Stephen J. Cloobeck
Telefax: (702)798-8840
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and to:
GRAND CASINOS NEVADA I, INC.
13705 First Avenue North
Plymouth, Minnesota 55441
Attn: President
Telefax: (612)449-9353
with a copy to:
LIONEL SAWYER & COLLINS
300 South Fourth Street
Suite 1700
Las Vegas, Nevada 89101
Attn: Jeffrey P. Zucker, Esq.
Telefax: (702)383-8845
Payments of Base Rent and other sums due Landlord from Tenant (collectively
referred to in this Lease as "RENT") shall be deemed to be remitted only upon
actual receipt thereof by Landlord.
If and when included within the term "Landlord" or "Tenant" there is
more than one person or legal entity, all shall jointly arrange among themselves
for one among their numbers to receive at one specified address all such notices
and payments; all parties included within the term "Landlord" or "Tenant," as
appropriate, shall be bound by notices delivered by the other party in
accordance with the provisions of this Article 24 as if each had received such
notice.
25. DEFAULT.
25.1. Events of Default. Each of the following events shall be an
"Event of Default" under this Lease:
25.1.1. Tenant shall fail to pay any installment of rent hereby
reserved as and when the same shall become due and shall not cure such
default within five (5) days after written notice thereof is given by Landlord
to Tenant;
25.1.2. Subject to the following sentence, Tenant shall fail to
comply with any term, provision or covenant of this Lease, other than the
payment of rent, and shall not cure such failure within thirty (30) days
after written notice thereof is given by Landlord to Tenant. If such default
cannot reasonably be cured within thirty (30) days, then Tenant shall have an
additional reasonable period of time within which to cure such default so long
as Tenant commences to cure such default within the initial thirty (30) day
period and thereafter diligently prosecutes such cure to completion;
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25.1.3. Tenant shall be adjudged insolvent, make a transfer in fraud of
creditors or make an assignment for the benefit of creditors;
25.1.4. Tenant shall abandon the Leased Premises or shall cease
operations in the Premises (except for short time periods not exceeding thirty
(30) days in any twelve (12) month period or ninety (90) days in any sixty (60)
month period and except for interruptions in Tenant's operations which are
caused by events which are beyond Tenant's control, including, without
limitation, casualty damage (but not including Tenant's financial inability to
operate); provided that Tenant may cease operations in the Leased Premises for
one (1) period of up to two (2) years in any twenty (20) year period in order to
diligently construct major renovations to, or replacement of, the Improvements;
25.1.5. Tenant shall file a petition under any section or chapter of
the Bankruptcy Reform Act of 1978, as amended, or under any similar law or
statute of the United States or any state thereof, or Tenant shall be adjudged
bankrupt or insolvent in proceedings filed against Tenant thereunder; or
25.1.6. A receiver or trustee shall be appointed for all or
substantially all of the assets of Tenant and Tenant shall not have had such
appointment discharged within thirty (30) days after Tenant receives written
notice of such appointment.
25.2. Landlord's Remedies. Upon the occurrence of any Tenant Event of
Default, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever:
25.2. 1. Terminate this Lease, in which event Tenant shall immediately
surrender the Leased Premises to Landlord, and if Tenant fails so to do,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the Leased
Premises and expel or remove Tenant and any other person who may be occupying
the Leased Premises, or any part thereof, by force if necessary, without being
liable to prosecution or for any claim for damages; and Landlord may recover
from Tenant:
25.2.1.1. The worth at the time of award of any unpaid rent which
has been earned at the time of such termination; plus
25.2.1.2. The worth at the time of award of any amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus
25.2.1.3. The worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of the award exceeds
the amount of such rental loss that Tenant proves could be reasonably avoided;
plus
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25.2.1.4. Any other reasonable amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease; and
25.2.1.5. At Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
All such amounts shall be computed on the basis of the monthly amount
thereof payable on the date of Tenant's default. As used in Sections 25.2.1.1
and 25.2.1.2 above, the "worth at the time of award is computed by allowing
interest in the per annum amount equal to two percent (2%) in excess of the
Reference Rate of interest announced from time to time by Bank of America
National Trust and Savings Association (or an equivalent rate announced by a
comparable national bank selected by Landlord in the event Bank of America no
longer announces a Reference Rate), but in no event in excess of the maximum
interest rate permitted by law. As used in paragraph 25.2.1.3 above, the "worth
at the time of award" is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
25.2.2. Enter upon and take possession of the Leased Premises and
expel or remove Tenant and other persons who may be occupying the Leased
Premises, or any part thereof, by force if necessary, without being liable to
prosecution or for any claim for damages, and relet the Leased Premises, as
Tenant's agent, and receive the rent therefor; and Tenant agrees to pay Landlord
on demand any deficiency that may arise by reason of such reletting; or
25.2.3. Enter upon the Leased Premises, without being liable to
prosecution or for any claim for damages, and do whatever Tenant is obligated to
do under the terms of this Lease; and Tenant agrees to reimburse Landlord on
demand for any reasonable and necessary expenses which Landlord may incur in
thus effecting compliance with Tenant's obligations hereunder.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damage accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. Forbearance by Landlord to enforce one or more of the remedies herein
provided upon the occurrence of a Tenant Event of Default shall not be deemed or
construed to constitute a waiver of such default.
26. HAZARDOUS MATERIALS.
26.1. Covenant. Tenant covenants to Landlord that it will not use, or
allow to be used on the Leased Premises, or bring onto, or allow to be brought
onto, the Leased Premises any Hazardous Substance, as defined below, except as
may be reasonably required in connection with its permitted business on the
Leased Premises, and then only in full compliance with all federal,
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state or local laws. Tenant shall require every sublease to contain
provisions similar to the provisions set forth in this Article 26.
26.2. Right of Entry. Subject to applicable laws and Tenant's
reasonable security policies, Landlord reserves the right to enter the Leased
Premises and all Improvements thereon at any reasonable time and upon reasonable
notice, and at any time in exigent circumstances, for the purpose of inspecting
and examining the Leased Premises for the presence of any Hazardous Substance
whenever Landlord has a reasonable basis for believing that Tenant has not
complied with this Article 26. If the results of such inspection or examination
reveal the presence of Hazardous Substances in, on or about the Leased Premises,
and if Landlord has reasonable cause to believe that they are present in, on or
about the Leased Premises due to Tenant's failure to be in compliance with
Article 26, then Tenant shall reimburse Landlord for its costs incurred in
undertaking such inspection and examination.
26.3. Indemnity. Tenant shall indemnify, defend and hold Landlord and
its trustees, beneficiaries, heirs, successors, assigns, agents, employees and
representatives harmless from any and all Indemnified Costs caused by the
presence of Hazardous Substances in, on or about the Leased Premises which are
placed, or allowed to be placed, in, on or about the Leased Premises by Tenant,
or incurred by Landlord in connection with the release, removal or storage of
any Hazardous Substance placed, or allowed to be placed, in, on or about the
Leased Premises by Tenant. The provisions of this indemnity shall remain in full
force and effect and shall not be affected or impaired by the expiration or any
earlier termination of this Lease and shall survive any such expiration or
termination. "INDEMNIFIED COSTS" means all actual or threatened liabilities,
claims, actions, causes of action, judgments, orders, damages (including
foreseeable and unforeseeable consequential damages), reasonable costs,
reasonable expenses, fines, penalties and losses (including sums paid in
settlement of claims and all reasonable consultant, expert and legal fees),
including those incurred in connection with any investigation of site conditions
or any clean-up, remedial, removal or restoration work (whether of the Leased
Premises, or any other property), or any resulting damages, harm or injuries to
the person or property of any third parties or to any natural resources.
Without limiting the foregoing, "Indemnified Costs" incurred by Landlord as a
result of any work of cure, mitigation, cleanup, remediation, removal or
restoration shall bear interest at the rate of fifteen percent (15%) per annum
until paid in full. In addition, Indemnified Costs are recoverable by Landlord
regardless of whether (i) the Indemnified Costs are incurred or suffered
pursuant to any order of any federal, state or local governmental agency
relating to the clean-up, remediation or other responsive action required by any
applicable law, or (ii) Landlord now or hereafter has or should have had actual
knowledge of any environmental condition giving rise to any indemnity obligation
of Tenant under this Article.
26.4. Hazardous Substances Defined. As used herein, the term "HAZARDOUS
SUBSTANCES" shall include: (i) petroleum or any of its fractions, flammable
substances, explosives, radioactive materials, hazardous wastes or substances,
toxic wastes or substances or any other similar materials or pollutants which
pose a hazard to the Leased Premises, or to persons on or about same, cause the
Leased Premises to be in violation of any law or local approval, or are defined
as or included in the definition of "HAZARDOUS SUBSTANCES", "HAZARDOUS WASTES",
"HAZARDOUS
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MATERIALS", or "TOXIC", or words of similar import under any applicable law,
including, but not limited to: (A) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 4.2 U.S.C. Section 9601, et
seq.; (B) the Hazardous Materials Transportation Act, as amended, 49 U.S.C.
Section 1801, et seq.; (C) the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. Section 6901, et seq.; and (D) regulations adopted and
publications promulgated pursuant to the aforesaid laws; (ii) asbestos in any
form which is or could become friable, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing
levels of polychlorinated biphenyls in excess of 50 parts per million; and
(iii) any other chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority or may or could
pose a hazard to the health and safety of the occupants of the Leased Premises
or the owners and/or occupants of property adjacent to or surrounding the
Leased Premises.
26.5. Landlord's Legal Obligations. Nothing contained herein shall be
deemed to limit Landlord's obligations under law for the removal of Hazardous
Substances which exist on the Leased Premises prior to the delivery thereof to
Tenant or which are thereafter placed upon the Leased Premises by Landlord or to
impose upon Tenant any obligation for the removal of such Hazardous Substances.
However, the removal of any asbestos from the Existing Improvements on the
Leased Premises shall be the responsibility of Tenant, at Tenant's sole cost and
expense.
27. MISCELLANEOUS.
27.1. Termination. In the event this Lease is terminated pursuant to a
right to do so herein contained, except as specifically provided herein (such
as, for example, but without limitation, in Section 2.11 (Tenant's obligation to
remove the Improvements and regrade the Land), in Article 4 (the payment of
hold-over rent by Tenant), in Article 5 (the obligations of the parties
following a termination by Tenant during the Feasibility Period), in Section
13.1 (Tenant's right to remove its personal property after the expiration of
this Lease Term), in Article 16 (indemnity), and in Article 26 above (hazardous
materials)) neither Landlord nor Tenant hereto shall thereafter have any further
obligation or liability one to the other except such obligations as are owed
under this Lease through the date of termination, and this Lease shall be of no
further force or effect.
27.2. Captions. The captions used in this Lease are for convenience
only and shall not be deemed to amplify, modify or limit the provisions hereof.
27.3. Meanings. Words of any gender used in this Lease shall be
construed to include any other gender, and words in the singular shall include
the plural and vice versa, unless the context otherwise requires.
27.4. Successors and Assigns. Subject to the restrictions set forth
herein on assignment and subletting by Tenant, this Lease shall be binding upon
and shall inure to the benefit of Landlord and Tenant and their respective
heirs, legal representatives, successors and assigns.
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27.5. Entire Agreement. The Exhibits annexed to this Lease are hereby
incorporated by reference in their entirety with the same force and effect as
if they were set forth in this Lease in their entirety. This Lease contains the
entire agreement of Landlord and Tenant with respect to the subject matter
hereof and can be altered, amended or modified only by written instrument
executed by both of such parties.
27.6. Time. It is expressly agreed by Landlord and Tenant that time
is of the essence with respect to this Lease. In the event the date for
performance of an obligation or delivery of any notice hereunder falls on a
day other than a business day, then the date for such performance or delivery
of such notice shall be postponed until the next ensuing business day. Any
references to "business days" contained herein are references to normal
working business days (i.e., Monday through Friday of each calendar week,
exclusive of Federal and Nevada state holidays).
27.7. Severability. If any term or provision, or any portion thereof,
of this Lease, or application thereof to any person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each term and provision of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
27.8. Counterparts. This Lease may be signed in counterparts with
the same force and effect as if all required signatures were contained in a
single, original instrument.
27.9. Attorneys' Fees. In the event of litigation between the
parties to enforce this Lease, the prevailing party in any such action shall
be entitled to recover reasonable costs and expenses of suit, including, without
limitation, court costs, attorneys' fees, and discovery costs.
27.10. Memorandum of Lease. Landlord and Tenant shall execute a
memorandum of this Lease and record such memorandum against the Land.
27.11. Governing Law. This Lease shall construed, interpreted, and
enforced pursuant to the laws of the State of Nevada.
28. GAMING PROVISION
28.1. Cooperation and Compliance by Landlord. Landlord, at Tenant's
sole cost and expense, shall promptly apply for and use its best efforts to
obtain all necessary licenses and other approvals and permits, if any,
required of Landlord from any foreign, federal, state or local gaming and
liquor licensing authorities (collectively "GOVERNMENTAL AUTHORITIES") for the
operation by Tenant of its business at the Leased Premises, and shall
otherwise fully cooperate, at Tenant's sole cost and expense, with such
Governmental Authorities in connection with any approval or permit
applications of Landlord or Tenant, or otherwise, which shall include, without
limitation, provision of such information, books and records as may be
requested by such authorities and compliance with all orders and requirements
of such Governmental Authorities.
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28.2. Denial. If at any time (a) Landlord, or any affiliate of Landlord or
either of them, is denied a license or is denied or otherwise unable to obtain
any other approval or permit required by any Governmental Authority with
respect to the operation by Tenant or any affiliate of Tenant or either of them
of its business at the Leased Premises (collectively "APPROVALS"), is required
by any Governmental Authority to apply for an Approval and does not apply
within any required time limit, or withdraws any application for Approval other
than upon a determination by the applicable Governmental Authority that such
Approval is not required, and such denial or failure or withdrawal prevents
Tenant or any affiliate of Tenant or either of them from operating its
business; or (b) any Governmental Authority commences or threatens to commence
any suit or proceeding against Tenant or any affiliate of Tenant or either of
them to terminate or deny any Approval of Tenant or any affiliate of Tenant or
either of them as a result of Landlord or any person associated with Landlord
(all of the foregoing events described in (a) and (b) above are collectively
referred to as a "DENIAL"), if such action may be cured by the replacement of
one or more individuals as shareholders, officers, employees or directors of
Landlord or by a sale of the Leased Premises or disassociation from the
applicable person, then Landlord shall have up to one hundred twenty (120) days
from such Denial (but not more than thirty (30) days less than the period, if
any, as may be allowed by the Governmental Authorities to effect such cure or
if greater half of such period), to replace the disapproved individual with
someone, or sell the Leased Premises to someone, acceptable to the Governmental
Authorities and reasonably acceptable to Tenant. If a cure of the type
described in the preceding sentence is not feasible or permitted, or if the
same is feasible and permitted but not effected within the time limit set forth
in the previous sentence, Tenant shall have the right, in addition to all its
other rights and remedies, to elect to (a) terminate this Lease, or (b)
purchase the Leased Premises as provided in Paragraph 28.3. Anything in this
Article 28 to the contrary notwithstanding, Landlord shall effect all cures as
expeditiously as possible.
28.3. Purchase Right. Landlord hereby grants to tenant an option (the
"PURCHASE RIGHT") to purchase the Leased Premises as provided in this Paragraph
28.3.
28.3.1. Tenant may exercise the Purchase Right at any time
following a Denial and the cure period specified in Paragraph 28.2 by
delivering written notice to Landlord specifying a commercially reasonable
place at which the close (the "CLOSING") of escrow ("ESCROW") shall occur. The
Closing shall be ten (10) days after the determination of the Purchase Price
pursuant to Section 28.3.2 below.
28.3.2. The total purchase price for the Leased Premises (the
"PURCHASE PRICE") shall be equal to the sum of (i) present value of all
payments of Base Rent due for the remainder of the Lease Term, computed using
an interest rate equal to the "Prime Rate" of interest, as defined below, for
the business day preceding Tenant's notice pursuant to Section 28.3.1, and
(ii) the fair market value of Landlord's residuary interest in the Leased
Premises and the Improvements. If the parties are unable to agree upon the
fair market value of such residuary interest within ten (10) days after
Tenant's exercise of its Purchase Right pursuant to the preceding Section
28.3.1, such value shall be determined by arbitration in accordance with the
provisions of Article 29; provided that if Tenant disapproves the value so
determined by
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arbitration, Tenant shall have the right, to be exercised by written
notice to Landlord within fifteen (15) days after such determination is made,
to terminate this Lease (in which event Tenant shall pay all costs incurred by
Landlord under this Section 28.3). The Purchase Price shall be paid by Tenant
(a) at the close of Escrow in cash or (b) in Tenant's discretion, in equal
installments payable over five (5) years following the close of Escrow. If
Tenant elects to pay the balance of the Purchase Price in accordance with
clause (b) of the preceding sentence, an initial installment equal to twenty
percent (20%) of the balance of the Purchase Price will be payable at the close
of Escrow and all remaining obligations shall be secured by a first priority
deed of trust encumbering the Leased Premises. The remaining amount will be
payable in sixty (60) equal installments of principal, plus accrued interest,
on each monthly anniversary of the close of Escrow. The unpaid principal
balance of the Purchase Price shall bear interest at the Prime Rate, plus three
percent (3%) per annum; provided that such interest rate shall not exceed
fifteen percent (15%) per annum. For the purpose of this Section, "PRIME RATE"
shall mean the rate of interest per annum from time to time publicly announced
by Bank of America N.A. (or, if Bank of America, N.A. is no longer in existence
or is no longer announcing such a rate, then such other comparable bank as
Landlord may elect) as its prime or reference rate. The rate of interest shall
change on the effective date of any change in the prime rate.
28.3.3. Upon exercise of the Purchase Right, Landlord shall convey
title to the Leased Premises to Tenant at the close of Escrow by grant,
bargain and sale deed subject only to matters shown in Tenant's leasehold title
policy delivered pursuant to Article 5 of this Lease and matters caused or
consented to in writing by Tenant. At close of Escrow, Landlord shall provide
Tenant with a CLTA owner's policy of title insurance, in the face amount of the
Purchase Price, and otherwise in a form and from an insurer or insurers
reasonably satisfactory to Tenant, with such endorsements and reinsurance as
Tenant may reasonably request, insuring Tenant's title to the Leased Premises.
28.3.4. Closing costs other than title insurance shall be allocated in
accordance with the then prevailing practice in Las Vegas, Nevada. Rent shall
be prorated as of the date of the close of Escrow. At the close of Escrow,
Landlord shall provide Tenant with a suitable affidavit satisfying the
requirements of the Internal Revenue Code relating to withholding of a portion
of the Purchase Price in the event of a purchase from a foreign person.
28.3.5. Landlord and Tenant shall promptly upon request prepare,
execute and deliver such further documents, and shall promptly obtain
beneficiary statements and similar certificates and perform such other acts as
shall from time to time be reasonably required in effecting the close of Escrow
and the better perfecting, assuring, conveying, assigning, transferring and
confirming unto Tenant the Leased Property and the rights to be conveyed or
assigned.
29. ARBITRATION. If any controversy or claim between the parties hereto
arises out of this Lease, other than a claim by Landlord arising from any
failure by Tenant to pay rent as and when such rent becomes due, and if the
parties are unable to agree by direct negotiations, the parties shall promptly
mediate any such disagreement or dispute under the Commercial Mediation
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Rules of the American Arbitration Association. If the parties are unable
to resolve such disagreement or dispute through mediation within ten (10) days
after the first written notice of an election to mediate, or if the
disagreement concerns the buyout price under Section 28.3, then such
disagreement or dispute (excluding an action by Landlord in unlawful detainer,
as provided above) shall be submitted to binding arbitration under the
Commercial Arbitration Rules of the American Arbitration Association.
Notwithstanding the foregoing, if the resolution of any controversy or claim
requires the participation of a third party who is not required and who
declines to participate in an arbitration proceeding, the parties shall not be
required to proceed with an arbitration of such controversy or claim.
The arbitrators shall be appointed under the Commercial Arbitration Rules
of the American Arbitration Association. As soon as the panel has been
convened, a hearing date shall be set within twenty-one (21) days thereafter.
Written submittals shall be presented and exchanged by both parties ten (10)
days before the hearing date, including reports prepared by experts upon whom
either party intends to rely. At such time the parties will also exchange
copies of all documentary evidence upon which they will rely at the arbitration
hearing and a list of the witnesses whom they intend to call to testify at the
hearing. Each party shall also make its respective experts available for
deposition by the other party prior to the hearing date. The hearings shall be
concluded no later than five (5) days after the initial hearing date. The
arbitrators shall make their award within ten (10) business days after the
conclusion of the hearing. In the event of a three-member panel, the decision
in which two (2) of the members of the arbitration panel concur shall be the
award of the arbitrators.
Except as otherwise specified herein, there shall be no discovery or
dispositive motion practice (such as motions for summary judgment or to dismiss
or the like) except as may be permitted by the arbitrators, who shall authorize
only such discovery as is shown to be absolutely necessary to insure a fair
hearing and no such discovery or motions permitted by the arbitrators shall in
any way conflict with the time limits contained herein. Nothing herein shall be
deemed to permit discovery in such arbitration proceeding except as provided
above. The arbitrators shall not be bound by the rules of evidence or civil
procedure, but rather may consider such writings and oral presentations as
reasonable businessmen would use in the conduct of their day-to-day affairs,
and may require the parties to submit some or all of their presentation as the
arbitrators may deem appropriate. It is the intention of the parties to limit
live testimony and cross-examination to the extent absolutely necessary to
insure a fair hearing to the parties on the significant matters submitted to
arbitration. The parties have included the foregoing provisions limiting the
scope and extent of the arbitration with the intention of providing for prompt,
economic and fair resolution of any dispute submitted to arbitration.
If Landlord gives Tenant notice of a claimed default pursuant to Article
25 of this Lease, and if the out-of-pocket costs to Tenant of curing such
claimed default are reasonably expected to be One Hundred Thousand Dollars
($100,000) or less, Tenant's election to dispute such claimed default pursuant
to the provisions of this Article 29 shall not extend or toll the running of
any cure period provided in Article 25. However, if the out-of-pocket costs to
Tenant of curing such claimed default are reasonably expected to exceed One
Hundred Thousand Dollars
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<PAGE> 48
($100,000), and if Tenant in good faith elects to dispute such claimed default
pursuant to the provisions of this Article 29, any cure period provided in
Article 25 for the claimed default shall be tolled during the resolution of
such dispute hereunder.
The arbitrators shall have the discretion to award the costs of
arbitration, arbitrators' fees and the respective attorneys' fees of each party
between the parties as they see fit.
Judgment upon the award entered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
Notwithstanding the parties' agreement to mediate or arbitrate their
disputes as provided herein, any party may seek emergency relief in a court of
law without waiving the right to arbitrate.
The arbitrators shall make their award in accordance with applicable law
and this Lease and based on the evidence presented by the parties, and at the
request of either party at the start of the arbitration, shall include in their
award findings of fact and conclusions of law supporting the award.
Nothing contained herein is intended to, nor shall, limit Landlord's right
to pursue any action in unlawful detainer in the case of a Tenant Event of
Default in the payment of Base Rent.
30. GUARANTY. The obligations of Tenant under this Lease shall be
guaranteed by Grand Casinos, Inc. ("GRAND"). Within fourteen (14) days after
the Effective Date, Grand shall execute and deliver to Landlord a guaranty in
the form attached hereto as Exhibit "E" (the "GUARANTY"). Such Guaranty shall
provide that it will not apply with respect to obligations occurring under this
Lease more than five (5) years after the Effective Date if, within such time,
Tenant constructs and thereafter maintains Tenant's Project, so long as
Tenant's Project has a Fair Market Value of not less than Two Hundred Million
Dollars ($200,000,000), all subject to such Guaranty being reinstated pursuant
to Section 14.1 above. If the Guaranty is not executed and delivered to
Landlord as provided herein, this Lease shall terminate and the remaining
portion of the Security Deposit shall be returned to Tenant.
31. LANDLORD'S SECURITY INTEREST.
31.1. Grant of Security Interests in Project Parcels. Prior to
commencing construction of any portion of Tenant's Project, as hereinafter
defined, upon the Leased Premises (the date of such commencement is referred to
herein as the "START DATE"), and as additional security for the payment and
performance of Tenant's obligations under this Lease, Tenant shall convey,
grant and assign (or cause to be conveyed, granted and assigned) to Landlord a
lien on, security interest in and assignment of (collectively, "LANDLORD'S
LIEN") all of the right, title and interest which is now owned or hereafter
acquired by Tenant or either of them or any affiliate of either of them in each
other parcel of land (together with all improvements thereon and appurtenances
thereto, collectively, the "PROJECT PARCELS") upon which Tenant's integrated
hotel/casino project and
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<PAGE> 49
related, integrated amenities thereto (collectively, "TENANT'S PROJECT"),
or any part thereof, is to be located, as shown by the site plan which is
included as a part of Tenant's Renderings. Without limiting the foregoing,
Landlord's Lien shall automatically extend to and cover any after acquired
right, title, or interest in any Project Parcel (including, without limitation,
a fee interest therein). Tenant shall, at Landlord's request, execute and
deliver (or cause to be executed and delivered) (in recordable form, if
appropriate) any instrument reasonably necessary or appropriate to subject to
Landlord's Lien any such after acquired property, when, and if, Tenant or either
of them or any affiliate or either of them acquires such property. In addition,
if, upon the Start Date, neither Tenant nor either of them nor any affiliate of
either of them has yet acquired any right, title or interest in a Project
Parcel, Tenant shall convey, grant and assign (or cause to be conveyed, granted
and assigned) the Landlord's Lien in such Project Parcel immediately after
Tenant or either of them or any affiliate of either of them has acquired any
right, title or interest therein. Notwithstanding the foregoing, Landlord's
Lien shall not encumber any "time share" buildings and related non-gaming
amenities (including the land upon which such improvements are located)
("TENANT'S TIME SHARE IMPROVEMENTS") which are constructed on any Project
Parcel so long as Tenant's Time Share Improvements are not constructed upon the
Leased Premises and do not secure a Leasehold Mortgage. If a Leasehold Mortgage
initially encumbers the land or leasehold interest in the land upon which
Tenant's Timeshare Improvements are constructed, and if such Leasehold Mortgage
is released to allow for the construction of Tenant's Time Share Improvements
to be separately financed or otherwise, Landlord's Lien shall encumber such
land until the Leasehold Mortgage is released, at which point Landlord's Lien
shall likewise be released from Tenant's Time Share Improvements. If at any
time thereafter a Leasehold Mortgagee acquires a security interest in Tenant's
Time Share Improvements, Tenant shall likewise convey Landlord's Lien in such
property to Landlord with the priority described in Section 31.3.2. No Landlord
Lien shall be granted in the property commonly known as "Polo Plaza" or the
"Shark Club" unless and until Tenant has been granted the right to construct,
maintain, use or operate a portion of Tenant's Project thereon, whether by
deed, lease, conveyance or otherwise.
31.2. Grant of Security Interests in Furniture, Fixtures and Equipment.
Prior to the Start Date, Tenant shall, and as additional security for
the payment and performance of Tenant's obligations under this Lease, grant (or
cause to be granted) to Landlord a security interest (the "LANDLORD'S SECURITY
INTEREST") in all items of personal property, whether tangible or intangible,
and whether now owned or hereafter acquired, owned, used or held in connection
with the ownership, operation or maintenance of Tenant's Project, including,
without limitation, all furniture, fixtures and equipment (collectively, the
"FF&E"), whether such items are to be located or used upon the Leased Premises
or upon one more the Project Parcels. Nothing contained herein shall prevent
Tenant from disposing of items of FF&E in the ordinary course of Tenant's
business so long as the FF&E maintained by Tenant is at all times sufficient
for the operation of Tenant's Project.
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<PAGE> 50
31.3. PERFECTION AND PRIORITY.
31.3.1 Forms of Conveyance. The Landlord's Lien in a Project Parcel
shall be evidenced by a recorded deed of trust, fixture filing, security
agreement and assignment of leases and rents in a commercially reasonable form,
reasonably acceptable to Landlord and Tenant. The Landlord's Security Interest
shall be evidenced by a written security agreement and shall be perfected by
the filing and recordation of appropriate financing statements, all in
commercially reasonable forms, reasonably acceptable to Landlord and
Tenant.
31.3.2. Priority. Subject to the following provisions of this Section
31.3.2, each of Landlord's Lien and Landlord's Security Interest shall be prior
to all other liens and encumbrances on the interests of Tenant or either of
them or any affiliate of either of them, and, concurrently with the grant of
each Landlord's Lien in a Project Parcel (and concurrently with the acquisition
of any after acquired title therein), Tenant shall provide Landlord with an
ALTA lender's policy of title insurance (or an endorsement thereto, in the case
of any after acquired title), issued through Nevada Title Company in the amount
of the current market value of the subject Project Parcel, as reasonably
demonstrated by Tenant's delivery of an escrow closing statement for its
purchase of such parcel or other evidence of value which is reasonably
acceptable to Landlord, insuring the priority of Landlord's Lien in such
collateral. Landlord's Lien and Landlord's Security
Interest shall be subordinated to other financing ("PRIOR DEBT") which
satisfies the following conditions:
31.3.2.1. The amount of the Prior Debt encumbering the Project Parcels
and the FF&E shall not exceed seventy-five percent (75%) of the Fair Market
Value, determined in the manner described in Section 31.4 below, of the
aggregate of the Project Parcels (including improvements) and FF&E in which
Landlord has a security interest.
31.3.2.2. The amount of the Prior Debt encumbering the Project Parcels
shall not exceed seventy percent (70%) of the Fair Market Value,
determined in the manner described in Section 31.4 below, of the aggregate of
the Project Parcels (including improvements) in which Landlord has a security
interest.
31.3.2.3. The Prior Debt shall specifically provide that Landlord
shall receive notice of any default thereunder and shall have the right to cure
any such default to the extent that Tenant is afforded any such cure rights.
31.3.2.4. Tenant shall provide Landlord with a title insurance
policy, or an appropriate endorsement to Tenant's existing title insurance
policy with respect to the subject collateral, insuring Tenant's subordinated
security interest in an amount equal to the Fair Market Value of that
collateral.
31.3.2.5. Landlord shall have the right to review the loan documents
for the Prior Debt to verify that the conditions to the subordination of
Landlord's security interest, as set forth herein, have been satisfied.
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<PAGE> 51
31.4. Fair Market Value. Tenant shall provide Landlord with an appraisal
of the "Fair Market Value" of the Project Parcels and of the FF&E prior to any
subordination of Landlord's security interest hereunder. If such appraisal is
relied upon by Tenant's Leasehold Mortgagee or, with respect to the value of
the FF&E, by the lender financing the FF&E, as the value of the subject
collateral for the purpose of making the loan which is secured by the Leasehold
Mortgage or the FF&E, as the case may be, then such appraisal shall be accepted
by Landlord and the value shown therein shall be the Fair Market Value.
Otherwise, such appraisal, and the determination of Fair Market Value, shall be
subject to the following provisions of this Section 31.4.
Tenant's appraisal shall be prepared by a licensed MAI or other
qualified appraiser. Unless Landlord disapproves such appraisal within ten (10)
days of its receipt of the same, the value shown therein shall be deemed to be
the Fair Market Value of the subject collateral; provided that: if Landlord,
acting reasonably and in good faith, disapproves such appraisal, then Landlord
shall appoint its own qualified MAI appraiser within ten (10) days after
receipt of Tenant's appraisal, and Landlord's appraiser shall give its opinion
as to the Fair Market Value of the subject collateral within thirty (30) days
after being so appointed. If the values determined by Landlord's appraiser and
Tenant's appraiser do not differ by more than five percent (5%) of the lower
appraisal, then the "Fair Market Value," as used herein, shall mean the
arithmetic average of such two (2) appraisals. If the two appraisals differ by
more than five percent (5%) of the lower appraisal, then the two appointed
appraisers shall agree upon a third qualified appraiser within ten (10) days
after the expiration of such thirty (30) day period who shall be given copies
of the two (2) preceding appraisals and who shall determine the Fair Market
Value within fifteen (15) days after such third appraiser is engaged, provided
that such final Fair Market Value shall not be greater than the higher of the
two previous appraisals nor less than the lower of the two previous appraisals.
Landlord and Tenant shall each bear the cost of their own appraiser and shall
share equally the cost of the third appraiser. For purposes of determining the
ratios under Section 31.3 in the case of Prior Debt which is construction or
FF&E financing, the Fair Market Value shall be determined on a "completed
project" basis.
31.5. Further Assurances. Landlord shall execute, acknowledge
and deliver to Tenant or to Tenant's lender and/or title insurer, as designated
by Tenant, such evidence of the subordination of Landlord's Lien and Landlord's
Security Interest required hereunder as Tenant may reasonably request.
32. TENANT'S OPTION TO PURCHASE THE LEASED PREMISES.
Tenant shall have the option to purchase the Leased Premises during the
twentieth (20th) year after the Phase II Commencement Date, (the "Option
Year"), for the purchase price of Thirty Million Dollars ($30,000,000) (the
"OPTION PURCHASE PRICE"). Such option shall be exercised, if at all, by written
notice to Landlord not later than two and one-half (2.5) years prior to the
proposed closing date, which closing date (hereinafter, the "PURCHASE OPTION
CLOSING DATE") shall be within the Option Year and shall be set forth in
Tenant's written notice. The Option Purchase Price shall be paid in cash or by
cash equivalent upon the Purchase Option
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<PAGE> 52
Closing Date. If Tenant fails to exercise its option in a timely manner as
provided herein, the provisions of this Article 32 shall have no further force
or effect.
Upon exercise of Tenant's option to purchase the Leased Premises
hereunder, Landlord shall convey title to the Leased Premises to Tenant at the
close of escrow by grant, bargain and sale deed subject only to matters shown
in Tenant's leasehold title policy delivered pursuant to Article 5 of this
Lease and matters caused or consented to in writing by Tenant. At close of
escrow, Landlord shall provide Tenant with a CLTA owner's policy of title
insurance, in the face amount of the Option Purchase Price, and otherwise in a
form and from an insurer or insurers reasonably satisfactory to Tenant, with
such endorsements and reinsurance as Tenant may reasonably request, insuring
Tenant's title to the Leased Premises.
Closing costs other than title insurance shall be allocated in
accordance with the then prevailing practice in Las Vegas, Nevada. Rent shall
be prorated as of the date of the close of escrow. At the close of escrow,
Landlord shall provide Tenant with a suitable affidavit satisfying the
requirements of the Internal Revenue Code relating to withholding of a portion
of the Option Purchase Price in the event of a purchase from a foreign person.
Landlord and Tenant shall promptly upon request prepare, execute and
deliver such further documents, and shall promptly obtain beneficiary
statements and similar certificates and perform such other acts as shall from
time to time be reasonably required in effecting the close of escrow and the
better perfecting, assuring, conveying, assigning, transferring and confirming
unto Tenant the Leased Property and the rights to be conveyed or assigned.
If Tenant elects to purchase the Leased Premises, Landlord may elect to
participate in a tax-free exchange under Section 1031 of the Internal Revenue
Code. Tenant agrees to cooperate with such an exchange by Landlord, so long as
such cooperation is without cost to Tenant and does not materially affect
Tenant's purchase. Landlord specifically reserves the right to accelerate the
Purchase Option Closing Date to accommodate a tax-free exchange provided that
(i) Landlord shall provide Tenant with notice of the earlier Purchase Option
Closing Date not later than one hundred eighty (180) days prior to such date;
and (ii) such date be at least one hundred eighty (180) days after Tenant's
notice of the exercise of its option to purchase the Leased Premises hereunder.
33. BINDING OBLIGATION. Tenant hereby represents and warrants to Landlord
that this Lease and the consummation of the transactions contemplated hereby is
valid and binding upon Tenant (and the individuals executing this Lease on
behalf of Tenant represent and warrant that they are authorized to so act) and
does not constitute a default (or an event which with notice or passage of time
or both will constitute default) under any contract to which Tenant is a party
or by which Tenant is bound; provided that such representation and warranty
shall apply to the Guaranty only after the Guaranty is executed and delivered
by Grand Casinos. Within fourteen (14) days after the Effective Date, Tenant
shall provide Landlord with a certified resolution of the board of directors
of each entity constituting Tenant authorizing the transactions contemplated
hereby and the execution and delivery of this Lease by the persons executing
the same on behalf of Tenant.
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<PAGE> 53
IN WITNESS WHEREOF, the parties hereto have executed this Lease to be
effective as of the Effective Date.
LANDLORD:
BROOKS FAMILY TRUST
By: /s/ Jewel Brooks
------------------------------
Jewel Brooks, Trustee
Date:
----------------------------
NEVADA BROOKS COOK
/s/ Nevada Brooks Cook
---------------------------------
Date:
----------------------------
TENANT:
CLOOBECK ENTERPRISES
a California corporation
By: /s/ Stephen J. Cloobeck
------------------------------
Date: 6/17/96
----------------------------
By:
------------------------------
Date:
----------------------------
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<PAGE> 54
GRAND CASINOS NEVADA I, INC.
a Minnesota corporation
By: /s/ Stanley Taube, President
-----------------------------
Date: 6-17-96
----------------------------
By:
------------------------------
Date:
----------------------------
Nevada Title Company of Las Vegas, a Nevada corporation, hereby
acknowledges receipt of the foregoing instructions and agrees to act as Escrow
Agent in accordance with the terms and conditions thereof.
DATED: Nevada Title Company
------------------- a Nevada corporation
By:
------------------------------
Title:
---------------------------
Escrow Number:
-------------------
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<PAGE> 55
ESCROW NUMBER 96-06-0201 RMG
EXHIBIT "A"
LEGAL DESCRIPTION
PARCEL ONE (1):
THAT PORTION OF THE NORTHWEST QUARTER (NW 1/4) OF THE SOUTHWEST QUARTER (SW
1/4) OF SECTION 21, TOWNSHIP 21 SOUTH, RANGE 61 EAST, M.D.M., DESCRIBED AS
FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE SOUTHWEST QUARTER (SW 1/4) OF SAID
SECTION 21; THENCE SOUTH 89 DEGREES 07'15" EAST A DISTANCE OF 80.01 FEET TO A
POINT IN THE EAST LINE OF U.S. HIGHWAY NO. 91 (ORIGINAL ALIGNMENT 80 FEET
WIDE), SAID POINT BEING THE NORTHWEST CORNER OF THAT CERTAIN PARCEL OF LAND
CONVEYED BY MORRIS ROSE, ET AL, TO LAND O'SUN LAND COMPANY, BY DEED RECORDED
AUGUST 12, 1954, AS DOCUMENT NO. 17629 OF OFFICIAL RECORDS, CLARK COUNTY,
NEVADA; THENCE CONTINUING SOUTH 89 DEGREES 07'15" EAST ALONG THE NORTH LINE OF
THE ABOVE DESCRIBED PARCEL A DISTANCE OF 409.87 FEET TO A POINT; THENCE SOUTH 0
DEGREES 02'00" EAST A DISTANCE OF 158.92 FEET TO THE TRUE POINT OF BEGINNING;
THENCE CONTINUING SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 230.00 FEET TO A
POINT IN THE SOUTH LINE OF SAID PARCEL CONVEYED BY DOCUMENT NO. 17629; THENCE
NORTH 88 DEGREES 42'28" WEST ALONG SAID SOUTH LINE, A DISTANCE OF 410.00 FEET
TO A POINT IN THE AFOREMENTIONED EAST LINE OF U.S. HIGHWAY NO. 91; THENCE NORTH
0 DEGREES 02'00" WEST ALONG SAID EAST LINE A DISTANCE OF 230.00 FEET TO A POINT
IN A LINE THAT BEARS NORTH 88 DEGREES 42'28" WEST FROM THE TRUE POINT OF
BEGINNING; THENCE ALONG SAID LAST MENTIONED LINE SOUTH 88 DEGREES 42'28" EAST
PARALLEL WITH THE AFOREMENTIONED SOUTH LINE OF SAID CONVEYED PARCEL, A DISTANCE
OF 410.00 FEET TO THE TRUE POINT OF BEGINNING.
EXCEPTING FROM THE HEREINABOVE DESCRIBED PARCEL, THE INTEREST IN AND TO THE
WESTERLY TEN (10) FEET, AS CONVEYED TO THE STATE OF NEVADA, FOR HIGHWAY
PURPOSES.
FURTHER EXCEPTING THEREFROM THAT PORTION OF SAID LAND LYING WITHIN PARCEL TWO
(2) HEREIN BELOW DESCRIBED.
PARCEL TWO (2):
THAT PORTION OF THE NORTHWEST QUARTER (NW 1/4) OF THE SOUTHWEST QUARTER (SW
1/4) OF SECTION 21, TOWNSHIP 21 SOUTH, RANGE 61 EAST, M.D.M., DESCRIBED AS
FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE SOUTHWEST QUARTER (SW 1/4) OF THE
SAID SECTION 21; THENCE SOUTH 89 DEGREES 07'15" EAST A DISTANCE OF 80.01 FEET
TO A POINT IN THE EAST LINE OF U.S. HIGHWAY NO. 91, (ORIGINAL ALIGNMENT, 80
FEET WIDE), SAID POINT BEING THE NORTHWEST CORNER OF THAT CERTAIN PARCEL OF
LAND CONVEYED BY MORRIS ROSE, ET AL, TO LAND O'SUN LAND COMPANY, BY DEED
RECORDED AUGUST 12, 1954 AS DOCUMENT NO. 17629 OF OFFICIAL RECORDS, CLARK
COUNTY, NEVADA;
A-1
<PAGE> 56
ESCROW NO. 96-06, 0201 RMG
EXHIBIT "A" (CONTINUED)
LEGAL DESCRIPTION
THENCE CONTINUING SOUTH 89 DEGREES 07'15" EAST ALONG THE NORTH LINE OF THE ABOVE
DESCRIBED PARCEL A DISTANCE OF 409.87 FEET TO A POINT; THENCE SOUTH 0 DEGREES
02'00" EAST A DISTANCE OF 158.92 FEET TO A POINT; THENCE NORTH 88 DEGREES
42'28" WEST PARALLEL WITH THE SOUTH LINE OF SAID PARCEL CONVEYED BY DOCUMENT
NO. 17629, A DISTANCE OF 110.00 FEET TO THE TRUE POINT OF BEGINNING; THENCE
SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 115.00 FEET TO A POINT; THENCE NORTH
88 DEGREES 42'28" WEST PARALLEL WITH THE AFOREMENTIONED SOUTH LINE OF SAID
CONVEYED PARCEL, A DISTANCE OF 300.00 FEET TO A POINT IN THE AFOREMENTIONED
EAST LINE OF U.S. HIGHWAY NO. 91; THENCE NORTH 0 DEGREES 02'00" WEST ALONG SAID
EAST LINE A DISTANCE OF 115.00 FEET TO A POINT IN A LINE THAT BEARS NORTH 88
DEGREES 42'28" WEST FROM THE TRUE POINT OF BEGINNING; THENCE ALONG SAID LAST
MENTIONED LINE SOUTH 88 DEGREES 42'28" EAST PARALLEL WITH THE AFOREMENTIONED
SOUTH LINE OF SAID CONVEYED PARCEL, A DISTANCE OF 300.00 FEET TO THE TRUE POINT
OF BEGINNING.
EXCEPTING THEREFROM THE HEREINABOVE DESCRIBED PARCEL, THE INTEREST IN AND TO
THE WESTERLY TEN (10) FEET, AS CONVEYED TO THE STATE OF NEVADA FOR HIGHWAY
PURPOSES.
PARCEL THREE (3):
THAT PORTION OF THE NORTHWEST QUARTER (NW 1/4) OF THE SOUTHWEST QUARTER (SW
1/4) OF SECTION 21, TOWNSHIP 21 SOUTH, RANGE 61 EAST, M.D.M., DESCRIBED AS
FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE SOUTHWEST QUARTER (SW 1/4) OF SAID
SECTION 21, THENCE SOUTH 89 DEGREES 07'15" EAST A DISTANCE OF 80.01 FEET TO A
POINT ON THE EAST LINE OF U.S. HIGHWAY NO. 91, (ORIGINAL ALIGNMENT, 80 FEET
WIDE), SAID POINT BEING THE NORTHWEST CORNER OF PARCEL CONVEYED BY MORRIS ROSE,
ET. AL., TO LAND O'SUN LAND CO., BY DEED RECORDED AUGUST 12, 1954 AS DOCUMENT
NO. 17629, OFFICIAL RECORDS, CLARK COUNTY, NEVADA; THENCE SOUTH 0 DEGREES
02'00" EAST ALONG THE EAST LINE OF SAID U.S. HIGHWAY NO. 91, A DISTANCE OF
271.38 FEET TO A POINT; THENCE SOUTH 88 DEGREES 42'28" EAST, PARALLEL WITH THE
SOUTH LINE OF ABOVE DESCRIBED PARCEL A DISTANCE OF 410.00 FEET TO THE TRUE
POINT OF BEGINNING; THENCE CONTINUING SOUTH 88 DEGREES 42'28" EAST A DISTANCE
OF 400 FEET TO A POINT; THENCE SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 115.00
FEET TO THE SAID SOUTH LINE; THENCE NORTH 88 DEGREES 42'28" WEST ALONG THE
SAID SOUTH LINE A DISTANCE OF 400.00 FEET TO A POINT; THENCE NORTH 0 DEGREES
02'00" WEST A DISTANCE OF 115.00 FEET TO THE TRUE POINT OF BEGINNING.
A-2
<PAGE> 57
ESCROW NO. 96-06, 0201 RMG
EXHIBIT "A" (CONTINUED)
LEGAL DESCRIPTION
PARCEL FOUR (4) :
THAT PORTION OF THE NORTHWEST QUARTER (NW 1/4) OF THE SOUTHWEST QUARTER (SW
1/4) OF SECTION 21, TOWNSHIP 21 SOUTH, RANGE 61 EAST, M.D.M., DESCRIBED AS
FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE SOUTHWEST QUARTER (SW 1/4) OF SAID
SECTION 21; THENCE SOUTH 89 DEGREES 07'15" EAST A DISTANCE OF 80.01 FEET TO A
POINT ON THE EAST LINE OF U.S. HIGHWAY 91, (ORIGINAL ALIGNMENT 80 FEET WIDE),
SAID POINT BEING THE NORTHWEST CORNER OF PARCEL CONVEYED BY MORRIS ROSE, ET AL,
TO LAND O'SUN LAND COMPANY DEED RECORDED AUGUST 12, 1954 AS D0CUMENT NO. 17629,
OFFICIAL RECORDS, CLARK COUNTY, NEVADA; THENCE CONTINUING SOUTH 89 DEGREES
07'15" EAST ALONG THE NORTH LINE OF THE ABOVE DESCRIBED PARCEL A DISTANCE OF
409.87 FEET TO THE TRUE POINT OF BEGINNING; THENCE CONTINUING SOUTH 89 DEGREES
07'15" EAST ALONG THE SAID NORTH LINE A DISTANCE OF 399.91 FEET TO A POINT;
THENCE SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 161.42 FEET TO A POINT; THENCE
NORTH 88 DEGREES 42'28" WEST PARALLEL WITH THE SOUTH LINE OF THE SAID CONVEYED
PARCEL A DISTANCE OF 400.00 FEET TO A POINT; THENCE NORTH 0 DEGREES 02'00" WEST
A DISTANCE OF 158.92 FEET TO THE TRUE POINT. OF BEGINNING.
EXCEPTING THEREFROM THE NORTH 40 FEET THEREOF FOR ROAD PURPOSES.
PARCEL FIVE (5):
THAT PORTION OF THE NORTHWEST QUARTER (NW 1/4) OF THE SOUTHWEST QUARTER (SW 1/4)
OF SECTION 21, TOWNSHIP 21 SOUTH, RANGE 61 EAST, M.D.M., DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE SOUTHWEST QUARTER (SW
1/4) OF SAID SECTION 21; THENCE SOUTH 89 DEGREES 07'15" EAST A DISTANCE
OF 80.01 FEET TO A POINT ON THE EAST LINE OF U.S. HIGHWAY NO. 91,
(ORIGINAL ALIGNMENT, 80 FEET WIDE), SAID POINT BEING THE
NORTHWEST CORNER OF PARCEL CONVEYED BY MORRIS ROSE; ET AL, TO
LAND O'SUN LAND CO. BY DEED RECORDED AUGUST 12, 1954 AS DOCUMENT
NO. 17629, OFFICIAL RECORDS, CLARK COUNTY, NEVADA RECORDS; THENCE
CONTINUING SOUTH 89 DEGREES 07'15" EAST ALONG THE NORTH LINE OF THE
ABOVE DESCRIBED PARCEL A DISTANCE OF 409.87 FEET TO A POINT; THENCE
SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 158.92 FEET TO THE TRUE POINT
OF BEGINNING; THENCE SOUTH 88 DEGREES 42'28" EAST, PARALLEL WITH THE
SOUTH LINE OF ABOVE DESCRIBED PARCEL A DISTANCE OF 400.00 FEET TO
A POINT; THENCE SOUTH 0 DEGREES 02'00" EAST A DISTANCE OF 115.00 FEET TO
A POINT; THENCE NORTH 88 DEGREES 42'28" WEST, PARALLEL WITH SAID SOUTH LINE A
DISTANCE OF 400.00 FEET TO A POINT; THENCE NORTH 0 DEGREES 02'00" WEST A
DISTANCE OF 115.00 FEET TO THE TRUE POINT OF BEGINNING.
A-3
<PAGE> 58
EXHIBIT "B"
TENANT'S RENDERINGS
[TO BE ATTACHED]
B-1
<PAGE> 59
ESCROW NO. 96-06-0201 RMG
EXHIBIT "C"
At the date hereof Exceptions to coverage in addition to the printed exceptions
and exclusions contained in said policy form would be as follows:
(1) SUBSEQUENT YEAR TAXES: Taxes for the fiscal year 1996 to
1997 and subsequent years, a lien not yet due or payable.
Taxes for the fiscal year 1995-96, are paid in full. All taxes current
(2) SUPPLEMENTAL TAXES: Any supplemental taxes which may become a lien on the
subject property by reason of increased valuations due to land use or
improvement, NRS 361.260, or otherwise. All taxes current
(3) SPECIAL ASSESSMENTS: for MEDIAN LANDSCAPE AND MAINTENANCE
Improvement District No.: 97A
Assessment No.: 162-21-301-007-5076
Term: 20 YEARS
Installment due on: FEBRUARY 1 AND AUGUST 1
Initial Principal Balance: $51,741.30
Interest Rate: 6.35
Pay off $53,596.42 if paid by June 30, 1996.
No. of delinquent installments 0
Affects: PARCEL ONE (1)
(4) SPECIAL ASSESSMENTS: for MEDIAN LANDSCAPE AND MAINTENANCE
Improvement District No.: 97A
Assessment No.: 162-21-301-003-5076
Term: 20 YEARS
Installment due on: FEBRUARY 1 AND AUGUST 1
Initial Principal Balance: $51,741.30
Interest Rate: 6.35
Pay off $56,733.57 if paid by June 30, 1996.
No. of delinquent installments 0
Affects: PARCEL TWO (2)
(5) PENDING SPECIAL ASSESSMENT: A pending assessment for Clark
County Special Assessment District No. 97B as disclosed by Assessment Plat
recorded October 10, 1994 in Book 941010 as Document No. 01177.
Affects: PARCEL 1 AND 2
(6) CLARK COUNTY SANITATION DISTRICT: The herein described property lies
within the boundaries of CLARK COUNTY SANITATION DISTRICT and may be subject to
all assessments and obligations thereof.
(7) PATENT: Reservations and Easements in the patent from the United States
of America, recorded July 1, 1931, in Book 18 of Deeds, Pages 272 and 273 as
Document No. 41003, of Official Records.
C-1
<PAGE> 60
ESCROW NO: 96-06-0201 RMG
(8) EASEMENT: An easement affecting that portion of said land and for the
purposes therein and incidental purposes thereto, in favor of NEVADA POWER
COMPANY, for electrical lines, recorded July 16, 1957, in Book 135 as Document
No. 110695 of Official Records.
(9) EASEMENT: An easement affecting that portion of said land and for the
purposes therein and incidental purposes thereto, in favor of NEVADA POWER
COMPANY, for electrical lines, recorded July 16, 1957, in Book 135 as Document
No. 110699 of Official Records.
(10) EASEMENT: An easement affecting that portion of said land and for the
purposes therein and incidental purposes thereto, in favor of NEVADA POWER
COMPANY, for electrical lines, recorded November 24, 1959, in Book 222 as
Document No. 180725 of Official Records.
(11) EASEMENT: An easement affecting that portion of said land and for the
purposes therein and incidental purposes thereto, in favor of NEVADA POWER
COMPANY, for electrical lines, recorded August 29, 1961, in Book 315 as
Document No. 255041 of Official Records.
(12) An unrecorded Lease executed by and between the parties named herein, for
the terms and upon and subject to all of the terms, covenants, and provisions
contained therein;
Dated: May 1, 1987
Lessor: BROOKS FAMILY TRUST
Lessee: FORTE HOTELS INTERNATIONAL, INC.
Term: 20 years
Disclosed by: MEMORANDUM OF LEASE
Recorded: October 9, 1989 in Book 891009 as Document No. 00485
Affects: PARCELS ONE (1) AND THREE (3)
Said lease was modified by an instrument executed by BROOKS FAMILY TRUST, JEWEL
BROOKS TRUSTEE, as lessor, and FORTE HOTELS INTERNATIONAL, INC., as lessee.
Said instrument recorded November 19, 1990 in Book 901119 of Official Records
as document number 00332.
C-2
<PAGE> 61
EXHIBIT "D"
PERMITTED CONDITIONS
Section 23.4 of this Lease grants to Tenant the right to encumber its interest
in this Lease by mortgage for the purpose of financing construction and
provides inter alia and acknowledges that a Leasehold Mortgage may provide that
certain property insurance proceeds and condemnation awards with respect to the
buildings and other improvements constructed on the Leased Premises shall only
be disbursed for repair, reconstruction or restoration upon the satisfaction of
certain specified conditions (the "CONDITIONS").
Landlord hereby acknowledges that the Conditions set forth below are
reasonable conditions to such disbursement and hereby grants its approval of
such conditions.
Conditions
1. A provision that all proceeds of such property insurance (which does
not include debris removal or demolition cost insurance) with respect to any
damage or destruction to the improvements on the Leased Premises, shall be
payable to the Leasehold Mortgagee if received by Tenant.
2. A provision that all proceeds of insurance shall be held by the
Leasehold Mortgagee for Tenant in a non-interest bearing escrow account pending
disbursement.
3. A provision that the amount of loss proceeds to be disbursed toward
reconstruction shall be the amount of such condemnation awards or insurance
proceeds remaining after deduction of all reasonable expenses of collection and
settlement including, without limitation, attorneys' and adjustors' fees and
charges.
4. A provision that no such loss proceeds shall be disbursed unless or
until:
(i) no default, or an event which with the giving of notice, the passage
of time, or both, would constitute a default has occurred and is continuing;
(ii) the sum of condemnation awards and/or insurance proceeds and other
amounts deposited with the Leasehold Mortgagee or its designee is sufficient to
complete such repair, reconstruction or alteration;
(iii) the Leasehold Mortgagee determines, in its reasonable judgment,
that the damage or destruction to the improvements on the Leased Premises can be
repaired and the restoration completed by the maturity date of the loan;
(iv) the Leasehold Mortgagee and all applicable governmental authorities
shall have approved the final plans and specifications for reconstruction of
the subject improvements;
D-1
<PAGE> 62
(v) Tenant shall have delivered to the Leasehold Mortgagee (A) a
budget of all costs of reconstruction of the improvements on the Leased
Premises, (B) a construction schedule for the reconstruction of such
improvements, and (C) a construction contract for the reconstruction work of
the improvements on the Leased Premises in form and content, and with a
contractor, acceptable to the Leasehold Mortgagee in its reasonable judgment;
(vi) the ratio of the loan amount to the value of the improvements on
the Leased Premises and Tenant's interest under this Lease is not more than that
ratio as of the date the loan evidenced by the Leasehold Mortgage was made;
(vii) the Leasehold Mortgagee receives satisfactory written evidence
that Clark County, Nevada has approved the plans and specifications for the
reconstruction work, if such approval is required;
(viii) the Leasehold Mortgagee receives satisfactory evidence that this
Lease is, and during the period of required reconstruction will remain, in full
force and effect and all necessary approvals in connection with the
reconstruction have been obtained from the Landlord; and
(ix) the Leasehold Mortgagee receives satisfactory evidence that ingress
to and egress from the Leased Premises, and Tenant's use thereof, will be fully
available as of the projected date of reconstruction of such improvements to
the same degree as before such damage or destruction.
D-2
<PAGE> 63
EXHIBIT "E"
GUARANTY
This Guaranty of LEASE ("GUARANTY) is made as of the ___ day of June, 1996,
by GRAND CASINOS, INC., a Minnesota corporation ("GUARANTOR") in favor of BROOKS
FAMILY TRUST and NEVADA BROOKS COOK (collectively, "LANDLORD"), with respect to
a certain Lease Agreement entered into as of ________, 1996 (the "LEASE") by and
between Landlord and CLOOBECK ENTERPRISES, a California corporation and GRAND
CASINOS NEVADA I, INC., a Minnesota corporation, (collectively, "TENANT").
W I T N E S S E T H
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
Guarantor agrees as follows:
1. Guarantor directly, absolutely, independently, primarily,
unconditionally and continually guarantees as to Landlord and its successors
and assigns, the full and punctual payment, performance and observance by
Tenant of all terms, covenants and conditions contained in the Lease on
Tenant's part to be kept, performed or observed, including, without limitation,
payment of Base Rent, late charges and all other amounts payable by Tenant to
Landlord under the Lease. If, at any time, default shall be made by Tenant in
the performance or observance of any of the terms, covenants or conditions
contained in the Lease on Tenant's part to be kept, performed or observed, or
if Tenant shall default in any payment due under the Lease, Guarantor will pay,
keep, perform and observe the same, as the case may be, in the place and stead
of Tenant.
2. Any act of Landlord or its agents, or the successors or assigns of
Landlord or their agents, consisting of a waiver of any of the terms or
conditions of the Lease, or the giving of any consent to any manner or thing
relating to the Lease, or the granting of any indulgences or extensions of time
to Tenant, or to the release of any collateral providing security for the full
performance of Tenant's obligations, or the failure of Landlord to resort to
any of its remedies provided by the Lease or at law or in equity, may be done
and taken without notice to Guarantor and without releasing the obligations of
Guarantor hereunder and Guarantor hereby expressly waives any notice of
non-payment, non-performance or non-observance, or proof of notice or demand,
in order for Landlord to claim under this Guaranty.
3. The obligations of Guarantor hereunder shall not be released by
Landlord's receipt, application or release of security given for the
performance and observance of covenants and conditions contained in the Lease,
nor by any modification of the Lease, but in case of any such modification the
liability of Guarantor shall be deemed modified in accordance with the terms of
any such modification.
E-1
<PAGE> 64
4. The liability Of Guarantor hereunder shall in no way be affected by:
(a) the release or discharge of Tenant in any receivership, bankruptcy or other
proceedings; (b) the impairment, limitation or modification of Tenant's
liability under the Lease resulting from the operation of any present or future
provision of the bankruptcy laws or other statute or from the decision in any
court; (c) the rejection or disaverments of the Lease in any such proceedings;
(d) the assignment or transfer or sublease of the Lease by Tenant; (e) any
disability or other defense of Tenant other than performance or accord and
satisfaction; (f) the cessation from any cause whatsoever of the liability of
Tenant other than performance or accord and satisfaction; (g) the impairment or
release of any collateral securing the full performance of Tenant's
obligations; or (h) the release of any other guarantor or surety for the
obligations of Tenant under the Lease or any portion of such obligation.
5. This Guaranty shall apply to the Lease, any extension or renewal
thereof and to any holdover term thereby granted or any extension or renewal
thereof.
6. This instrument may not be changed, modified, discharged or terminated
orally or in any manner other than by an agreement in writing signed by
Guarantor and Landlord.
7. Guarantor shall pay all costs incurred, including without limitation
reasonable attorneys' fees, in the event collection or enforcement efforts are
commenced against Guarantor by the placement of this Guaranty into the hands of
an attorney, such costs and reasonable attorneys' fees to be paid irrespective
of whether or not action or actions are commenced or continued to judgment.
8. Guarantor's liability herein is primary, direct, absolute, continual
and unconditional and is joint and several and independent of the obligations
of Tenant. A separate action may be brought and the obligations of Guarantor
may be immediately enforced without necessity of any action against Tenant or
collateral or the resort by Landlord to any of its remedies under the Lease or
at law or in equity and a separate action may be prosecuted against Guarantor
whether or not action or actions are brought against Tenant and whether or not
Tenant is joined in any such action and Guarantor hereby waives the benefit of
any enforcement thereof.
9. No delay on Landlord's part in exercising any right, power or
privilege under this Guaranty or any other document executed in connection
herewith shall operate as a waiver of any such privilege, power or right.
10. Guarantor agrees that any judgment rendered against Tenant for monies
or performance due Landlord shall in every and all respects bind and be
conclusive against Guarantor to the same extent as if Guarantor had appeared in
any such proceeding and judgment therein had been rendered against Guarantor.
11. Guarantor subordinates to Tenant's obligations to Landlord all
indebtedness of Tenant to Guarantor, whether now existing or hereafter
contracted, whether direct or indirect, contingent or determined.
E-2
<PAGE> 65
12. The terms, covenants and conditions contained in this Guaranty shall
apply to and bind the successors and assigns of undersigned.
13. The terms, covenants and conditions contained in this Guaranty shall
inure to the benefit of the successors and assigns of Landlord. Without
limiting the holder of any lien or security interest in the real property
described in the Lease, any assignee of Landlord's interest in the Lease and
any purchaser at a foreclosure, trustee's or other sale shall be entitled to
the benefits of this Guaranty.
14. If any term, covenant or condition of this Guaranty, or any
application thereof, should be held by a court of competent jurisdiction to be
invalid, void or enforceable, all terms, covenants and conditions of this
Guaranty, and all applications thereof not held invalid, void or unenforceable
shall continue in full force and effect and shall in no way be affected,
impaired or invalidated thereby.
15. In addition to the foregoing, (a) pursuant to Section 40.495 of the
Nevada Revised Statutes ("NRS"), Guarantor hereby waives and relinquishes all
rights and remedies to which Guarantor might otherwise be entitled pursuant to
NRS 40.430 or other applicable Nevada law, and (b) Guarantor specifically
waives its rights under NRS 104.3605, and agrees that the foregoing shall
constitute a waiver of discharge under NRS 104.3605(9).
16. Notwithstanding the foregoing provisions of this Guaranty, but subject
to the provisions of Section 14.1 of the Lease, the obligations of Guarantor
hereunder shall not extend to and Guarantor shall have no liability under this
Guaranty with respect to any obligations of the Tenant which arise after the
later of (i) the fifth annual anniversary of the Effective Date, as defined in
the first paragraph of the Lease; or (ii) the date upon which a certificate of
occupancy is issued for Tenant's Project, as defined in Section 31.1 of the
Lease, so long as the Fair Market Value of Tenant's Project, as defined in
Section 31.4 of the Lease, is a least Two Hundred Million Dollars
($200,000,000).
IN WITNESS WHEREOF, Guarantor has caused this instrument to be executed as
of the day and year first written above.
GRAND CASINOS, INC.
a Minnesota corporation
By:_________________________
Its:________________________
E-3
<PAGE> 66
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on _____________, 1996
by ____________ as _______________ of Grand Casinos, Inc.
______________________________
Notary Public
My commission expires:________
E-4
<PAGE> 1
EXHIBIT 10.77
FIRST AMENDMENT
TO
GROUND LEASE
This First Amendment to Ground Lease ("First Amendment") is made and
entered into by and between MacGregor Income Properties West I, Inc., a Nevada
corporation ("Landlord") and Grand Casinos Nevada I, Inc., a Minnesota
corporation ("Tenant").
WHEREAS, Landlord and Tenant's predecessor in interest Cloobeck
Enterprises entered into a Ground Lease (the "Lease") as of July 31, 1996
pursuant to which Landlord leased to Cloobeck Enterprises the real property and
improvements situated at 75 E. Harmon Avenue, Las Vegas, Nevada (the "Leased
Property") which Property constitutes substantially all of the assets of
Landlord, commencing August 1, 1996;
WHEREAS, the rights and obligations of Cloobeck Enterprises as lessee
under the Lease were assigned to and assumed by Tenant to take effect as of June
13, 1997;
WHEREAS, Cloobeck Enterprises on behalf of itself and on behalf of
Tenant has requested that Landlord dedicate the northerly twelve feet of the
Leased Property adjacent to and contiguous with the dedicated right-of-way known
as Harmon Avenue to the County of Clark for purposes of widening Harmon Avenue;
WHEREAS, MIP West I has been informed (and, based upon the information
provided, believes) that owners of adjacent and neighboring land are likewise
dedicating twelve feet of frontage property to the County of Clark for the
purpose of widening Harmon Avenue, east of Las Vegas Boulevard South;
WHEREAS, Section 6.02 of the Lease requires that if any Resort
Improvement (as defined in the Lease) designed to be constructed on the Property
requires, as a condition of a conditional use permit, any dedication of land,
Landlord will dedicate up to (but not more than) fifteen feet of frontage
property on the north side of the Leased Property;
WHEREAS, the Clark County Planning Commission approved an application
(VC-1528-96) to construct parking facilities for a time-share condominium resort
project, a condition of which requires the dedication of twelve feet of frontage
("Dedicated Strip") for the purpose of widening Harmon Avenue.
WHEREAS, the legal description of the Land attached as Exhibit A to the
Lease must be amended to exclude the Dedicated Strip.
NOW, THEREFORE, in consideration of the foregoing recitals which
constitute substantial and material terms and conditions of this First
Amendment, the mutual covenants and promises herein set
1
<PAGE> 2
forth, the material detrimental reliance that the parties and persons dealing
with the parties will place upon the execution and delivery of this First
Amendment, and other good and valuable consideration, the parties agree as
follows:
1. AMENDMENT OF EXHIBIT A TO LEASE. Exhibit A to the Lease shall be
amended by deleting the Dedicated Strip as reflected in Exhibit A attached to
and, by this reference incorporated in this First Amendment.
2. CAPITALIZED TERMS. Except to the extent otherwise defined in this
First Amendment, all capitalized terms used in this First Amendment shall have
the same meanings ascribed to such terms in the Lease.
3. NO OTHER MODIFICATION. No extension of the provisions of this First
Amendment shall be inferred; it being the intention of parties that the Lease
shall remain in full force and effect unmodified except to the extent the terms
of this First Amendment specifically require.
The undersigned have executed this First Amendment on the date
indicated.
MACGREGOR INCOME PROPERTIES WEST I, INC.
October, 24, 1997. By /s/ Robert G. Marsico,
---------------------------------------
Robert G. Marsico, President
GRAND CASINOS NEVADA I, INC.
November 25, 1997 By /s/ Terry Winnick
---------------------------------------
(signature)
By Terry Winnick, Executive Vice President
---------------------------------------
(name) (title)
CONSENT OF ORIGINAL TENANT AND GUARANTORS
The undersigned originally-named Tenant under the Lease and the
Guarantors of the Lease, being liable for the payment and performance of
Tenant's obligations under and pursuant to the
2
<PAGE> 3
Lease, hereby expressly and unconditionally, without qualification, consent to
and approve the foregoing First Amendment.
CLOOBECK ENTERPRISES (Original Tenant)
By
---------------------------------------
Stephen J. Cloobeck, President
GRAND CASINOS, INC. (Guarantor)
By /s/ Terry Winnick
----------------------------------------
Terry Winnick
Its Executive Vice President
----------------------------------------
---------------------------------------------
STEPHEN J. CLOOBECK (Guarantor)
---------------------------------------------
SHELDON H. CLOOBECK (Guarantor)
3
<PAGE> 4
EXHIBIT A
[POGGEMEYER DESIGN GROUP, INC. LETTERHEAD]
LEGAL DESCRIPTION
FOR
A 12 FOOT STRIP DEDICATION
ON HARMON AVENUE
BEING A PORTION OF THE SOUTHWEST QUARTER (SW 1/4) OF SECTION 21, TOWNSHIP 21
SOUTH, RANGE 61 EAST, M.D.M., CLARK COUNTY, NEVADA AND BEING MORE PARTICULARLY
DESCRIBED AS FOLLOWS:
COMMENCING AT THE WEST QUARTER (W 1/4) CORNER OF SAID SECTION 21; THENCE SOUTH
89 DEGREES 54'58" EAST, ALONG THE NORTH LINE OF SAID SOUTHWEST QUARTER (SW 1/4)
OF SECTION 21 AND THE CENTERLINE OF HARMON AVENUE, A DISTANCE OF 889.88 FEET;
THENCE SOUTH 00 DEGREES 05'02" WEST, A DISTANCE OF 40.00 FEET TO A POINT ON THE
SOUTHERLY RIGHT-OF-WAY OF SAID HARMON AVENUE (80 FOOT ROW), SAID POINT BEING THE
POINT OF BEGINNING; THENCE SOUTH 89 DEGREES 54'58" EAST ALONG SAID SOUTHERLY
RIGHT-OF-WAY OF HARMON AVENUE, A DISTANCE OF 405.60 FEET, THENCE SOUTH 00
DEGREES 02'00" EAST LEAVING SAID SOUTHERLY RIGHT-OF-WAY, A DISTANCE OF 12.00
FEET; THENCE NORTH 89 DEGREES 54'58" WEST, A DISTANCE OF 405.60 FEET; THENCE
NORTH 00 DEGREES 02'00" WEST, A DISTANCE OF 12.00 FEET TO THE POINT OF
BEGINNING.
SAID PARCEL CONTAINING APPROXIMATELY 4,867 SQUARE FEET.
[SEAL]
PROFESSIONAL LAND SURVEYOR
- STATE OF NEVADA No. 8660
PAUL B. CHANDLER
DATE: NOVEMBER 13, 1997
<PAGE> 5
EXHIBIT
MAP
<PAGE> 1
EXHIBIT 10.78
GROUND LEASE
This Ground Lease ("LEASE") is made and entered into as of the 31 day of
July, 1996, by and between MacGREGOR INCOME PROPERTIES WEST I, INC., a Nevada
corporation (hereinafter referred to as "LANDLORD"), and CLOOBECK ENTERPRISES, a
Nevada corporation (hereinafter referred to as "Tenant").
ARTICLE I
LEASED PROPERTY
1.01. DEMISE. Upon the conditions, limitations, covenants and agreements set
forth below, Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, those premises (the "LAND") consisting of that land described in
EXHIBIT A attached hereto and incorporated herein by reference, together with
all existing improvements thereon (the "SHARK CLUB IMPROVEMENTS") and all
appurtenances thereto (all of which is sometimes referred to herein as the
"LEASED PROPERTY"); subject to (i) all easements, licenses, reservations,
rights-of-way, conditions, covenants and restrictions of record reflected on
EXHIBIT B attached hereto and incorporated herein by reference (the "RECORDED
EXCEPTIONS"), (ii) all rights and interests of La-Tex Partnership pursuant to
and by virtue of that certain lease dated July 2, 1987, as amended (the "SHARK
CLUB LEASE") including the Shark Club Note, as defined in Section 5.02, and
(iii) conditions, facts, circumstances, rights and claims which could be
ascertained by an inspection of the status of title or condition of the Leased
Property (the "OTHER EXCEPTIONS") other than exceptions resulting from a
voluntary act or omission of Landlord. The Recorded Exceptions, Shark Club Lease
and the Other Exceptions are sometimes referred to in this Lease as the
"RESERVATIONS").
1.02. INSPECTION, EXAMINATION AND INVESTIGATION.
(a) Tenant has fully inspected, examined and investigated the condition
and status of title of the Leased Property and is entering into this Lease as a
result of such inspection, examination and investigation, and is acquiring an
interest in the Leased Property "as is" based upon its own independent and
completed inspection, examination and investigation of the condition and status
of title of the Leased Property and not as a result of any representation,
warranty, assurance, guaranty or promise of Landlord or any person purporting to
act on behalf of Landlord, other than those which may be expressly set forth in
this Lease. TENANT UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT NEITHER LANDLORD
NOR ANY AGENT, EMPLOYEE OR OTHER PERSON ACTING ON BEHALF OF LANDLORD HAS MADE
ANY AND LANDLORD EXPRESSLY DISCLAIMS EVERY REPRESENTATION, WARRANTY, ASSURANCE,
GUARANTY OR PROMISE, EXPRESS OR IMPLIED CONCERNING THE STATUS OF TITLE OR
CONDITION OF THE LEASED PROPERTY WHICH ARE NOT EXPRESSLY SET FORTH IN THIS LEASE
AND THAT NO AGENT, EMPLOYEE OR OTHER PERSON HAS ANY AUTHORITY TO MAKE
1
<PAGE> 2
OR DELIVER ANY REPRESENTATION, WARRANTY, ASSURANCE, GUARANTY OR PROMISE WHICH IS
NOT SET FORTH IN THIS LEASE.
(b) Tenant has reviewed all of the documents and correspondence
identified in EXHIBIT C attached hereto concerning the Shark Club Lease and has
had an adequate opportunity (regardless of whether or not exercised) to ask
questions of and receive answers from La-Tex Partnership and its agents
regarding the status of the Shark Club Lease and the Shark Club Note (as defined
in Section 5.02 of this Lease)
ARTICLE 11
TERM
2.01. DURATION; COMMENCEMENT DATE. The term of this Lease shall be for a
period of fifty (50) years commencing as of the first day of August, 1996 (the
"COMMENCEMENT DATE") and shall terminate at 11:59 p.m. on the last day of July,
2046, unless terminated earlier as elsewhere herein provided. Reference in this
Lease to the "LEASE TERM" or the "TERM OF THIS LEASE" shall refer to the period
starting on the Commencement Date and continuing through the date of termination
of this Lease.
2.02. HOLDING OVER. If Tenant continues in possession of the Leased Property
without the objection of Landlord after expiration of the term of this Lease,
such holding-over shall not be construed as a renewal or extension of this Lease
but shall be deemed to be a tenancy from month-to-month only, terminable in
accordance with subsection 1 (b) of NRS 40.251 but otherwise upon the same terms
and conditions set forth in this Lease.
2.03. LEASE YEAR DEFINED. As used in this Lease, "LEASE YEAR" shall mean
every twelve month period commencing on the first day of August of each calendar
year and ending on the last day of July of each succeeding calendar year.
ARTICLE III
RENT
3.01. BASE RENT; SUPPLEMENTAL RENT.
(a) Beginning on the Commencement Date and during the Lease Term,
Tenant shall pay Landlord monthly, in advance, without prior notice or demand,
and in lawful money of the United States of America, rent in the amount of
Sixty-five Thousand Dollars ($65,000) (the "BASE RENT"). Base Rent shall be
payable in advance on the first day of each month.
(b) Subject to Landlord's refund or credit obligations set forth in
this Section 3.01 (b), beginning on August 1, 1996, Tenant shall also pay
Landlord monthly, without prior notice or
2
<PAGE> 3
demand, and in lawful money of the United States of America, Six Thousand Five
Hundred Dollars ($6,500) (the "SUPPLEMENTAL RENT") until the outstanding amount
of Four Hundred Forty-Nine Thousand One Hundred Sixty Dollars and Eight Cents
($449,160.08) reflected on EXHIBIT D annexed to this Lease (the "SUPPLEMENTAL
RENT AMOUNT") has been fully amortized in accordance with EXHIBIT D. In the
event Tenant elects, by written notice delivered to Landlord on or before
October 31, 1998, not to use the Land (alone or in aggregation with any other
property contiguous with or in the immediate vicinity of the Land) as a part of
or in conjunction with the operation of a hotel and casino facility, Tenant
shall be relieved of the obligation to pay Supplemental Rent (retroactively from
the Commencement Date) and Landlord shall either credit against Tenant's
next-accruing obligations pursuant to this Lease or refund and pay to Tenant, as
Landlord may elect, any Supplemental Rent actually paid.
3.02. COST OF LIVING ADJUSTMENTS TO BASE RENT.
(a) The Base Rent shall be adjusted for increases (but not decreases)
in the cost-of-living as of the beginning of the second Lease Year and each
Lease Year thereafter in the manner herein provided. Landlord shall compute the
percentage increase in the cost of living for the preceding period based on the
average of all West-A Cities, set forth in the Consumer Price Index for Urban
Consumers for all items (1982-84=100), published by the Bureau of Labor
Statistics of the United States Department of Labor, or such succeeding index
(indices) as may then be in effect. The base index number shall be the index
number for the first month of the preceding Lease Year. The current index number
shall be the index number for the first month of Lease Year of adjustment. The
current index number shall be divided by the base index number. From the
quotient thereof, rounded to the nearest one-thousandth, there shall be
subtracted the integer one. The resultant positive number shall be deemed to be
the percentage of increase in the cost-of -living; provided that the percentage
increase for any Lease Year shall not be less than three percent (311) and shall
not be more than five percent (51). The percentage of increase in the cost of
living multiplied by the Base Rent (as adjusted) payable during the preceding
Lease Year shall be the increase required in the Base Rent. The sum of the
increase required plus the Base Rent (as previously adjusted) payable for and on
account of the preceding Lease Year shall be the Base Rent for the Lease Year of
the adjustment.
(b) Landlord shall, within a reasonable time after obtaining the
appropriate data necessary for computing the adjustment of the Base Rent for the
Lease Year of the adjustment, give Tenant notice of any increase determined. The
Base Rent, as so increased, shall be due and payable for each month, commencing
with the first month of the Lease Year of the adjustment. However, pending the
determination of the increase of the Base Rent, Tenant shall continue to pay the
Base Rent (as previously increased) for the prior Lease Year. When the increase
of the Base Rent for the Lease Year has been determined, Tenant shall pay the
increased Base
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Rent for the calendar month immediately succeeding such determination and pay
the difference between (I) the increased Base Rent for the period commencing
with the first month of the Lease Year of adjustment and ending with the month
preceding the month for which the increased Base Rent is paid; less (2) the Base
Rent already paid for such months.
(c) If, at the time required for the determination of any increase in
Base Rent, the Consumer Price Index mentioned in Section 3.02(a) is no longer
published or issued, Landlord shall use such other index (indices) as may then
be generally recognized and accepted for similar determination of purchasing
power for purposes of calculating and determining increases in Base Rent.
3.03. ADDITIONAL RENT. Any and all amounts required to be paid to Landlord,
for Landlord's benefit or otherwise required to be reimbursed to Landlord
pursuant to this Lease including without limitation, any and all amounts
required to be paid pursuant to Sections 3.04, 8.01, 8.02, 9.01, 10.09 and
22.02, shall be deemed and hereby constitutes "ADDITIONAL RENT" and shall be
paid, without offset, in lawful money of the United States of America, when and
as often as required by the terms of this Lease. Unless otherwise paid when due
or specified in this Lease, items of Additional Rent payable to Landlord shall
be paid with the next installment of Base Rent thereafter falling due hereunder;
but nothing contained in the preceding clause of this sentence shall be deemed
to suspend or delay the payment of any amount of money at the time the same
becomes due and payable hereunder, or limit any remedy of Landlord. It is the
intent of Landlord and Tenant that all payments of Base Rent, Supplemental Base
Rent and Additional Rent payable to Landlord (all of which is hereinafter
sometimes collectively referred to as "RENT") shall be absolutely net to
Landlord, with all costs, expenses and charges of every kind and nature relating
to the Leased Property that may arise or become due during the Lease Term to be
paid by Tenant, and with Landlord to be indemnified and held harmless by Tenant
from and against the same. It is the intention of the parties that Tenant shall
bear any and all expenses relating to the Leased Property, whether such expenses
be deemed significant or insignificant, whether currently anticipated or
unanticipated by Landlord or Tenant, and whether or not required by any
governmental or quasi-governmental authority as a condition to use or occupancy
of the Leased Property or otherwise. Nothing contained in this Section 3.03,
however, shall be construed to obligate Tenant to pay any principal, interest or
other charges accruing with respect to any Fee Mortgage (as defined in Section
14.01).
3.04. LATE CHARGE; INTEREST. If Tenant shall fail to pay, within ten days
after the same becomes due and payable, any amount payable pursuant to the terms
of this Lease, Tenant shall be obligated to bear and pay a late charge of five
percent (5%) of such unpaid amounts which shall accrue automatically as
Additional Rent. Further, if any such amount (including any late charge) is not
paid within thirty days after the same first becomes due and payable, the entire
unpaid amount shall bear interest, as
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Additional Rent, at the rate of fifteen percent (15%) per annum, compounded
monthly (the "INTEREST RATE") , from the date the unpaid amount originally
becomes due until paid. Landlord and Tenant acknowledge and agree that
Landlord's expenses, losses and damages (including consequential damages)
resulting from late payment would be difficult to determine, and that the late
charge and the interest payable pursuant to the provisions of this Section 3.04
constitute reasonable estimates of the amounts of those expenses, losses and
damages.
3.05. NO ABATEMENT, SETOFF OR RENTAL TAX. Rent shall be paid to Landlord
without any abatement, setoff, reduction, deduction, counterclaim, or recoupment
whatsoever. Rent shall be paid to Landlord free and clear of any and all taxes,
liens and other charges, costs, expenses and liabilities of any type whatsoever
(including, without limitation, any rental tax or fee and any business license,
tax or fee measured upon the payment of rent or on the size of the Leased
Property) other than taxes measured upon the income of Landlord.
3.06. PLACE OF PAYMENT. Rent shall be paid to Landlord c/o Edward A. Wilson
CPA, Wilson & Company, 2688 South Rainbow Blvd., Suite A, Las Vegas, Nevada
89102 or at such other place or places as Landlord may, from time to time
designate in writing.
3.07. GUARANTY OF LEASE. As a condition precedent to the enforcement of
Tenant's rights and Landlord's obligations pursuant to this Lease, Stephen J.
Cloobeck and Sheldon H. Cloobeck ("GUARANTORS") shall have absolutely and
unconditionally personally guaranteed the full and faithful payment and
performance of all of Tenant's obligations pursuant to this Lease, jointly and
severally, which shall be evidenced by a written guaranty substantially in the
form of EXHIBIT E annexed to this Lease.
ARTICLE IV
SECURITY DEPOSIT
4.01. AMOUNT.
(a) Contemporaneously with the execution of this Lease, Tenant shall
deposit with Landlord Five Hundred Thousand Dollars ($500,000) (the "SECURITY
DEPOSIT").
(b) Prior to the commencement of any construction on the Land
(including the demolition of any of the Shark Club Improvements) , Tenant shall
increase the Security Deposit to Two Million Five Hundred Thousand Dollars
($2,500,000).
(c) Prior to the commencement of the fifth Lease Year, Tenant shall
increase the Security Deposit to Three Million Five Hundred Thousand Dollars
($3,500,000). Prior to the commencement of the sixth Lease Year and each Lease
Year thereafter, Tenant shall increase the Security Deposit, as previously
augmented, by
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Three Hundred Thousand Dollars ($300,000), so that prior to the commencement of
the tenth lease year, the total security deposit shall be Five Million Dollars
($5,000,000).
(d) Any portion of the Security Deposit which is posted in money shall
earn interest at the rate of six percent (60%) per annum compounded annually.
Earned interest shall constitute a part of the Security Deposit to be held for
the benefit of Tenant and to be used and distributed in accordance with this
Lease.
(e) If (i) Tenant furnishes to Landlord an appraisal prepared by a
nationally recognized firm of real estate appraisers approved by Landlord,
which approval shall not be unreasonably withheld, conditioned or delayed,
reflecting that the value of the Land and all Improvements thereon together with
any improvements on any property contiguous with or in the immediate vicinity of
the Land which constitutes a part of the project which includes the Improvements
is more than Two Hundred Million Dollars ($ 200,000,000), and (ii) the
Improvements constitute a material and integral part of such project the
Security Deposit shall be reduced to the Five Hundred Thousand Dollars
($500,000) specified in Section 4.01 (a) together with interest accrued thereon.
4.02. OPTION TO POST LETTERS OF CREDIT. Other than the first Five Hundred
Thousand Dollars ($500,000) of the Security Deposit which shall be posted in
lawful money of the United States of America, Tenant shall be entitled to post
and deliver to Landlord in lieu of money, any portion of the Security Deposit in
one or more irrevocable letters of credit naming Landlord as the sole and
exclusive obligee entitling Landlord or the firm of Leavitt, Sully & Rivers to
unilaterally draw upon such letters of credit (i) in the event Tenant fails to
replace, renew or extend the maturity of any letter of credit prior to the close
of business on the last banking day which is at least thirty days prior to the
expiration of such letter of credit; or (ii) for any purpose provided in Section
4.03 of Lease. If Landlord draws upon any letter of credit, the proceeds of such
letter of credit shall nevertheless constitute a portion of the Security Deposit
subject to the parties' respective rights and obligations pursuant to this
Lease.
4.03. USE OF SECURITY DEPOSIT.
(a) If, at any time during the Lease Term, any Rent shall be overdue
and unpaid, then Landlord may, at the option of Landlord (but Landlord shall not
be required to), appropriate and apply any portion of the Security Deposit to
the payment of such unpaid amount. If any portion of the Security Deposit is
appropriated and applied by Landlord for the payment of Rent, then Tenant shall,
upon written demand of Landlord, forthwith remit to Landlord, a sufficient
amount to restore the Security Deposit to the amount required to be deposited
pursuant to Section 4.01; and Tenant's failure to do so shall constitute a
default in the payment of Rent pursuant to this Lease, entitling Landlord to the
remedies set forth in Article XV hereof.
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(b) In the event Landlord exercises Landlord's Put Option (as defined
in Section 12.01), the portion of the Security Deposit then posted shall be used
and applied in payment of a portion of the Purchase Price (as defined in Section
12.03) for the Leased Property. Similarly, in the event Tenant exercises
Tenant's Call Option (as defined in Section 12.02), the portion of the Security
Deposit then posted shall be used and applied in payment of a portion of the
Purchase Price for the Leased Property.
(c) Upon the expiration of the Lease Term any portion of the Security
Deposit which has not previously been used in accordance with this Lease shall
be returned to Tenant.
ARTICLE V
USE; ASSUMPTION OF SHARK CLUB LEASE; AND QUIET ENJOYMENT
5.01. PURPOSE. Tenant shall have the right to use the Land during the
Lease Term for the construction and operation of a first-class recurrent
periodic interval ownership (i.e. time share) resort facility, together with
reasonably related uses necessary and incident thereto. Tenant may also elect to
use the Land for the construction and operation of facilities (alone or in
aggregation with any other property contiguous with or in the immediate vicinity
of the Land) as a part of or in conjunction with the operation of a first class
hotel and casino unless Tenant gives written notice to Landlord on or before
October 31, 1998 that Tenant elects not to so use the Land as a part of or in
conjunction with the operation of a hotel and casino. In the event Tenant timely
gives written notice of its election not to so use the Land as a part of or in
conjunction with a hotel and casino, then Tenant shall be excused from the
obligation to pay Supplemental Rent, as more fully set forth in Section 3.01 (b)
but Tenant shall thereafter only be permitted to use the Land for the purposes
set forth in the first sentence of this Section 5.01. In the event Tenant does
not timely elect not to use the Land as a part of or in conjunction with a hotel
and casino but fails to obtain all necessary Approvals (as defined in
Section 5.04 (b)) to construct and operate a hotel and casino, then Tenant
shall have the right to use the Land for such purposes, in addition to or in
lieu of those set forth in the first sentence of this Section 5.01 as Landlord
may approve in writing, which approval shall not be unreasonably withheld,
delayed or conditioned, but Tenant shall nevertheless continue to pay
Supplemental Rent in accordance with Section 3.01 (b). For purpose of this
Lease, the facilities to be constructed on the Land and any other property
contiguous with or in the immediate vicinity of the Land (whether as a
recurrent periodic interval ownership resort and/or as a hotel and casino) is
sometimes referred to in this lease as the "RESORT". Except as otherwise
permitted in accordance with this Section 5.01 (in the event Tenant has failed
to elect not to use the Land as a part of a hotel and casino but fails to
obtain necessary Approvals), Tenant shall not use the Land for any purpose
other than as a part of the Resort without the prior written consent of
Landlord which may be
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given, withheld by Landlord, in Landlord's sole, absolute and unfettered
discretion. All buildings, real property improvements and fixtures hereafter
erected, constructed or placed on the Land from time to time during Tenant's
occupancy of the Land in connection with the Resort are referred to herein as
the "RESORT IMPROVEMENTS". Nothing contained in this Section 5.01 shall be
construed to preclude or limit Tenant's obligations pursuant to the Shark Club
Lease which are assumed pursuant to section 5.02 of this Lease.
5.02. ASSIGNMENT AND ASSUMPTION OF SHARK CLUB LEASE. Landlord hereby
assigns to Tenant all of its right, title and interest in and to the Shark Club
Lease and all claims Landlord may have under or pursuant to the Shark Club Lease
(regardless of whether or not previously asserted). Tenant hereby assumes and
agrees to timely and fully pay and perform all obligations of Landlord under,
pursuant to and with respect to the Shark Club Lease including without
limitation all obligations for the payment of principal and interest in
accordance with that certain promissory note secured by deed of trust (the
"SHARK CLUB NOTE") in the original principal amount of Two Hundred Fifty
Thousand Dollars ($250,000) which constitutes the security deposit of La-Tex
Partnership pursuant to section 32 of the Shark Club Lease and all other
obligations with respect to the retention and disposition of the security
deposit pursuant to the Shark Club Lease; but Tenant does not assume any
obligation under or with respect to the Shark Club Lease arising before the
Commencement Date which is not disclosed by any item disclosed on Exhibit C.
Tenant shall procure a reconveyance of the deed of trust given to secure the
repayment of the Shark Club Note as a condition of payment of the Shark Club
Note. Tenant hereby agrees to indemnify, defend and hold Landlord harmless from
and against all claims, losses, damages, proceedings, actions, judgments,
interest, costs and expenses (including attorney fees) and other liability
arising out of or in connection with the Shark Club Lease and the payment of the
Shark Club Note.
5.03. PERMITS AND LICENSES - NO CONDITION. Neither the ability of
Tenant to obtain nor to retain any license, permit or approval for Tenant's use
of the Leased Property shall be a condition to the effectiveness of this Lease
or the obligations of Tenant hereunder. Tenant hereby waives any right to
terminate this Lease or to seek or obtain a discharge of Tenant's obligations
hereunder by reason of "commercial frustration", "frustration of purpose" or any
similar claim or defense. Tenant acknowledges that Tenant assumes all risks
associated with the Leased Property and activities that are now or may hereafter
be conducted on the adjoining or nearby properties, none of which shall affect
Tenant's obligations to Landlord under this Lease. Nothing contained in this
Section 5.03, however, shall be construed to release or relieve Landlord from
its obligations pursuant to Section 5.04 (b)(2) or elsewhere herein.
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5.04. COMPLIANCE WITH LAWS; PERMITS; ENVIRONMENTAL COMPLIANCE.
(a) Tenant shall, at Tenant's sole cost and expense, without any
expense being imposed on Landlord, promptly comply with or cause compliance with
all laws, statutes, ordinances, rules, regulations, orders and requirements
of all federal, state, county and municipal governmental authorities with
respect to the condition of, use of, or activities conducted by Tenant on the
Leased Property. Tenant shall have the right to contest by appropriate legal
proceedings before any tribunal having jurisdiction, whether judicial or
administrative, without any expense being imposed on Landlord, the validity or
applicability of any law, statute, ordinance, rule, regulation, order or
requirement of any governmental authority, and Landlord shall reasonably
cooperate with Tenant, at Tenant's sole cost and expense, in that regard.
(b) (1) Subject to Landlord's obligations pursuant to Section 5.04 (b)
(2), Tenant shall, at Tenant's sole expense without any expense being imposed
on Landlord, apply for, obtain and maintain all governmental and
quasi-governmental licenses, permits, consents and approvals required in
connection with any and every activity conducted on the Leased Property.
Specifically, without limitation, at Tenant's sole cost and expense, Tenant
shall promptly apply for and use its best efforts to obtain all necessary
licenses, permits, approvals and consents required for the construction and
operation of the Resort and shall otherwise fully cooperate with such
governmental authorities, which shall include, without limitation, the
provision of such information, books and records as may be requested by such
governmental authorities and compliance with all orders and requirements of
such governmental authorities. If at any time (i) Tenant or any person or
entity associated in any way with Tenant is denied a license or is denied or
otherwise unable to obtain any other approval or permit ("APPROVAL") required
by law or any governmental authority with respect to the Leased Property, is
required by any governmental authority to apply for an Approval and does not
apply within any required time limit, withdraws any application for Approval
other than upon a determination by the applicable governmental authority that
such Approval is not required; or (ii) any governmental authority commences or
threatens to commence any suit or proceeding against Tenant, or any affiliate
of Tenant or to terminate or deny any Approval of Tenant or any affiliate of
Tenant (all of the foregoing events described in clauses (i) or (ii)
above being collectively referred to as a "DENIAL"), and if such action may be
cured by the replacement of one or more individuals as shareholders, officers,
employees, directors or trustees of Tenant or by a transfer of this Lease or
disassociation from the applicable person, then Tenant shall have such period
as may be allowed by the governmental authorities to effect such cure to
replace the disapproved individual with someone, or transfer the Lease to
someone acceptable to the governmental authorities and reasonably acceptable to
Landlord.
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(2) Landlord shall cooperate with Tenant in submitting and, whenever
required by a governmental authority to obtain any Approval, directly submit all
applications with and notices to all governmental authorities to obtain
Approvals for the construction and operation of the Resort including without
limitation (i) the recording of such instruments as may be reasonably required
by the Real Estate Division of the State of Nevada Department of Commerce to
publish notice of Tenant's leasehold interest for the benefit of owners of time
shares of the Resort; and/or (ii) unless Tenant makes a timely election not to
use the Land as a part of or in conjunction with a hotel and casino in
accordance with Section 5.01, the submission of such applications for a finding
of suitability to be a landlord of a gaming licensee as may be required by the
State Gaming Control Board and/or Nevada Gaming Commission or any other
governmental authority (whether or not in the State of Nevada) having
jurisdiction over gaming; provided that Landlord shall not be required to take
any action which will result in the incurrence of any cost or expense for which
Landlord bears or will bear any liability or financial responsibility. Nothing
contained in the preceding sentence shall be construed to preclude Landlord or
any person associated with Landlord from taking, and Landlord and every person
associated with Landlord shall be entitled to take, any action for purposes of
preventing or avoiding any Denial on the basis of a finding that Landlord or any
person affiliated with Landlord is not suitable to be a landlord of a gaming
licensee or otherwise defending Landlord's or such person's character and
reputation. In the event of any Denial in any jurisdiction, whether or not with
respect to the Leased Property, as a result of a finding or other determination
that Landlord or any person associated with Landlord is not suitable or
otherwise may not be associated with Tenant or any affiliate of Tenant, unless
Denial may be cured by disassociation and Landlord effects such disassociation
(which Landlord shall not necessarily be required to do) prior to the Closing
provided below, Tenant shall have the right to accelerate the date of exercise
of the Call Option to any date after such finding or determination and the date
of Closing shall be such date as may be required or recommended by such
governmental authority from which the Denial emanates, or if such governmental
authority has not required or recommended a date by which the sale of the Leased
Property shall occur, Closing shall take place on the date specified in the
Tenant's notice given in accordance with and subject to Section 12.02 (b);
provided that if the sale and purchase of the Leased Property is as a result of
an exercise of Tenant's Call Option (accelerated by virtue of a Denial) prior to
the first day of July, 2006, the Purchase Price (as defined in Section 12.03) is
increased by One Million Dollars ($1,000,000) ; and provided further that if
the sale and purchase of the Leased Property occurs prior to January 1, 2000 as
a result of an exercise of Tenant's Call Option (accelerated by virtue of a
Denial) the Purchase Price is increased in accordance with Section 12.03 (d).
Nevertheless, notwithstanding such Denial and resulting purchase of the Leased
Property, Landlord and any person associated with Landlord that is the subject
of such Denial may, if permitted by applicable law and provided the same shall
have no material
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adverse effect on any Approval, appeal, seek a redetermination or otherwise
contest such Denial.
(c) (1) Tenant shall not, as a result of an intentional or unintentional
act or omission, release, pump, pour, empty, or dump any Hazardous Material (as
defined in Section 5.04 (c)(5)(B) below) upon or permit any Hazardous Material
to exist on the Leased Property in violation of any Environmental Law (as
defined in Section 5.04 (c)(5)(A) below). Tenant will keep and maintain the
Leased Property in compliance with, and shall not cause or permit the Leased
Property to be in violation of, any Environmental Law or allow any other person
or entity to do so.
(2) Tenant shall give prompt written notice to Landlord of (i) every
proceeding or inquiry by any federal, state, county and municipal authority
with respect to the presence or migration of any Hazardous Material on, to or
from the Leased Property; (ii) every claim made or threatened by any third
person against Tenant or the Leased Property of which Tenant becomes aware
relating to any loss or injury resulting from any Hazardous Material; and (iii)
every discovery (to the extent known by Tenant) of any occurrence or condition
on any real property adjoining or in the vicinity of the Leased Property that
could cause the Leased Property or any part thereof to be subject to any
restrictions on the ownership, occupancy, transferability or use of the Leased
Property under any Environmental Law. Landlord shall have the right, if it so
elects, to join and participate, as a party, in any action, lawsuit or
proceeding initiated in connection with violation of any Environmental Law and
Tenant hereby agrees to pay all expenses (including reasonable attorney fees)
thereby incurred by the Landlord in connection therewith if such action,
lawsuit or proceeding is based upon a violation of Section 5.04 (c) (1) of this
Lease.
(3) Tenant shall protect, defend, indemnify, and hold harmless
Landlord, its directors, officers, administrators, shareholders,
employees, agents, contractors, attorneys, successors and assigns from and
against any and all claims, demands, proceedings, actions, penalties, loss,
damage, cost, interest, expense (including reasonable attorney fees) and other
liability which is directly or indirectly attributable to Tenant's failure to
observe or perform Tenant's obligations pursuant to this Section 5.04 (c).
(4) In the event that any investigation, site monitoring, containment,
cleanup, removal, restoration, or other remedial work of any kind or nature is
required by any judicial order or decree or ruling of any governmental entity
or agency because of, or in connection with the actual, threatened, or
suspected presence of a Hazardous Material in, upon, or under the Leased
Property or any portion thereof, Landlord shall furnish Tenant with written
notice of such order, decree, or ruling and Tenant shall have thirty days after
written notice (or such shorter period of time as may be required pursuant to
any such order, decree or ruling) to commence, or cause to be commenced, all
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remedial work resulting from Tenant's failure to perform any obligation imposed
by this Section 5.04 (c) and to thereafter diligently perform or cause to be
performed to completion all such remedial work.
(5) For purposes of this Lease, the following terms shall have the
meanings as set forth below:
(A) "ENVIRONMENTAL LAW" shall mean any federal, state, county or
municipal law, statute, ordinance, or regulation, ruling, order or
decree pertaining to health, industrial hygiene, or the environmental
conditions on, under or about the premises, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") as amended, 42 U.S.C. Sections 9601 et seq. and the Resource
Conservation and Recovery Act of 1976 ("RCRA") as amended, 42 U.S.C. Sections
6901 et seq.
(B) The term "HAZARDOUS MATERIAL" shall include without
limitation:
(i) those substances, included within the definitions of any
more or one of the term "hazardous substances", "hazardous materials",
"toxic substances", and "solid waste" in CERCLA, RCRA, and the Hazardous
Materials Transportation Act, as amended, 49 U.S.C. Sections 1801 et seq., and
in the regulations promulgated pursuant to said laws;
(ii) those substances listed in the United States Department
of Transportation Table (49 CFR 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto);
(iii) such other substances, materials and wastes which are
or become classified as hazardous or toxic under any Environmental Law; and
(iv) any material, waste or substance which is (A)
petroleum; (B) asbestos; (C) polychlorinated biphenyls; (D)
designated as hazardous pursuant to Section 311 of the Clean Water Act, 33
U.S.C. Sections 1251 et seq. (33 U.S.C. Section 1317) (E) flammable explosives;
or (F) radioactive materials.
(6) Notwithstanding anything to the contrary contained in or inferable
from this Lease, the covenants and agreements contained in this Section 5.04
(c) shall survive the term of this Lease.
5.05. NO WASTE. Tenant shall not commit or suffer to be committed any
waste on the Leased Property and Tenant shall not permit or suffer any act to
be done or any condition to exist on the Leased Property which may constitute a
nuisance, public or private, or which materially obstructs or interferes with
the rights of adjacent property owners.
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5.06. QUIET ENJOYMENT. Landlord covenants that, so long as Tenant shall
faithfully perform the obligations, terms, covenants and conditions of this
Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the
Leased Property for the Lease Term, subject to the Reservations.
ARTICLE VI
CONSTRUCTION OF IMPROVEMENTS
6.01. REMOVAL OF SHARK CLUB IMPROVEMENTS. Tenant shall not remove,
demolish or destroy any of the Shark Club Improvements without first (i)
satisfying all obligations pursuant to the Shark Club Lease with respect
thereto, terminating the Shark Club Lease or procuring a waiver from La-Tex
Partnership which, by its terms, releases Landlord from liability; (ii)
increasing the Security Deposit in accordance with Section 4.01 (b); (iii)
affording Landlord an adequate opportunity to remove the items of personal
property identified on EXHIBIT F annexed to this Lease (regardless of whether
or not affixed to the realty); and (iv) securing all necessary permits,
licenses, and approvals from all federal, state, county and municipal
governmental authorities. Tenant shall notify Landlord not less than thirty
days prior to the commencement of any removal, demolition or destruction of any
of the Shark Club Improvements, which notice shall advise Landlord of the date
on which the intended removal, demolition or destruction will be commenced and
shall specifically advise Landlord of Landlord's right to post a notice of
non-responsibility (regardless of whether or not such notice of
non-responsibility is necessary to absolve the Landlord or the Leased Property
from responsibility).
6.02. RESORT IMPROVEMENTS.
(a) It is contemplated and understood that Tenant intends to develop,
construct and erect the Resort Improvements for uses incident to the operation
of the Resort; provided, however, that if any aspect of any Resort Improvement
requires waiver, action, consent or approval of any governmental authority with
respect to a design review, a conditional use permit, a variance, or otherwise,
then Landlord shall cooperate with Tenant in submitting all applications with
and notices to all governmental authorities with respect thereto, including
without limitation the making and delivery of a dedication of up to (but not
more than) fifteen feet of frontage property on the north side of the Land as
may be required by any governmental authority having jurisdiction for purposes
of widening Harmon Avenue; provided that Landlord shall not be required to take
any action which will result in the incurrence of any cost or expenses for
which Landlord bears or will bear any liability or financial responsibility.
(b) If Tenant develops, constructs or erects the Resort Improvements
without any proceeds from an financing provided by Leasehold Mortgagee (as
defined in Section 7.01 (b), Tenant shall, at Tenant's sole cost and expense,
without any expense being
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imposed on Landlord, procure and maintain a completion bond to secure the
timely completion of construction of the Resort Improvements, naming Landlord
as the beneficiary or obligee of such bond or, if Tenant procures and maintains
a completion bond for the benefit of any Leasehold Mortgagee, Tenant shall name
Landlord as an additional beneficiary or obligee of such bond. Tenant shall
deliver or cause to be delivered to landlord a true and correct copy of such
completion bond, upon issuance. Not less than fifteen days prior to the formal
engagement of any architect, engineer, surveyor or contractor to provide any
labor or material with respect to the construction of Resort Improvements,
Tenant shall notify Landlord in writing of the persons so selected.
(c) Subject to other conditions and provisions of this Lease, Tenant
shall diligently construct the Resort Improvements or cause the Resort
Improvements to be diligently constructed to completion, in compliance with all
applicable governmental laws, statutes, ordinances, rules, regulations, orders,
requirements, licenses, permits, approvals and consents. Landlord shall not be
responsible for the construction or installation of any improvement to the
Leased Property (including without limitation off-site improvement or extension
of utility lines to the Leased Property), all of which shall be the sole
responsibility and obligation of Tenant.
6.03. SUBSEQUENT CONSTRUCTION. Tenant shall have the right, from time to
time, to erect and make additions and alterations to the Resort Improvements
for use in conformance with Section 5.01; provided, however, all such
improvements, additions and alterations shall be subject to the same rights
reserved by Landlord with respect to the construction of the Resort
Improvements as provided in Section 6.02. For purposes of this Lease all such
additions and alterations together with the Shark Club Improvements (until and
during demolition) and the Resort Improvements are sometimes referred to in
this Lease generally as "IMPROVEMENTS".
6.04. CONSTRUCTION AND OTHER LIENS. Tenant shall pay or cause to be paid
all costs associated with the demolition and/or construction of all
Improvements. Tenant shall not. suffer or permit to be enforced against the
Leased Property (i) any mechanic, materialman, contractor, subcontractor or
other lien or claim arising from or in any way related to any work performed
on, or material supplied with respect to any Improvements, or (ii) any claim,
lien, charge, encumbrance or judgment (other than a permitted Leasehold
Mortgage, defined in Section 7.01), whether or not well-founded, of a party
claiming through Tenant or any subtenant, licensee or concessionaire of Tenant,
including, but not limited to, any claim, lien, charge, encumbrance or judgment
directly or indirectly arising out of any use or occupancy of the Leased
Property by Tenant or any subtenant, licensee or concessionaire of Tenant, any
actual or purported act, omission or activity of Tenant or any such subtenant,
licensee or concessionaire, or as a result of any actual or purported
obligation incurred by Tenant or any such subtenant, licensee or
concessionaire. Within thirty days after the recordation of any
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lien, judgment or encumbrance (other than a permitted Leasehold Mortgage)
against the Leased Property, including any mechanic's or materialman's lien,
Tenant shall obtain the complete discharge and release thereof unless the
discharge is waived by Landlord or Landlord otherwise agrees to the
postponement of discharge. However, Tenant shall have the right to contest, in
good faith, any mechanic or materialman lien upon the condition that Tenant
provides security reasonably acceptable to landlord in an amount sufficient to
satisfy such lien and adequately indemnify landlord from and against liability
with respect to such lien in accordance with this Section 6.04. Tenant shall
indemnify, defend and hold Landlord harmless from and against all claims,
losses, damages, proceedings, actions, judgments, interest, costs and expenses
(including attorney fees) and other liability arising out of or in connection
with the construction of Improvements.
ARTICLE VII
PERMITTED ENCUMBRANCE OF LEASEHOLD
7.01. DEFINITIONS.
(a) The term "LEASEHOLD MORTGAGE" as used in this Lease shall mean a
first mortgage, deed of trust, deed to secure debt, collateral
assignment, or other security instrument or device by which Tenant's leasehold
estate is mortgaged, conveyed, assigned or otherwise transferred, to secure an
obligation to provide financing for the construction of the Resort Improvements
and/or refinancing of any such obligation.
(b) The term "LEASEHOLD MORTGAGEE" as used in this Lease shall refer
to a holder of a Leasehold Mortgage (which in the case of a deed of
trust is the beneficiary thereof and in the case of a collateral assignment is
the assignee) which is not an affiliate of Tenant with respect to which the
notice provided in Section 7.03 has been given to Landlord and as to which the
provisions of this Article VII are applicable.
7.02. RIGHT TO MORTGAGE LEASEHOLD INTEREST. On one or more occasions
without Landlord's prior consent, Tenant may mortgage or otherwise encumber
Tenant's leasehold estate under one or more (in pari passu with one another)
Leasehold Mortgages and assign this Lease as security for the benefit of the
holder of such Leasehold Mortgage on such terms and conditions as Tenant and
the Leasehold Mortgagee may elect; provided, however, that any such Leasehold
Mortgage shall be subject and subordinate to the rights of Landlord in the
Leased Property. UNDER NO CIRCUMSTANCES SHALL LANDLORD BE OBLIGATED TO SUBJECT
OR SUBORDINATE ITS FEE TITLE INTEREST IN THE LEASED PROPERTY TO THE LIEN OF ANY
PERMITTED LEASEHOLD MORTGAGE, NOR SHOULD ANY PROVISION OF THIS LEASE BE
CONSTRUED AS CREATING OR REQUIRING ANY SUCH SUBORDINATION.
7.03. NOTICE OF LEASEHOLD MORTGAGE. Provided the holder of a Leasehold
Mortgage gives Landlord written notice of such
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Leasehold Mortgage together with a true copy of such Leasehold Mortgage and the
name and address of the Leasehold Mortgagee, following receipt of such notice
by Landlord, the provisions in this Article VII shall apply with respect to
each such Leasehold Mortgage.
7.04. NO MODIFICATION OF LEASE WITHOUT CONSENT OF LEASEHOLD MORTGAGEE. No
cancellation, surrender or modification of this Lease shall be effective as to
any Leasehold Mortgagee unless consented to in writing by such Leasehold
Mortgagee.
7.05. NOTICES TO LEASEHOLD MORTGAGEE.
(a) Upon providing Tenant any notice of: (1) default under this Lease,
(2) a termination of this Lease, or (3) a matter with respect to which Landlord
may predicate or claim a default, Landlord shall contemporaneously provide a
copy of such notice to every Leasehold Mortgagee of which Landlord has notice
(as provided in Section 7.03). No such notice by Landlord to Tenant shall be
deemed to have been duly given unless and until a copy of such notice has been
so provided to every Leasehold Mortgagee in accordance with Section 7.14. Upon
expiration of the period of time given to Tenant to cure any monetary default,
unless the default has been cured, every such Leasehold Mortgagee shall have an
additional period of twenty additional days immediately succeeding Tenant's ten
day cure period to cure the monetary default asserted. Upon expiration of the
period of time given to Tenant to cure any nonmonetary default, unless the
default has been cured, every such Leasehold Mortgagee shall have an additional
period of thirty days immediately succeeding Tenant's cure period to cure the
nonmonetary default asserted.
(b) If, during the applicable cure period, any Leasehold Mortgagee:
(i) notifies Landlord of such Leasehold Mortgagee's desire to
nullify any termination of this Lease by Landlord;
(ii) pays or causes to be paid all Rent and other monetary
obligations then due and in arrears as specified in the notice to such
Leasehold Mortgagee as well as those monetary obligations which may
become due during such Leasehold Mortgagee's cure period; and
(iii) cures or commences to cure and proceeds in good faith and
with reasonable diligence to cure all nonmonetary defaults asserted (provided,
however, that nothing contained in this clause (iii) shall be construed to
require a Leasehold Mortgagee to cure or commence to cure any default
consisting of Tenant's failure to satisfy and discharge any lien, charge or
encumbrance against Tenant's interest in this Lease or the Leased Property
junior in priority to the lien of the Leasehold Mortgage held by such Leasehold
Mortgagee);
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then this Lease shall not terminate; provided that such Leasehold Mortgagee
pays and performs every obligation of Tenant pursuant to this Lease and, to the
extent not enjoined or stayed, such Leasehold Mortgagee institutes proceedings
or files an action to acquire or sell Tenant's interest in this Lease by
foreclosure of the Leasehold Mortgage or other appropriate means within six
months following the date of any notice of default by Landlord to such
Leasehold Mortgage. If a Leasehold mortgagee complies with this Section 7.05,
upon the acquisition of Tenant's leasehold estate by such Leasehold Mortgagee
or its designee (other than Tenant or any affiliate of Tenant) or any other
purchaser (other than Tenant or any affiliate of Tenant) at a foreclosure sale
or otherwise, this Lease shall continue in full force and effect as if Tenant
had not defaulted under this Lease. Landlord shall accept any performance of
Tenant's obligations under this Lease by or at the instigation of such
Leasehold Mortgagee as if the same had been done by Tenant. Tenant authorizes
each Leasehold Mortgagee to take such action at such Leasehold Mortgagee's
option and does hereby authorize entry upon the Leased Property by the
Leasehold Mortgagee for such purpose.
7.06. ASSUMPTION OF TENANT'S OBLIGATIONS.
(a) The making of Leasehold Mortgage shall itself not be deemed to
constitute an assignment or transfer of this Lease or of the leasehold estate
hereby created, nor shall any Leasehold Mortgagee, as such, be deemed to be an
assignee or transferee of this Lease or of the leasehold estate hereby created
so as to require such Leasehold Mortgagee, as such, to assume the performance
of any of the terms, covenants or conditions on the part of the Tenant to be
performed hereunder. Nevertheless, a Leasehold Mortgagee or other purchaser at
any foreclosure or similar sale, shall become the legal owner and holder of
Tenant's leasehold estate under this Lease and become the Tenant hereunder upon
lawful foreclosure of a Leasehold Mortgage or as a result of the assignment of
Tenant's leasehold estate in lieu of foreclosure. Except as otherwise permitted
in the following Section 7.06(b), upon so becoming the owner and holder of the
leasehold estate, a Leasehold Mortgagee or the purchaser at any foreclosure or
similar sale shall have all rights, privileges, obligations and liabilities of
the original Tenant, and the purchaser (including a Leasehold Mortgagee in such
capacity) at any sale of this Lease shall be deemed to be a Permitted Assignee
(as defined in Section 16.01 (a) of this Lease).
(b) Notwithstanding anything to the contrary contained in or inferable
from this Lease, upon the acquisition of Tenant's rights under this Lease
following lawful foreclosure of a Leasehold Mortgage or the assignment of
Tenant's leasehold estate under this Lease in lieu of foreclosure, the
Leasehold Mortgagee shall have the right to thereupon and thereafter assign
Tenant's leasehold estate under this Lease so long as Landlord's written
consent is first obtained, which consent shall not be unreasonably withheld. In
the event of any such assignment, the assignee of such Leasehold Mortgagee
shall be deemed to be a Permitted Assignee and the
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Leasehold Mortgagee shall thereupon be relieved and released of any liability
or obligation under this Lease first accruing or arising after the assignment.
(c) In the event of the termination of this Lease as a result of
Tenant's default Landlord shall, in addition to providing the notices
of default required above, provide each Leasehold Mortgagee with written notice
("NOTICE OF TERMINATION") that the Lease has been terminated, together with a
statement of all sums which would at that time be due under this Lease, if any,
then known to Landlord. Landlord agrees to enter into a new lease ("NEW LEASE")
of the Leased Property with such Leasehold Mortgagee or such affiliate
("LEASEHOLD MORTGAGEE'S DESIGNEE") of such Leasehold Mortgagee as may be
designated in writing by such Leasehold Mortgagee for the remainder of the
Lease Term, effective as of the date of termination, upon terms, covenants and
conditions identical to those set forth in this Lease including obligations for
the payment of Rent and including obligations with respect to the Put Option
and the Call Option but excluding obligations which have already been satisfied
or fulfilled; provided:
(i) such Leasehold Mortgagee delivers a written request to
Landlord for such New Lease within sixty days after the date such
Leasehold Mortgagee receives Landlord's Notice of Termination;
(ii) such Leasehold Mortgagee pays or causes to be paid to
Landlord at the time of the execution and delivery of such New Lease,
any and all sums which would at the time of execution and delivery thereof be
due pursuant to this Lease and, in addition thereto, all reasonable expenses
(including reasonable attorney fees) which Landlord shall have incurred by
reason of such termination and the execution and delivery of the New Lease and
which have not otherwise been received by Landlord from Tenant or any other
party in interest under Tenant; and
(iii) such Leasehold Mortgagee cures or commences to cure and
proceeds in good faith and with reasonable diligence to cure all
non-monetary defaults of Tenant of which said Leasehold Mortgagee was notified
by Landlord's Notice of Termination which are reasonably susceptible of being
so cured.
If more than one Leasehold Mortgagee shall request a New Lease pursuant to this
Section 7.06 (c), Landlord shall enter into such New Lease with the Leasehold
Mortgagee whose mortgage is prior in lien or such Leasehold Mortgagee's
Designee. Landlord, without liability to Tenant or any Leasehold Mortgagee with
an adverse claim, may rely upon a mortgagee title insurance policy issued by a
responsible title insurance company doing business within the state in which
the Leased Property is located as the basis for determining the appropriate
Leasehold Mortgagee who is entitled to such New Lease.
(d) Any Leasehold Mortgage may provide, at Tenant's option, that the
Leasehold Mortgagee, upon making good any failure
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or breach on the part of Tenant, shall be thereby subrogated to any and all of
the Rights of Tenant Under the terms and provisions of this Lease.
7.07. NO OBLIGATION TO CURE CERTAIN NONMONETARY DEFAULTS. Nothing herein
contained shall require any Leasehold Mortgagee, as a condition to its exercise
of its rights under this Article VII, to cure any default of Tenant not
reasonably susceptible of being cured by such Leasehold Mortgagee.
7.08. DISPOSITION OF TENANT'S SHARE OF CONDEMNATION AWARD. Tenant's share,
as provided by Section 11.03 of this Lease, of the proceeds arising from an
exercise of the power or threat of eminent domain shall, subject to the
provisions of such Section 11.03, be disposed of as provided for by any
Leasehold Mortgage.
7.09. INSURANCE MORTGAGEE CLAUSES. A mortgagee clause in such form as may
be reasonably acceptable to Landlord and each Leasehold Mortgagee consistent
with reasonable custom and usage prevailing in the industry naming each
Leasehold Mortgagee, may be added to any and all insurance policies required to
be carried by Tenant hereunder; provided that Landlord's rights with respect to
insurance proceeds are not diminished or prejudiced in any way or to any
extent. Any such mortgagee clause proposed in writing by any Leasehold
Mortgagee which is not disapproved in writing ten days after submission shall
be deemed acceptable by Landlord.
7.10. NOTICE of LITIGATION. Landlord shall give each Leasehold Mortgagee
prompt notice of any legal proceedings between Landlord and Tenant involving
obligations under this Lease. Each Leasehold Mortgagee shall have the right to
intervene in any such proceedings and be made a party to such proceedings, and
the parties hereto do hereby consent to such intervention. In the event that
any Leasehold Mortgagee shall not elect to intervene or become a party to any
such proceedings, Landlord shall give the Leasehold Mortgagee notice of, and a
copy of, any award or decision made in any such proceedings, which shall be
binding on all Leasehold Mortgagees notwithstanding any Leasehold Mortgagee's
failure to intervene after receipt of notice.
7.11. NO MERGER. So long as any Leasehold Mortgage is in existence, unless
Landlord, Tenant, all Leasehold Mortgagees and all Fee Mortgagees (as defined
in Section 14.01) shall otherwise expressly consent in writing, the fee title
to the Leased Property and the leasehold estate of Tenant herein created by
this Lease shall not merge but shall remain separate and distinct,
notwithstanding the acquisition of said fee title and said leasehold estate by
Landlord or by Tenant or by any third person, by purchase or otherwise.
7.12. TRANSFER OF SECURITY DEPOSIT RIGHTS. If any Leasehold Mortgagee or
other purchaser has acquired the leasehold estate of Tenant pursuant to
foreclosure, conveyance in lieu of foreclosure or other proceedings or a New
Lease, such Leasehold Mortgagee or other purchaser shall succeed to the rights
of Tenant, if any, in
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and to the Security Deposit paid and augmented in accordance with Section 4.01.
In such event, Tenant shall no longer have any rights to such Security Deposit,
and Landlord shall hold such Security Deposit for and on behalf of such
Leasehold Mortgagee or other purchaser.
7.13. STATEMENTS AND CERTIFICATES. Landlord shall, at any time and from
time to time, within ten days after written request from Tenant to do so,
certify by written instrument duly executed and acknowledged to any Leasehold
Mortgagee, proposed Leasehold Mortgagee or proposed Leasehold Mortgagee's
Designee, purchaser at any foreclosure or similar sale, or other assignee
specified in such request: (a) as to whether this Lease has been supplemented
or amended, and if so, the substance and manner of such supplement or
amendment; (b) as to the validity and force and effect of this Lease, in
accordance with its tenor; (c) as to the existence of any default hereunder;
(d) as to the existence of any offsets, counterclaims or defenses hereto on the
part of Tenant; (e) as to the commencement and expiration dates of the term of
this Lease; and (f) as to any other matters as may be reasonably so requested;
provided that, in so doing, Landlord shall not be required to bear any
unreasonable burden or expense. Any such certificate may be relied upon by
Leasehold Mortgagee and any other person, firm or corporation specified
therein, and the contents of such certificate shall be binding on Landlord.
Nothing contained in this Section 7.13 shall be construed to permit any
assignment which is not otherwise permitted pursuant to Article XVI of this
Lease.
7.14. NOTICES. Notices from Landlord to each Leasehold Mortgagee shall be
mailed to the address furnished Landlord pursuant to Section 7.03, and those
from the Leasehold Mortgagee to Landlord shall be mailed to the address
designated pursuant to the provisions of Section 17.02 (and subject to Section
17.04) of this Lease. Such notices, demands and requests shall be given in the
manner described in, and shall in all respects be governed by, the provisions
of Section 17.01.
7.15. AMENDMENT OF LEASE. In the event any proposed Leasehold Mortgagee
requests that this Lease be amended, Landlord agrees to amend this Lease for
the benefit of such Leasehold Mortgagee; provided that the proposed amendment
does not affect any of the economic terms of this Lease and does not materially
adversely affect the rights of Landlord or its interest in the Leased Property.
ARTICLE VIII
TAXES AND UTILITIES
8.01. PROPERTY TAXES.
(a) Tenant shall, for the entire Lease Term, be liable for and,
subject to any right to contest permitted hereunder, shall pay, as
Additional Rent, before delinquency, all taxes, fees, and assessments
(including sewer, water and other utility improvement
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assessments) of every kind and nature, and penalties and interest thereon, if
any, assessed or levied against the Leased Property ("IMPOSITIONS"). If Tenant
fails to pay any Impositions, Landlord may, but shall not be obligated to, pay
such Impositions on Tenant's behalf after first giving Tenant ten days' notice
of Landlord's intention to pay such Impositions. If Landlord pays any
Impositions in accordance with the preceding sentence, Tenant shall immediately
reimburse and pay to Landlord upon demand, as Additional Rent, any Impositions
so paid by Landlord.
(b) Tenant shall also pay directly to the imposing authority, before
delinquency, all personal property taxes, and all other fees, charges and
assessments of every kind and nature, and penalties and interest thereon,
accruing during the Lease Term on or with respect to property used on or in
connection with the Leased Property, including but not limited to ad valorem
personal property taxes, and parking fees, levies or charges. If Tenant fails
to timely pay any tax, fee or assessment required to be paid by Tenant pursuant
to this Section 8.01(b), Landlord may, but shall not be required to, pay
such tax, fee, charge or assessment on Tenant's behalf after first giving
Tenant ten days notice of Landlord's intention to pay. If Landlord pays any
such tax, fee, charge or assessment on Tenant's behalf in accordance with the
preceding sentence, Tenant shall immediately reimburse and pay to Landlord,
upon demand as Additional Rent, an amount equal to all such taxes, fees,
charges and assessments so paid.
(c) If any tax, fee or assessment may be paid in installments, Tenant
may elect to so pay such tax, fee or assessment in installments and
Tenant shall only pay those taxes, fees and assessments accruing during the
Lease Term.
(d) Tenant, at its expense, may contest in its own name or in the
name of Landlord, or both, by appropriate legal proceedings, the
amount, validity or application, in whole or in part, of any tax, fee or
assessment required to be paid hereunder; provided, however, that pending a
final determination of the contested tax, fee, or assessment, Tenant either (i)
pays such contested tax, fee or assessment under protest; or (ii) obtains and
posts a bond issued by a surety reasonably acceptable to Landlord in an amount
sufficient to satisfy and pay the amount of such contested tax, fee or
assessment and estimated interest and penalties thereon, and to adequately
indemnify Landlord from all liability with respect to the enforcement of such
tax, fee or assessment. Neither such contest or the failure to pay such
contested tax, fee or assessment during any period of contest shall constitute
a default hereunder; provided that if as a matter of law, such tax, fee or
assessment must be paid during such contest, Tenant shall do so.
8.02. UTILITIES.
(a) Tenant shall, for the entire Lease Term, be liable for and pay
before delinquency all charges for utilities and other services used or
consumed on the Leased Property during the Lease
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Term, including, without limitation, gas, electricity, water, sewer, telephone
and community antenna television service, and specifically including any and
all charges for initiating and terminating service, such as initiation or
"hook-up" fees, disconnection fees, and similar fees, as well as all costs and
charges incurred in relocating and extending utility lines, whether on or off
the Leased Property. Tenant shall not permit any such charges to accumulate or
become a lien on the Leased Property. If Tenant fails to timely pay any utility
or service charges required to be paid by Tenant pursuant to this Section 8.02,
Landlord may, but shall not be required to, pay such utility or similar service
charge on Tenant's behalf after first giving Tenant ten days' notice of
Landlord's intention to pay. If Landlord pays any such utility or similar
service charge on Tenant's behalf in accordance with the preceding sentence,
Tenant shall immediately reimburse and pay to Landlord upon demand, as
Additional Rent, an amount equal to all such utility and similar service
charges so paid.
(b) Landlord shall assign to Tenant all of Landlord's right, title and
interest in and to any equivalent residential units to which Landlord may be
entitled with respect to the Leased Property.
ARTICLE IX
MAINTENANCE, REPAIRS AND DESTRUCTION
9.01. MAINTENANCE AND REPAIRS. During the Lease Term, Tenant shall keep
and maintain the Leased Property and all Improvements (including landscaping)
thereon in a good clean, sanitary and safe condition, reasonable wear and tear
excepted, and shall make all necessary repairs thereto and replacements
thereof, interior and exterior, structural and non-structural. Nothing
contained in the preceding sentence shall be construed to limit or restrict
Tenant's right to remove the Shark Club Improvements in accordance with and
subject to Section 6.01 of this Lease. All repairs and replacements shall be
performed and installed promptly in a good and workmanlike manner and in
compliance with all applicable building, zoning and all other laws, statutes,
ordinances, orders, rules, regulations, requirements, permits and
authorizations of all federal, state, county and municipal governmental
authorities. Tenant shall be responsible for the repair and maintenance of all
sidewalks, driveways and parking areas on the Leased Property, whether
significant or insignificant, anticipated or unanticipated. Tenant's
maintenance, repair and replacement obligations of this Section 9.01 shall
extend to and include the repair and replacement of all underground and
overhead utility and service lines, facilities and systems, whether or not
located on the Leased Property (including gas, electrical, water, sewer,
telephone and community antenna television systems servicing the Leased
Property but located within rights-of-way adjoining the Leased Property),
unless and except to the extent such utility and service lines facilities and
systems are required to be and are in fact maintained by the provider of such
utility or service. If Tenant
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fails to keep and maintain the Leased Property in a clean, sanitary and safe
condition or if Tenant fails to commence or complete any necessary repairs or
replacements promptly and adequately, Landlord may, but shall not be required
to so maintain the Leased Property and to make and complete such repairs and
replacements on Tenant's behalf after giving Tenant ten days notice of
Landlord's intention to perform or cause the performance of such maintenance,
repair or replacement work on Tenant's behalf. If Landlord pays any amount for
the maintenance of the Leased Property or for necessary repairs or replacements
on Tenant's behalf in accordance with the preceding sentence, Tenant shall
immediately reimburse and pay to Landlord, upon demand, as Additional Rent, an
amount equal to all expenses and expenditures incurred in connection with such
maintenance, repairs or replacements.
9.02. NO RESPONSIBILITY OF LANDLORD. Landlord shall not be obligated to
inspect the Leased Property for any reason whatsoever. Landlord shall not be
liable for, and Tenant on behalf of itself and its licensees and invitees
hereby waives and holds Landlord harmless from any claim for, or right to
recover for, any loss or damage to persons or property which may be caused by
any condition of any Improvements, the condition of the Leased Property, by
flood or surface water, or by any other cause of similar nature.
9.03. DESTRUCTION OR DAMAGE.
(a) Except as otherwise permitted in Section 9.03 (b), if any
Improvements are destroyed or damaged to any extent, Tenant shall, at
Tenant's sole cost and expense, without any expenditure or expense being
imposed on Landlord, restore, repair, replace, rebuild and alter such
Improvements to at least as good a condition as existed prior thereto. Any
restoration, repair, replacement, rebuilding or alteration required pursuant to
this Section 9.03 shall be commenced promptly and in no event later than six
months after such destruction or damage, and shall be prosecuted with
diligence. All such restoration, repair, replacement, rebuilding or alteration
shall be subject to the same rights reserved by Landlord with respect to the
construction of Improvements pursuant to Section 6.03. Insurance proceeds shall
be applied to the cost of any such restoration as provided in Section 10.04,
and if the insurance proceeds are insufficient for such purposes, Tenant shall
be responsible for all excess expenditures and expenses required or necessary.
(b) If the Shark Club Improvements are destroyed or damaged as a
result of casualty, Tenant may elect to completely remove the Shark Club
Improvements provided Tenant first (i) satisfies all obligations pursuant to
the Shark Club Lease with respect thereto, terminates the Shark Club Lease, or
procures a waiver from La-Tex Partnership which, by its terms, releases
Landlord from liability; (ii) increases the Security Deposit in accordance with
Section 4.01 (b); (iii) to the extent practicable, affords Landlord an adequate
opportunity to remove any undamaged items of personal property identified on
EXHIBIT F annexed to this Lease; and (iv) secures all necessary permits,
licenses, and
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approvals from all federal, state, county and municipal governmental
authorities. If any other Improvements are destroyed or damaged, Tenant may
elect to completely remove such Improvements upon the condition that the amount
of the Security Deposit otherwise required to then be posted (but for Section
4.01 (e) of this Lease) shall be posted in accordance with Section 4.01,
notwithstanding Section 4.01 (e).
ARTICLE X
INSURANCE, INDEMNITY AND WAIVER
10.01. GENERAL LIABILITY INSURANCE.
(a) Tenant shall, at Tenant's sole cost and expense, without any
expense being imposed on Landlord, procure and maintain throughout the Lease
Term, one or more policies of comprehensive general liability insurance,
insuring against any and all claims for injuries to or death of any person or
persons, or damage to property occurring in, on or about the Leased Property or
occurring as a result of any activity being conducted on the Leased Property.
Tenant shall cause Landlord to be an additional insured on all such liability
insurance policies insuring Tenant with respect to its occupancy and activities
on the Leased Property, including, but not limited, to all comprehensive
general liability policies, all "umbrella" liability policies, all "excess
liability" policies and all other such liability policies, and under no
circumstances shall such liability insurance have a combined single limit
coverage of less than (i) Five Million Dollars ($5,000,000) or such greater
amount as may be required by a Leasehold Mortgagee if the Land is not used as a
part of or in conjunction with a hotel or casino facilities, or (ii) Twenty
Million Dollars ($20,000,000) or such greater amount as may be required by a
Leasehold Mortgagee if the Land is used as a part of or in conjunction with a
hotel or casino facility. Every such policy shall include liability coverage
normally incident to comprehensive general liability policies and shall include
broad form contractual liability coverage for Tenant's indemnity obligations
under this Lease, liquor legal liability ("dram shop") coverage and personal
liability coverage.
(b) Tenant shall at all times during the term of this Lease, without
any expense being imposed on Landlord, provide worker's compensation
coverage (through insurance or otherwise) as required by Nevada law and the
rules and regulations promulgated thereunder.
10.02. CASUALTY INSURANCE.
(a) Tenant, at its sole cost and expense, without any expense being
imposed on Landlord shall procure and maintain throughout the Lease
Term in full force and effect, in the names of Landlord and Tenant as their
interests may appear, property insurance, including "all-risk" coverage
insuring all Improvements which may, from time to time, constitute a part of
Leased Property
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on a (i) replacement cost basis of not less than ninety percent (90%) of
the replacement cost of all Improvements or (ii) a multiple location "stop
loss" limit basis of one hundred percent (100%) of the replacement cost of the
Improvements.
(b) Tenant, at Tenant's sole cost and expense, without any expense
being imposed on Landlord shall also procure and maintain throughout
the Lease Term in full force and effect loss of rents insurance sufficient in
amount and duration to satisfy Tenant's obligations to pay to Landlord Base
Rent, Supplemental Rent and Additional Rent as may then be payable from Tenant
to Landlord for a period of at least twelve months following any interruption
of Tenant's business by reason of any casualty. The loss of rents policy shall
name Landlord as a loss payee and provide for such payments to be made directly
to Landlord by the insurer.
10.03. COURSE-OF-CONSTRUCTION INSURANCE. During the construction of any
Improvements, the total cost of which exceeds or is expected to exceed Five
Hundred Thousand Dollar ($500,000), Tenant, at its sole cost and expense,
without any expense being imposed on Landlord, shall maintain in full force and
effect, in the names of Landlord and Tenant as their interests may appear,
course-of-construction casualty insurance coverage in such amount and with such
coverages as are commercially reasonable under the circumstances. Prior to
commencement of any construction, addition, alteration, repair, demolition,
destruction or removal of any Improvements the cost of which is anticipated to
exceed Five Hundred Thousand Dollars ($500,000), Tenant shall notify Landlord
not less than ten days in advance, in writing, of the starting date of such
intended work. At the time of the notice, if the cost of the work is
anticipated to exceed Five Hundred Thousand Dollars ($500,000), Tenant shall,
at Tenant's sole cost and expense, obtain a policy of owner's and contractor's
protective liability insurance, with a combined single limit coverage of not
less than Five Million Dollars ($5,000,000), insuring Landlord and Tenant
against any and all claims for injuries to or death of any person or persons or
damage to property occurring in, on or about the Leased Property as a result of
actions related to the construction, alteration, addition, repair, demolition,
destruction or removal of any Improvements. Every such policy shall include
normal comprehensive form liability coverage contained in such policies and
shall include, but shall not necessarily be limited to, bodily injury and broad
form property damage, blanket contractual liability coverage,
premises-operations coverage, explosion and collapse hazard coverage,
underground hazard coverage, products/completed operations hazard coverage,
independent contractors coverage and comprehensive form automobile liability
coverage.
10.04. PAYMENT OF PROCEEDS. Unless otherwise agreed by Landlord, Tenant
and any insured Leasehold Mortgagee and Fee Mortgagee, all insurance proceeds
payable under any casualty insurance policy required to be maintained under the
provisions of Section 10.02 or any course-of-construction casualty insurance
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policy maintained under the provisions of Section 10.03 shall be made
payable, in case of loss or damage, (a) except in the case of loss or damage to
the Shark Club Improvements, to a Leasehold Mortgagee, if a Leasehold Mortgagee
so requires, or (b) to a Fee Mortgagee, if a Fee Mortgagee so requires, or (c)
if no Leasehold Mortgagee or Fee Mortgagee so requires such proceeds be paid to
it, to a trust company authorized by law to exercise corporate trust powers in
the State of Nevada or other impartial third party, as shall be designated (in
either instance) by Landlord, as trustee of such proceeds. The trustee shall be
responsible only for the proper custody and application of policy proceeds as
provided for in this Lease, and Tenant shall pay all fees and expenses of such
trustee for or in connection with its services. The trustee shall make the
proceeds available to Tenant and shall be applied by Tenant to the extent
necessary for the repair, restoration or reconstruction of the Improvements.
Any insurance proceeds remaining after proper repair, restoration and
reconstruction and after payment of all costs and expenses incurred in
connection therewith shall be Tenant's sole property, subject to the terms and
requirements of any Leasehold Mortgage.
10.05. GENERAL INSURANCE REQUIREMENTS. Every policy of insurance required
pursuant to this Lease shall be written by insurance companies licensed in the
State of Nevada to provide the type of coverage required, each of which shall
be subject to the prior written approval of Landlord, which shall not be
unreasonably withheld. Any insurance company designated and/or policy
identified by Tenant in a written notice given to Landlord which is not
disapproved in writing within ten days after submission shall be deemed
approved. Each policy of insurance required pursuant to this Lease shall
contain an endorsement providing that neither the policy nor any coverage
provided therein may be cancelled, reduced, diminished or otherwise abrogated
in any manner or to any extent without first providing prior written notice to
Landlord and such other persons with an interest in the Leased Property and/or
this Lease as Landlord may have previously designated at least thirty days
prior to cancellation, reduction, diminishment or abrogation. At the time
provided for the procurement of insurance coverage as set forth in this Lease
and not less than thirty days prior to the expiration of each policy, Tenant
shall deliver to Landlord originally executed certificates and, as soon
thereafter as may be practicable, true and correct copies of the original
policies of insurance issued by the insuring company or companies evidencing
all coverages, endorsements and policy limits required herein. Each policy of
insurance required under the terms of this Lease shall be written as a primary
policy and not contributory policy with or in excess of any policy that may be
carried by Landlord. Every policy required pursuant to this Lease shall name as
insureds, Landlord and any other persons with an interest in the Leased
Property and/or this Lease as Landlord may reasonably designate. Tenant shall
carry insurance as required in this Lease in such amounts as will prevent the
imposition of a co-insurance penalty in the event of loss, notwithstanding any
other provision of this Lease. All policies required hereunder shall contain
loss payable or other similar endorsements so as to provide for the
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payment of insurance proceeds as required in this Lease. No policy of
insurance required to be carried by Tenant hereunder shall contain deductibles
or self-insured retentions greater than Fifty Thousand Dollars ($50,000)
without the prior written approval of Landlord. If Tenant obtains insurance
coverage with deductibles or self-insured retentions, Tenant shall be solely
responsible for the payment of all deductible and self-insured sums. Tenant may
provide any insurance required hereunder through blanket policies.
10.06. INDEMNIFICATION AND WAIVER.
(a) Tenant hereby covenants and agrees to indemnify, defend and hold
Landlord and Landlord's officers, directors, shareholders, partners,
members, principals, employees, agents and representatives free, clear and
harmless from any and all claims, demands, losses, damages, judgments, liens,
interest, costs, expenses (including attorney fees), expenses of appearing as a
witness (including attorney fees) even if not also a party and other liability
(all of which are herein referred to collectively as "CLAIMS" and each of which
is referred to singularly as a "CLAIM") other than Claims for which Landlord is
required to provide indemnification pursuant to Section 10.06 (b) in connection
with, arising out of, or by reason of: (1) any matter for which indemnification
is required pursuant to Sections 3.03, 5.02, 5.04(c)(3), 6.04 or otherwise
pursuant to this Lease, (2) the inaccuracy or breach of any warranties or
covenants of Tenant contained in this Lease; and (3) any act, omission or
negligence in any way connected with or in any way related to Tenant's
occupancy or use of the Leased Property or the condition of the Leased Property
including, without limitation, Claims resulting from or in any way related to
(i) any injury to or death of any person or damage to property occurring on the
Leased Property, or upon the sidewalks, driveways, parking areas, streets or
rights-of-way adjoining the Leased Property and which is actually or alleged to
be related to or connected with the use, condition or occupancy of the Leased
Property, or the condition of such sidewalks, driveways, parking areas, streets
or ways; (ii) any actual or alleged act or omission of Tenant, Tenant's
officers, directors, employees, servants, agents, contractors, representatives,
subtenants, licensees, customers or invitees; (iii) any violation or alleged
violation of any law, ordinance or regulation or breach or alleged breach of
any agreement or any failure or alleged failure of Tenant to perform or fulfill
any covenant of this Lease; (iv) any actual or alleged encroachment, trespass
or nuisance upon the Leased Property or to property adjoining the
Leased Property; and (v) any contest by Tenant of any ruling, tax, lien or
other matter, it being understood that this provision does not in any way
independently permit or approve of the contest of any such action not otherwise
specifically provided for in this Lease.
(b) Landlord hereby covenants and agrees to indemnify, defend and hold
Tenant and Tenant's officers, directors, shareholders, partners, members,
principals, employees, agents and representatives free, clear and harmless from
any and all Claims other than Claims for which Tenant is required to provide
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indemnification pursuant to Section 10.06 (a), in connection with, arising
out of, or by reason of: (1) the inaccuracy or breach of any warranties or
covenants of Landlord contained in this Lease; (2) any act, omission or
negligence of Landlord while in, upon, about or in any way connected with the
Leased Property; and (3) any matter arising from or connected with the Leased
Property and accruing on or before the Commencement Date, other than
obligations relating to the Shark Club Lease which have been assumed by Tenant
pursuant to this Lease.
(c) Any person entitled to indemnification pursuant to this Section
10.06 (an "INDEMNITEE") shall provide the indemnifying party (an
"INDEMNITOR") with notice of any Claim with reasonable promptness and the
indemnitor shall defend indemnitee in such proceedings by counsel of the
indemnitor's selection subject to the indemnitee's approval (which shall not be
unreasonably withheld, conditioned or delayed), the cost and expense of which
(including attorney fees) shall be borne by the indemnitor. The indemnitee
shall cooperate fully in all respects with the indemnitor in any such defense,
including, without limitation, making available to the indemnitor all pertinent
information under the control of the indemnitee. If an indemnitee so requests
indemnification, the indemnitor shall defend, but not settle, a Claim without
waiving the indemnitor's right to assert that such Claim is not subject to an
obligation of indemnification pursuant to this Lease.
10.07. MUTUAL WAIVERS OF SUBROGATION. As a material inducement to Landlord
to enter into this Lease, Tenant hereby waives any and all rights of recovery
(including any subrogation rights of its insurers) from Landlord, and
Landlord's officers, directors, shareholders, partners, members, principals,
employees, agents and representatives for any loss or damage, including
consequential loss or damage, covered by any insurance policy maintained by
Tenant, whether or not such policy is required pursuant to this Lease. Landlord
likewise hereby waives any and all rights of recovery (including any
subrogation rights of its insurers) from Tenant and Tenant's officers,
directors, shareholders, partners, members, principals, employees, agents and
representatives for any loss or damage, including consequential loss or damage,
covered by any insurance policy maintained by Landlord.
10.08. LANDLORD NOT OBLIGATED. Notwithstanding anything to
the contrary contained in or inferable from any provision of this
Lease, Landlord shall not be required to carry or maintain
insurance coverage of any kind or nature; and Tenant hereby waives
all claims and demands against, and any and all rights of recovery
against Landlord, its officers, directors, shareholders, partners,
members, principals, employees, agents and representatives, for any
losses, damages, claims, and causes of action other than those
proximately caused by and resulting from Landlord's willful
misconduct or acts of gross negligence, or matters which are the
subject of Landlord's indemnification obligations under Section
10.06 (b).
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10.09. FAILURE TO MAINTAIN INSURANCE. If Tenant fails or refuses to
procure or maintain any insurance coverage required by this Lease or fails or
refuses to furnish Landlord with required evidence that the insurance has been
obtained, is in force and has been paid for, Landlord may, but shall not be
required to, procure and maintain such insurance on Tenant's behalf after first
giving Tenant ten days' notice of Landlord's intention to do so. If Landlord
pays any premium for insurance coverage on tenant's behalf in accordance with
the preceding sentence, Tenant shall immediately reimburse and pay to Landlord,
upon demand, as Additional Rent, an amount equal to all expenses associated
therewith.
ARTICLE XI
EMINENT DOMAIN
11.01. CONDEMNATION. If all of the Leased Property shall be taken or
acquired by any governmental or quasi-governmental authority under the power or
threat of eminent domain or by inverse condemnation, the Lease Term shall cease
as of the day possession shall be taken by such authority. Likewise, even if
less than all, but so much of, the Leased Property is taken such that a
reasonable amount of reconstruction will not render the Improvements legally
usable or feasibly suited for the use in the manner the Leased Property was
used immediately prior to the taking, the taking shall be deemed to be and
treated as a complete taking for purposes of this Section 11.01. Upon a
complete taking of the Leased Property, Tenant shall pay Rent up to the date
possession is taken with an appropriate refund by Landlord of such Base Rent
and Additional Rent as may have been paid in advance for any period subsequent
to the date possession in taken.
11.02. PARTIAL CONDEMNATION.
(a) If up to fifteen feet of frontage property (based upon current lot
lines) is taken or acquired by any governmental or quasi-governmental authority
under the power or threat of eminent domain or by inverse condemnation for the
purpose of widening Harmon Avenue, the Lease Term shall not cease or be
interrupted to any extent, there shall be no abatement of Rent for the portion
of the Leased Property so taken and Tenant shall continue to fully pay and
perform all obligations pursuant to this Lease.
(b) With respect to any taking other than or in excess of the taking
described in Section 11.02 (a), if less than all of the Leased Property shall
be taken or acquired by any governmental or quasi-governmental authority under
the power or threat of eminent domain or by inverse condemnation, such that a
reasonable amount of reconstruction will render the Improvements legally usable
and feasibly suited for the use in the manner the Leased Property was used
immediately prior to the taking, the Lease Term shall not cease, Tenant shall
continue to pay Rent up to the date possession is taken and, thereafter, Base
Rent (not Supplemental Rent and not Additional Rent) as it then exists shall be
reduced in
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the same proportion that the value of the Leased Property immediately
before the taking bears to the value of the Leased Property immediately after
the taking. Tenant shall, at its sole cost and expense, without any expense
being imposed on Landlord, make fully restore, repair, replace, rebuild and
alter the Improvements in accordance with Section 9.03 so as to constitute the
remaining premises a complete architectural unit.
11.03. CONDEMNATION AWARD.
(a) Except as otherwise provided in Section 11.03 (b), all compensation
awarded or paid for any taking or acquiring of the Land and/or the Shark Club
Improvements under the power or threat of eminent domain or by inverse
condemnation, complete or partial, up to an amount equal to the Purchase Price
(determined in accordance with Section 12.03 as if either party had timely
exercised one of the options set forth and the date payment is made is deemed
to be the date of Closing), shall be the property of Landlord; and any and all
amounts awarded as compensation for the taking or acquiring of the Resort
Improvements and for any diminution in the value of Tenant's leasehold interest
shall be the property of Tenant. In the event the condemnation award for the
taking or acquiring of the Land and/or Shark Club Improvements is less than the
Purchase Price (so determined), Landlord shall be entitled to retain from the
Security Deposit an amount equal to the difference between the Purchase Price
(so determined) minus the condemnation award and the balance of the Security
Deposit, if any, shall be delivered to Tenant. In the event the condemnation
award for the taking or acquiring of the Land and/or Shark Club Improvements
and the portion of the Security Deposit retained by Landlord equals or exceeds
the Purchase Price (so determined), any amounts in excess of the Purchase Price
(so determined) shall belong to Tenant and Landlord shall transfer all rights
in the Leased Property to Tenant upon receipt of the Purchase Price.
(b) With respect to any condemnation award on account of any taking
described in Section 11.02 (a), the first Two Hundred Fifty Thousand Dollars
($250,000) thereof shall belong to Landlord and the balance of such award shall
be divided between Landlord and Tenant in the same proportions as the values of
their respective interests.
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ARTICLE XII
PURCHASE RIGHTS
12.01. LANDLORD'S PUT OPTION.
(a) Tenant hereby grants to Landlord an option to sell ("PUT OPTION")
the Leased Property subject to all of the Reservations (other than any Fee
Mortgage) and all easements, licenses, reservations, rights-of-way, conditions,
covenants, and restrictions which become matters of record on or after the
Commencement Date through no act or omission of Landlord and all other
conditions, facts, circumstances, rights and claims which are not shown as
matters of record and which arise on or after the Commencement Date through no
act or omission of Landlord for the Purchase Price and upon the terms and
conditions set forth in this Article XII.
(b) Landlord may exercise the Put Option by delivering written notice
to Tenant at any time on or after the first day of the fifth Lease Year. Such
notice shall specify a date and place at which the Closing (as defined in
Section 12.05) shall occur, which date shall not be less than three months nor
more than four months after the date of such notice.
12.02. TENANT'S CALL OPTION.
(a) Landlord hereby grants to Tenant an option ("CALL OPTION") to
purchase the Leased Property subject to the same matters identified in Section
12.01 (a) for the Purchase Price and upon the terms and conditions set forth in
this Article XII.
(b) Provided there does not exist any uncured event of default
pursuant to Section 15.01 of this Lease, Tenant may exercise the Call
Option by delivering written notice to Landlord at any time on or after the
first day of January, 1999 (subject to Tenant's right to accelerate in
accordance with Section 5.04 (b) (2) or 14.02 (b)); provided, however, that if
such notice is given prior to the first day of July, 2006, the Purchase Price
shall be increased in accordance with Section 12.03 (c) and (d), if applicable.
Such notice shall specify a date and place at which the Closing shall occur,
which date (except as provided in Section 5.04 (b) (2) and 14.02 (b)) shall not
be less than twelve months or more than fifteen months after the date of such
notice.
12.03. PURCHASE PRICE. Subject to Sections 5.04 (b)(2), 14.02 (b) and
12.02 (b), in the event Landlord exercises Landlord's Put Option or in the event
Tenant exercises Tenant's Call Option, the purchase price (the "PURCHASE
PRICE") for the Leased Property shall be an amount equal to:
(a) the product of (i) either (A) in the case of a sale and purchase of
the Leased Property on or after January 1, 2000, the Base Rent, as adjusted,
payable during the month preceding the Closing adjusted to take into account
increases (but not decreases)
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in the cost-of-living occurring during the Lease Year in which the Closing
occurs, based on the same index (indices) as may then be used for the
calculation of adjustments of Base Rent pursuant to Section 3.02, such
adjustment being made in the same manner and subject to the same limitations
(proportionately applied) as Base Rent is adjusted pursuant to Section 3.02
with the base index number being the first month of the Lease Year in which
Closing occurs and the current index number being the month preceding the month
in which Closing occurs, or (B) in the case of a sale and purchase of the
Leased Property which occurs prior to January 1, 2000 as a result of an
exercise of Tenant's Call Option (accelerated by virtue of a Denial in
accordance with Section 5.04 (b) (2)), the Base Rent that would have been
payable for the month of January, 2000, adjusted to take into account
adjustments in cost-of-living in the same manner as set forth in the preceding
clause (A) of this Section 12.03 (a) (i), assuming cost-of-living increases of
three percent (3%) per annum between the date of Closing and January, 2000;
multiplied by (ii) 12; multiplied by (iii) 10; plus
(b) if Tenant has failed to timely elect not to use the Land as a part
of or in conjunction with a hotel and casino in accordance with Section 5.01,
the outstanding balance of the Supplemental Rent Amount for the month in which
Closing occurs which balance shall be determined in accordance with EXHIBIT D
annexed to this Lease plus a lease termination fee of Two Hundred Fifty
Thousand Dollars ($250,000); plus
(c) if Tenant gives notice of exercise of Tenant's Call Option prior to
July 1, 2006 (with Closing being not less than twelve months or more than
fifteen months thereafter), One Million Dollars ($1,000,000) but nothing
contained in the preceding clause shall be construed to permit an exercise of
the Call Option any earlier than the date specified in Section 12.02 (b); plus
(d) if Tenant accelerates the exercise of Tenant's Call option as a
result of a Denial in accordance with Section 5.04 (b) (2), the present value
of the Base Rent Landlord would have received pursuant to this Lease from and
after the date of the sale and purchase of the Leased Property (but for such
sale and purchase) through and including December, 1999, assuming cost-of-living
increases of three percent (3%) per annum and employing a discount factor of
eight percent (8%); less
(e) any amount received by Landlord pursuant to Section 11.03 (a) (but
not any amount received by Landlord pursuant to Section 11.03 (b)).
Upon exercise of Landlord's Put Option, Landlord may, but shall not be
obligated to, use and apply all or any portion of the Security Deposit toward
the payment of the Purchase Price, after first giving Tenant thirty days'
notice of Landlord's intention to so use and apply the Security Deposit for
such purposes, during which time Tenant may substitute money for any letters of
credit then constituting a part of the Security Deposit. If Landlord exercises
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its Put Option or if Tenant exercises Tenant's Call Option but Tenant fails to
timely close the purchase of the leased property, through no fault of Landlord,
Landlord may elect but shall not be obligated to elect to recover, in addition
to terminating the Lease, as its exclusive remedy for damages, the Security
Deposit as liquidated damages. It is agreed that the exact amount of costs,
expenses and damages incurred and suffered by Landlord would be difficult to
determine and that the amount of the Security Deposit which shall then have
been paid is a reasonable estimate of that amount. In that regard, Tenant and
Landlord stipulate, acknowledge and agree that the failure to close the sale
and purchase of the Leased Property on or before the date of Closing shall
deprive Landlord of not only the opportunity to earn interest or other normal
investment return on funds that Landlord would receive at Closing, but shall
also preclude Landlord from availing itself of valuable business opportunities
and engaging in transactions that could result in substantial monetary profit
to Landlord. Tenant and Landlord agree that the likely amount of such profit
would be extremely difficult to determine, but that the amount of any such
profit, as well as the likelihood of Landlord making such profit, will diminish
with the passage of time. Tenant and Landlord acknowledge, stipulate and agree
that the retention by Landlord of the Security Deposit, increasing in amount as
provided in Section 4.01, will be reasonable, and that the increasing amount of
the Security Deposit shall bear direct relationship to the likelihood and
amount of lost opportunity profits to Landlord.
12.04. TAX-FREE EXCHANGE. In the event Landlord exercises its Put Option
or Tenant exercises its Call Option and Landlord desires to structure the sale
of the Leased Property to Tenant as part of a tax-free exchange pursuant to
Section 1031 of the Internal Revenue Code of 1986, Tenant shall cooperate with
Landlord in such efforts and shall execute and deliver such documents and
perform such actions as Landlord may reasonably request. However, in no event
shall such structuring or accommodation result in any cost to Tenant or in any
way relieve Landlord of any of its obligations under this Lease.
12.05. TERMS OF PURCHASE. The following provisions shall govern the sale
and purchase of the Leased Property, regardless of whether the sale and
purchase results from an exercise of Landlord's Put Option or Tenant's Call
Option:
(a) The closing ("CLOSING") shall take place on the date specified in
notice given by Landlord pursuant to Section 12.01 or the date specified in the
notice given by Tenant pursuant to Section 12.02.
(b) At Closing, Landlord shall convey title to the Leased Property to
Tenant by grant, bargain and sale deed subject to the Reservations, any
Leasehold Mortgage and all encumbrances and liens not resulting from any act or
omission of Landlord and Landlord shall remove, any and all exceptions to title
reasonably related to any act or omission of Landlord including, but not
limited to, any Fee Mortgage.
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(c) Closing costs other than title insurance (which shall be borne by
Tenant) shall be allocated in accordance with the custom and usage then
prevailing in Clark County, Nevada. Rent shall be prorated as of the date of
the Closing. At Closing, Landlord shall provide Tenant with a suitable
affidavit satisfying the requirements of the Internal Revenue Code relating to
the withholding of a portion of the purchase price in the event of any purchase
from a "foreign" person.
(e) Each party shall promptly prepare, execute and deliver such further
documents, and shall promptly perform whatever acts are necessary to Closing.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
13.01. LANDLORD'S WARRANTIES. Landlord hereby represents and warrants to
Tenant that:
(a) Landlord is the owner of the Land. Previous to the execution of
this Lease, Landlord has not conveyed the Leased Property or any interest
therein except as disclosed by the Recorded Exceptions and the Shark Club Lease.
(b) Landlord has furnished to Tenant true and correct copies of all
items identified in EXHIBIT C, all of which set forth and constitute the entire
understanding between Landlord and La-Tex Partnership concerning the Leased
Property; and rent has not been prepaid in advance of dates upon which such
rent becomes due in accordance with the Shark Club Lease.
(c) Landlord has furnished Tenant true and correct copies of the Shark
Club Note, the Short Form Deed of Trust and Assignment of Rents executed by
Landlord for the benefit of La-Tex Partnership recorded in Book 870702 as
Instrument No. 01263, in the office of the Clark County Recorder and the
Assignment of Short Form Deed of Trust and Assignment of Rents and Promissory
Note recorded in Book 870803 as Instrument No. 00566 in the office of the
Clark County Recorder, which together with the documentation described in
Section 13.01 (b) constitute the entire understanding between Landlord and
La-Tex Partnership concerning such loan transaction.
(d) As of the Commencement Date, the outstanding balance of principal
and interest due on and with respect to the Shark Club Note is Four Hundred
Twenty-two Thousand Three Hundred Sixty-Nine Dollars and Seventy-Four Cents
($422,369.74).
(e) Landlord claims that Tenant is in default under the Shark Club
Lease and La-Tex Partnership claims that Landlord is in default under the Shark
Club Lease as more fully disclosed in various items of correspondence and
pleadings identified on EXHIBIT C annexed to this Lease, copies of which have
been provided to
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Tenant; and there exist no defaults by either party under the Lease other than
those which are the subject of the items of correspondence and pleadings
identified on EXHIBIT C.
(f) Other than the right embodied in Section 39 of the Shark Club Lease
which have been the subject of various items of correspondence identified in
Section 13.02 (a), Landlord has not granted La-Tex Partnership or any other
person any option or right to purchase the Leased Property.
(g) Landlord has furnished to Tenant true and correct copies of the
documents which constitute the entire understanding of Landlord and Bank of
America Nevada concerning the loan set forth therein (the "BOFA LOAN").
(h) As of April 19, 1996, the outstanding principal balance of the BofA
Loan was Nine Hundred Twelve Thousand Six Hundred Fifty-Two Dollars and
Seventy-Eight Cents ($912,652.78).
(i) The BofA Loan may be prepaid at anytime without any prepayment
premium or penalty.
(j) Landlord has full power and authority to enter into this Lease. All
actions by Landlord necessary to authorize the execution, delivery and
performance of this Lease have been duly undertaken. In addition to these
representations and warranties of Landlord, the person executing this Lease on
behalf of Landlord represents and warrants to Tenant that such person has full
power and authority to execute this Lease on behalf of Landlord.
(k) This Lease constitutes the legal, valid and binding obligation of
Landlord, enforceable in accordance with its terms.
(l) There exists no litigation, instrument or agreement which would
prevent Landlord from entering into or performing this Lease. Without limiting
the generality of the foregoing, there is no agreement other than the Shark
Club Lease which allows any person or entity to use the Leased Property.
(m) Landlord has not received any notice or other communication
concerning any alleged violation of any Environmental Law or any notices or
other communications concerning liability for the presence of any Hazardous
Material in connection with the Leased Property, and there exists no writ,
injunction, decree, order or judgment outstanding, nor any lawsuit, claim,
proceeding, citation or investigation, pending or, to Landlord's actual
knowledge, threatened, relating to the ownership, use, maintenance or operation
of the Leased Property by any person, or to any alleged violation of any
Environmental Law or to the suspected presence of any Hazardous Material
thereon, nor does there exist any basis for any such lawsuit, claim,
proceeding, citation or investigation being instituted or filed. To the best of
Landlord's actual knowledge, there are no Hazardous Materials stored,
deposited, or otherwise located in, on or under the Leased Property nor has the
Leased Property ever been used as a landfill or waste
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disposal site, or used or occupied for the purpose of, or in any way
involving, the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal of any Hazardous Material to,
from or across the Leased Property. Landlord has not been involved in
operations upon the Leased Property which could lead to the imposition on
Landlord or any other owner or lessee of the Leased Property of liability or
the creation of a lien on the Leased Property under any Environmental Law.
13.02. TENANT'S WARRANTIES. Tenant hereby represents and warrants to
Landlord that:
(a) Tenant understands and acknowledges that La-Tex Partnership has a
right to first negotiate to purchase the Leased Property as more fully set
forth in section 39 of the Shark Club Lease and that Tenant has been provided
copies of (i) Landlord's notice to Tenant dated December 8, 1995, (ii) Tenant's
request for extension dated December 19, 1995, (iii) Landlord's denial of
Tenant's requested extension dated December 20, 1995, (iv) Tenant's offer to
purchase the Leased Property dated December 29, 1995, and (iv) Tenant's
response to Tenant's offer dated January 4, 1996.
(b) Tenant understands and acknowledges that as of the expiration of
the Lease Term, the balance of principal and interest due with respect to the
Shark Club Note will approximate Four Hundred Forty-Seven Thousand Seven Hundred
Eleven Dollars and Seventy-Four Cents ($447,771.74) the obligation for the
payment of which is assumed by Tenant by virtue of Section 5.02 of this Lease.
(c) Tenant has full power and authority to enter into this Lease. All
actions by Tenant necessary to authorize the execution, delivery and
performance of this Lease have been duly undertaken. In addition to these
representations and warranties of Tenant, the person executing this Lease on
behalf of Tenant represents and warrants to Landlord that such person has full
power and authority to execute this Lease on behalf of Tenant.
(d) This Lease constitutes the legal, valid and binding obligation of
Tenant enforceable in accordance with its terms.
(e) There exists no litigation, instrument or agreement which would
prevent Tenant from entering into or performing this ILease.
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ARTICLE XIV
TRANSFER AND ENCUMBRANCE OF FEE
14.01. Encumbrance by Landlord; Subordination.
(a) At Landlord's election, subject to the rights of any
Leasehold Mortgagee pursuant to Article VII and subject to the conditions set
forth in this Article XIV, this Lease (and any sublease hereunder) shall be
subject and subordinate to the lien of any present or future mortgage, deed of
trust, security agreement, lease assignment or any other encumbrance, and any
renewal, extension or replacement thereof, and to all advances made or hereafter
to be made upon the security thereof (herein collectively referred to as a "FEE
MORTGAGE") including without limitation the deed of trust given to secure the
repayment of the BofA Loan encumbering Landlord's fee interest in the Leased
Property, without regard to the time of execution or the time of recording of
the Fee Mortgage, and without the necessity of the execution and delivery of any
further instruments on the part of Tenant to effectuate such subordination; upon
the condition, however, that with respect to any Fee Mortgage any holder ("FEE
MORTGAGEE") of any such Fee Mortgage (other than the holder of the BofA Loan),
shall have agreed in writing and in recordable form, for the benefit of Tenant
and any Leasehold Mortgagee, that so long as Tenant is not in default under any
of the provisions, covenants or conditions of this Lease or such Leasehold
Mortgagee is complying with the provisions of Article VII, neither this Lease
nor any of the rights of Tenant under this Lease (including without limitation
Tenant's Call Option) or any rights of any Leasehold Mortgagee then holding a
security interest in this Lease shall be terminated or modified or be subject to
termination or modification, nor shall Tenant's possession of the Leased
Property be disturbed by proceedings to foreclosure such Fee Mortgage, and that
any person or entity acquiring title to the Leased Property through foreclosure
of such Fee Mortgage, deed in lieu thereof or otherwise shall take title subject
to all of the provisions of this Lease (including without limitation Tenant's
Call Option). Nevertheless, Tenant covenants and agrees to execute and deliver,
in recordable form, upon demand, such further instruments as Landlord may
request to (i) confirm in writing and in recordable form that this Lease is so
subordinate to the lien of any Fee Mortgage, or (ii) so subordinate this Lease
to the lien of such Fee Mortgage, which confirmation and/or subordination shall
be in such form as may be reasonably required by the Fee Mortgagee. If a Fee
Mortgagee elects to constitute this Lease as a lien superior to the lien its Fee
Mortgage, upon the giving of written notice to Tenant and to any Leasehold
Mortgagee than holding a security interest in this Lease to such effect, this
Lease shall be superior in priority to the lien of such Fee Mortgage. Further,
Tenant agrees to execute and deliver, from time to time, upon demand by
Landlord, such documents as may be reasonably requested by Landlord to evidence
or effect such priority. In no event may the amount secured by the Fee
Mortgages, at any time, exceed the amount of the Purchase Price less the
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amount of the Security Deposit, and such indebtedness must be
prepayable at anytime, without premium or penalty.
(b) Nothing contained in Section 14.01 (a) shall relieve
Landlord of any liability or responsibility with respect to the BofA Loan
pursuant to Section 5.06. Tenant may prepay the BofA Loan at any time for any
reason and, in such event, Landlord shall thereafter pay to Tenant all payments
due, and render all performance due, with respect to the BofA Loan the same as
if the BofA Loan had not been prepaid and Tenant were the holder thereof (except
to the extent any obligation is the obligation of Tenant pursuant to this
Lease).
14.02. TRANSFER OF LEASED PROPERTY.
(a) Subject to Tenant's right of acceleration set forth in
section 14.02 (b) in the case of a sale, Landlord may sell, exchange or
transfer all or any portion of Landlord's interest in the Leased Property and
assign and transfer all or any portion of Landlord's interest in this Lease;
provided the transferee agrees in writing and in recordable form to be subject
in all respects to the terms, covenants and provisions of this Lease (including
without limitation Tenant's Call Option). Upon the transfer of all of the Leased
Property and all of Landlord's interest in the Lease, including without
limitation the entire Security Deposit then held by Landlord, Landlord shall
thereupon be released from all liabilities and obligations imposed upon Landlord
pursuant to this Lease accruing after the date of transfer and such liabilities
and obligations shall be binding solely upon the transferee of the Leased
Property and Lease.
(b) Upon receipt of any offer to purchase the Leased Property
for the payment of money or the deferred payment of money from any third person,
Landlord shall not accept such offer without first giving Tenant written notice
("NOTICE OF OFFER") of such offer including the latest date on which such offer
may be accepted and an opportunity to accelerate Tenant's Call Option as set
forth herein. For thirty days after the date of such Notice of Offer, Tenant
shall have the right and privilege, exercisable by written notice given prior to
the expiration of such thirty day period, to accelerate the date of exercise of
the Call Option to a date which is not earlier than the latest date on which the
offer set forth in the Notice of Offer may be accepted and purchase the Leased
Property for an amount equal to the sum of (i) the Purchase Price set forth in
Section 12.03; plus (ii) One Million Dollars ($1,000,000). In the event Tenant
so elects to accelerate Tenant's Call Option, the purchase and sale of the
Leased Property shall be conducted in accordance with and be governed by the
terms and conditions set forth in Section 12.05. If Tenant fails to timely
exercise Tenant's right to accelerate the Call Option set forth in this Section
14.02 (b), then Landlord shall be entitled to accept the offer which is the
subject of the Notice of Offer and proceed with the sale of the Leased Property
in accordance therewith without any further obligation to Tenant; but such
failure to elect to accelerate Tenant's Call Option shall not in any way impair
or
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limit Tenant's rights pursuant to Section 5.04 (b)(2) and Section 12.02.
Nothing contained in this Section 14.02 (b) shall be construed to restrict,
limit or otherwise affect Landlord's right to transfer all or any portion of the
Leased Property (subject to this Lease) and/or all or any portion of Landlord's
rights pursuant to this Lease to one or more persons in a transaction other than
a sale, such as contributions to corporations, partnerships, limited
partnerships, limited liability companies, joint ventures, trusts or other
entities and such as distributions in liquidation of Landlord, or to restrict,
limit or otherwise affect the right of the shareholders of Landlord to transfer
corporate shares of Landlord and other beneficial interests of Landlord
(howsoever evidenced) by assignment, exchange, gift, bequest, legacy,
inheritance or otherwise.
14.03. STATEMENTS AND CERTIFICATES. Tenant shall, at any time and from
time to time, within ten days after written request from Landlord to do so,
certify by written instrument duly executed and acknowledged to any Fee
Mortgagee or proposed Fee Mortgagee specified in such request: (a) as to whether
this Lease has been supplemented or amended, and if so, the substance and manner
of such supplement or amendment; (b) as to the validity and force and effect of
this Lease, in accordance with its tenor; (c) as to the existence of any default
hereunder; (d) as to the existence of any offsets, counterclaims or defenses
hereto on the part of Tenant; (e) as to the commencement and expiration dates of
the term of this Lease; and (f) as to any other matters as may be reasonably so
requested; provided that, in so doing, Tenant shall not be required to bear any
unreasonable burden or expense. Any such certificate may be relied upon by any
Fee Mortgagee and any other person, firm or corporation specified therein, and
the contents of such certificate shall be binding on Tenant.
14.04. ATTORNMENT. If the Leased Property is sold pursuant to
foreclosure of a Fee Mortgage or transferred in lieu of foreclosure by reason of
a default under a Fee Mortgage, or in the event the Leased Property and Lease
are otherwise transferred, Tenant shall not disaffirm this Lease or any of its
obligations under this Lease, and Tenant shall attorn to the Fee Mortgagee,
purchaser in foreclosure, or other transferee of the Leased Property and Lease;
provided that Tenant's right to quiet possession of the Leased Property shall
not be disturbed so long as Tenant shall pay all amounts required to be paid
pursuant to this Lease and observe and perform all of the provisions of this
Lease. Without limiting the generality of the foregoing, the Call Option shall
remain in full force and effect and Tenant shall be entitled to offset the
Security Deposit against the Purchase Price of the Leased Property. Landlord may
transfer the Security Deposit to the purchaser; and, thereupon, if the purchaser
of the Leased Property assumes the obligations of Landlord under this Lease,
Landlord shall be discharged from any further liability in reference thereto.
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14.05. FEE MORTGAGEE'S RIGHTS. If Landlord notifies Tenant that the
Leased Property is encumbered by a Fee Mortgage, with a notice that sets forth
the name and address of the Fee Mortgagee and a request that Tenant give copies
of all notices intended for Landlord to its Fee Mortgagee, then no notice
intended for Landlord shall be deemed properly given unless and until a copy of
the notice is also given to the Fee Mortgagee. If any Fee Mortgagee shall
perform any obligation that Landlord is required to perform under this Lease,
the performance by the Fee Mortgagee shall be deemed to be performance on behalf
of Landlord, and the performance shall be accepted by Tenant as if performed by
Landlord.
ARTICLE XV
DEFAULTS, REMEDIES AND SURRENDER
15.01. EVENTS OF DEFAULT. Each of the following events shall
constitute a material default and breach of this Lease by Tenant:
(a) Any failure to pay any portion of any Rent or other
monetary obligation required to be paid by Tenant pursuant to this Lease when
the same shall become due and payable, and such failure continues for a period
of ten days after notice of such failure from Landlord or a representative of
Landlord to Tenant and, an additional period of twenty days thereafter for the
exclusive benefit of any Leasehold Mortgagee to whom notice is required to be
sent pursuant to Section 7.05.
(b) Any failure to observe, comply with or perform any
nonmonetary covenant or obligation set forth in this Lease (including without
limitation Tenant's failure to purchase the Leased Property following the
Landlord's exercise of its Put Option) and such failure or breach continues for
a period of thirty days after notice of such failure or breach from Landlord or
a representative of Landlord to Tenant and an additional period of thirty days
thereafter for the exclusive benefit of any Leasehold Mortgagee to whom notice
is required to be sent pursuant to Section 7.05; provided, however, that if the
default is one which, with reasonable diligence, is capable of being cured but
more than thirty days is reasonably required to cure the default asserted,
Tenant shall not be deemed to be in default if cure is commenced by Tenant
within a reasonable period after the thirty day notice to Tenant or by a
Leasehcld Mortgagee within a reasonable period after the thirty day notice to
Leasehold Mortgagee and, in either case, the cure of the default asserted is
thereafter diligently pursued to completion.
(c) The vacation or abandonment of the Leased Property.
(d) (1) The making by Tenant of any general assignment for
the benefit of creditors; (2) subject to the rights of a trustee or court in
bankruptcy under the Bankruptcy Code of 1978, or any similar succeeding law, the
filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or
of a petition for
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reorganization or arrangement under any law relating to bankruptcy (unless, in
the case of a petition filed against Tenant, the same is dismissed within sixty
days); or (3) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Leased Property or of
Tenant's interest in this Lease, where possession is not restored to Tenant
within sixty days.
(e) Subject to any right of contest set forth in this Lease,
if this Lease or any estate or interest of Tenant in the Leased Property shall
become subject to any attachment or judgment, or to any lien, charge or
encumbrance other than a Leasehold Mortgage unless such attachment, judgment,
lien, charge or encumbrance is fully released within sixty days thereafter.
(f) Any actual, attempted or purported assignment or sublease
in violation of this Lease.
(g) Any other event, act or failure of Tenant specified as a
default in this Lease.
Any notice required to be furnished pursuant to this Section 15.01 shall be
sufficient and valid notice regardless of whether or not the notice requires
Tenant to quit the Leased Property as an alternative to the performance of the
action demanded in the notice. Further, any such notice shall be in lieu of and
not in addition to any notice required pursuant to NRS Chapter 40 as a condition
precedent to the maintenance of an unlawful detainer action. Any vacation or
abandonment of the Leased Property by Tenant following any such notice to
Tenant, any entry on the Leased Property by Landlord, or any action by Landlord
in unlawful detainer or otherwise to obtain possession of the Leased Property
shall not result in a surrender of the Leased Property or a termination of
Tenant's obligations under this Lease unless Landlord expressly notifies Tenant
in writing that a surrender or termination of Tenant's obligations is intended
by, or acceptable to, Landlord.
15.02. LANDLORD'S REMEDIES. In the event of default of Tenant,
Landlord, at its option, in addition to, and not to the exclusion of, any and
all other rights and remedies herein set forth or at law or in equity, may (i)
declare the term of this Lease ended and re-enter and take possession of the
Leased Property (including all Improvements) terminating all of the rights of
Tenant under this Lease and in and to the Leased Property and to collect from
Tenant all costs and damages to which Landlord is entitled as a result of such
default; (ii) without declaring the term of this Lease ended, re-enter the
Leased Property and occupy the Leased Property or lease the whole or any portion
thereof, for and on account of Tenant as hereinafter provided, applying any
monies received first to payment of such expenses, including attorney fees and
real estate commissions paid, assumed or incurred by Landlord in or in
connection with the recovery, cleaning, repairing, restoring, altering and
reletting of the Leased Property and then to the fulfillment of the obligations
of Tenant, with any
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such reletting to be for such a term, at such rent, and on such other
conditions as Landlord in its discretion deems advisable; (iii) even though it
may have relet all or any portion of the Leased Property as above provided,
thereafter at any time terminate this Lease for such previous default on the
part of Tenant retaining the right to bring legal action against Tenant for
recovery of damages sustained by Landlord as a result of Tenant's default; and
(iv) demand and recover the Shark Club Note (unless paid), in which case Tenant
shall also execute and deliver such assignments as may be necessary to reassign
the Shark Club Lease and reconvey the beneficial interest the deed of trust
given to secure the Shark Club Note. If at the time of any termination of this
Lease, the Resort is the subject of any recurrent periodic interval ownership
interests and, therefore, subject to regulation by the Real Estate Division of
the State of Nevada Department of Commerce, then Landlord shall (i) give notice
of termination to such association of time-share owners as may then exist; and
(ii) enter into a new replacement lease with such association of timeshare
owners as may then exist upon terms and conditions identical to those set forth
in this Lease. Nothing contained in the preceding sentence shall be construed
to require Landlord to negotiate any term or condition with such association
even if the proposed term or condition would otherwise constitute a reasonable
departure from the terms and conditions of this Lease.
15.03. DAMAGES FOLLOWING TERMINATION. In the event Landlord elects to
re-enter and take possession of the Leased Property following a default by
Tenant and terminate all of the rights of Tenant under this Lease pursuant to
the provisions set forth in clause (i) or clause (iii) of Section 15.02, Tenant
and Landlord acknowledge and agree that future rental values and future demands
in the rental market are and will be uncertain and extremely difficult to
determine, with the result that Landlord's damages, including consequential
damages, resulting from Tenant's default will be difficult to determine.
Landlord and Tenant therefore stipulate and agree that Landlord may recover from
Tenant damages in an amount equal to the sum of the following amounts:
(a) any unpaid rent which had been earned at the time of such
termination, plus interest at the Interest Rate; plus
(b) the amount by which the unpaid rent that would have been
earned after termination until the time of award exceeds the amount of such
rental loss that Tenant proves reasonably could be avoided, plus interest
thereon at the Interest Rate.
(c) the value at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award exceeds
the amount of such rental loss that Tenant proves reasonably could be avoided
(computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent); plus
(d) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to
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perform its obligations under this Lease or which, in the ordinary course of
things, would be likely to result therefrom including without limitation
expenses of cleaning, repairing, restoring, altering the Leased Property, real
estate brokerage and leasing commissions and other expenses of reletting the
Leased Property, all costs incurred in connection with the removal, storage and
disposition of personal property located on the Leased Property upon the
termination of Tenant's occupancy, and attorneys fees; and
(e) at Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
Any efforts by Landlord to mitigate the damages caused by Tenant's default shall
not waive or constitute a waiver of or otherwise limit or restrict Landlord's
from right to recover damages under this Section 15.03. Notwithstanding anything
in the foregoing to the contrary, Landlord's recovery of the foregoing amounts
from Tenant shall not be in settlement or payment of Tenant's obligations and
liabilities that survive termination of this Lease, and Tenant shall in any
event be and remain liable to Landlord with respect to those obligations and
liabilities following termination.
15.04. NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of any amount which is less than an amount required to be paid pursuant
to this Lease shall be other than a payment on account to be applied to the
earliest Rent due and payable hereunder, nor shall any endorsement or statement
on any check or any letter accompanying any check or payment be an accord and
satisfaction, and Landlord may accept and endorse any such check or payment
without prejudice to Landlord's right to recover the balance of all Rent due or
pursue any other remedy available to Landlord notwithstanding such endorsement
or statement.
15.05. NO TERMINATION WITHOUT LANDLORD CONSENT. Neither the
commencement of any action by Landlord against Tenant for unlawful detainer of
the Leased Property, nor the entry of any temporary or permanent writ of
restitution or judgment in favor of Landlord against Tenant in any such action
shall terminate or result in a forfeiture of this Lease or the future
obligations of Tenant hereunder except at the option of Landlord, exercised by
either (i) written notice thereof from Landlord to Tenant, (ii) specific and
express prayer therefor in Landlord's complaint in such action or (iii) specific
and express written application therefor in such action. In that regard, Tenant
waives all rights which Tenant might otherwise have, statutory or otherwise, if
any, to cause this Lease or the obligations of Tenant to be declared terminated
as a result of any such commencement of unlawful detainer proceedings, entry of
writ of restitution or Judgment.
15.06. LANDLORD DEFAULTS. Landlord shall be in default hereunder if
Landlord fails to perform or observe any provision of this Lease to be performed
or observed by Landlord and (i) if such failure constitutes a failure to pay any
monetary obligation required to be paid by Landlord pursuant to this Lease (it
not
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being conceded by Landlord that any such obligation exists) and such failure
continues for a period of ten days after notice from Tenant to Landlord and an
additional period of twenty days thereafter for the exclusive benefit of any Fee
Mortgagee of which Tenant has notice; or (ii) if such failure constitutes a
failure to observe or perform any nonmonetary covenant or obligation and such
failure continues for a period of thirty days after written notice thereof from
Tenant to Landlord and an additional period of thirty days thereafter for the
exclusive benefit of any Fee Mortgagee of which Tenant has notice provided,
however, that if the default is one which, with reasonable diligence, is
capable or susceptible of being cured and more than thirty days is reasonably
required to cure the default asserted, Landlord shall not be deemed to be in
default if cure is commenced by Landlord within a reasonable period of time
after the thirty day notice to Landlord or by a Fee Mortgagee within a
reasonable period of time after the thirty day notice to the Fee Mortgagee and,
in either case, the cure of the default asserted is thereafter diligently
pursued to completion.
15.07. TENANT'S REMEDIES. In the event Tenant exercises the Call Option
or Landlord exercises the Put Option and Landlord fails to timely close the sale
of the Leased Property, through no fault of Tenant, Tenant shall have the
remedy of specific performance to enforce the provisions of this Lease requiring
the sale of the Leased Property to Tenant. Under no circumstances shall Tenant
have the right to terminate this Lease or its obligations hereunder except
pursuant to express provisions of this Lease permitting such termination.
15.08. SURRENDER. Upon the expiration or earlier termination of this
Lease or the termination of Tenant's right to occupy the Leased Property, all
Improvements shall automatically become the property of Landlord. Tenant
covenants to thereupon surrender the Leased Property in good and (if applicable)
operating condition, reasonable wear and tear excepted, free and clear of any
liens, claims, charges or encumbrances and with no Hazardous Material located
therein, thereon or thereunder (other than those liens, claims, charges,
encumbrances and Hazardous Materials which are attributable to any act or
omission of Landlord), and Tenant shall at its sole cost and expense remove
Tenant's records and all consumable items from the Leased Property. If Tenant
fails to remove any such records or consumable items, Landlord may deem the same
abandoned by Tenant, or Landlord may, but is not obligated to, at Tenant's
expense and without notice to Tenant, remove the same from the Leased Property
and thereafter, in Landlord's sole discretion, use, consume, destroy, dispose of
or sell all or any part thereof without notice to Tenant. Any proceeds from
sales of such property by Landlord shall belong solely to Landlord. Upon
termination of Tenant's occupancy, Tenant shall promptly execute and deliver to
Landlord (i) a quitclaim deed or, at Landlord's option, a memorandum, in
recordable form, evidencing the termination of this Lease and (ii) bills of sale
and other documents and instruments of conveyance, transfer and assignment as
Landlord may reasonably request to evidence Landlord's acquisition of ownership
of the Improvements.
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ARTICLE XVI
ASSIGNMENT AND SUBLETTING
16.01. CONSENT TO ASSIGNMENT REQUIRED.
(a) Except as provided in Section 16.01 (b) with respect to
Permitted Assignees, Tenant shall not assign or transfer or permit the
assignment or transfer of this Lease voluntarily or involuntarily (by operation
of law or otherwise) in whole or in part without first obtaining the prior
written consent of Landlord, which may be given or withheld by Landlord, in
Landlord's sole, absolute and unfettered discretion.
(b) Notwithstanding Section 16.01 (a), Tenant shall be
permitted to assign and transfer this Lease, in its entirety, to the following
persons ("PERMITTED ASSIGNEES") upon the conditions stated, if any:
(1) Any affiliate of Tenant.
(2) Any Leasehold Mortgagee in accordance with and
subject to Section 7.02 of this Lease.
(3) A purchaser (including without limitation any
Leasehold Mortgagee in such capacity) at any foreclosure or similar sale or
any assignee of such Leasehold Mortgagee in accordance with and subject to
Section 7.06 of this Lease.
(4) Any lawfully organized association, the members of
which consist exclusively of time-share owners and/or the developer of the
Resort, and/or any lawfully organized association the members of which consist
exclusively of condominium owners, time-share owners and/or the developer of
the Resort administering time-share and/or condominium property on the Leased
Property.
(5) Grand Casinos, Inc. or any affiliate of Grand
Casinos, Inc. if and only if (i) Grand Casinos, Inc. or an affiliate of Grand
Casinos, Inc. acquires an interest in this Lease on or before October 31, 1998;
and (ii) Grand Casinos, Inc. becomes fully liable for the payment and
performance of all obligations of Tenant pursuant to this Lease (including
without limitation the obligation to purchase the Leased Property in the event
Landlord exercises Landlord's Put Option), whether by direct assumption,
guaranty of its affiliate's obligations, or other written instrument reasonably
satisfactory to Landlord.
(6) Any person controlled by Tenant and/or one or
more Permitted Assignees designated in Section 16.01 (b)(1) and/or Section
16.01 (b)(5).
(7) Any transferee of Grand Casinos, Inc. or any
affiliate thereof which is a Permitted Assignee by virtue of Section
16.01 (b)(5) if and only if (A) the conditions set forth in
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Section 16.01 (b)(5) have been fully satisfied; and (B) (i) Tenant furnishes an
appraisal prepared by a nationally-recognized firm of real estate appraisers
approved by Landlord which approval shall not be unreasonably withheld,
conditioned or delayed reflecting that the value of the Land and all
Improvements thereon together with any improvements on any property contiguous
with or in the immediate vicinity of the Land constitutes a part of the project
which includes the Improvements is more than Two Hundred Million Dollars
($200,000,000), and (ii) the Improvements constitute a material and integral
part of such project. Notwithstanding any assignment or transfer pursuant to
this Section 16.01 (b) (7), however, Grand Casinos, Inc. shall remain
absolutely and unconditionally liable to fully and faithfully pay and perform
all obligations imposed upon Tenant pursuant to this Lease. The consent by
Landlord to any assignment of the Lease or any right or obligation of Tenant
shall not constitute a waiver of the necessity for such consent to any other
assignment or transfer.
(c) If this Lease is assigned or transferred to any person
(including Grand Casinos, Inc. pursuant to Section 16.01 (b) (5) and any
assignee of Grand Casinos, Inc. pursuant to Section 16.01 (b) (7)) to any
extent, regardless of whether or not Landlord consents to such assignment or
transfer, by accepting any benefit of any such assignment the assignee shall be
deemed to have fully assumed and agreed to pay and perform all obligations of
Tenant pursuant to this Lease. If Landlord has not consented to any such
assignment or transfer, the subsequent acceptance of payment or performance by
the assignee or transferee shall not be deemed to be a waiver of the necessity
to obtain Landlord's consent. Notwithstanding any assignment or transfer, Tenant
and Guarantors shall remain absolutely and unconditionally liable to fully and
faithfully pay and perform all obligations imposed by this Lease.
(d) If, at any time during the Lease Term, more than fifty
percent of the corporate shares, partnership interests, membership interests or
other beneficial interest of Tenant shall be transferred, directly or indirectly
(through one or more affiliates or otherwise), by sale, assignment, exchange,
gift, bequest, legacy, inheritance, assignment, operation of law or otherwise so
as to result in the change of the present effective control of Tenant, such
transfer, at the election of Landlord, may be treated as an assignment of this
Lease subject to the preceding section 16.01 (a). Nothing contained in this
Section 16.01 (d) however shall be construed to limit or restrict the issuance
or transfer of publicly traded shares of stock of any corporation which
constitutes Tenant.
16.02. SUBLETTING. It is recognized and understood that Tenant
contemplates subletting interests in the Leased Property in connection with its
operation of the Resort; and, therefore, Tenant may sublet the Leased Property
to (i) any one or more Permitted Assignees; (ii) any one or more recurrent
periodic interval owners of the Resort provided that each such sublease is in a
form which has been approved by Landlord, in writing which approval shall not be
unreasonably withheld, conditioned or delayed; and/or (iii) any
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operator of any restaurant, store, or other business which is incident to
Tenant's operation of the Resort. Except as provided in the preceding sentence,
Tenant shall not voluntarily or involuntarily (by operation of law or
otherwise), license, franchise, or sublet any portion of the Leased Property.
ARTICLE XVII
SERVICE OF NOTICES
17.01. MANNER OF DELIVERY. Any and all notices and demands by any party
hereto to the other party, required or desired to be given hereunder shall be in
writing and shall be validly given or made only if deposited in the United
States mail, certified or registered, postage prepaid, return receipt requested
or if made by Federal Express or other similar delivery service keeping records
of deliveries and attempted deliveries or if made by telecopy. Service by United
States mail or delivery service shall be conclusively deemed made on the first
business day delivery is attempted or upon receipt, whichever is sooner. Service
by telecopy shall be deemed made upon the date of transmission provided
transmission is confirmed prior to 5:00 o'clock p.m. local time at the place of
delivery or on the day after the date of transmission if transmission is
confirmed after 5:00 o'clock p.m. local time.
17.02. NOTICES TO LANDLORD. Any notice or demand to Landlord shall be
addressed to Landlord c/o Robert G. Marsico, 8484 Turtle Creek Circle, Las
Vegas, Nevada 89113, with a copy to Landlord's counsel at Leavitt, Sully &
Rivers, 601 E. Bridger Avenue, Las Vegas, Nevada 89101, telecopier (702)
382-2892.
17.03. NOTICES TO TENANT. Any notice or demand to Tenant shall be
addressed to Tenant at c/o Stephen J. Cloobeck, Polo Towers, 3745 Las Vegas
Blvd. South, Las Vegas, Nevada 89109, fax (702) 798-8840, with a copy to
Tenant's counsel at Lionel Sawyer & Collins, 300 South Fourth Street, #1700, Las
Vegas, Nevada 89101, attention Jeffrey P. Zucker, Esq., fax (702) 383-8845.
17.04. CHANGES OF ADDRESSES. Any party hereto may change its address
for the purpose of receiving notices or demands as herein provided by a written
notice given in the manner aforesaid to the other party hereto, which notice of
change of address shall not become effective, however, until the actual receipt
thereof by the other party.
ARTICLE XVIII
SUCCESSORS AND ASSIGNS
The terms, provisions, covenants and conditions contained in this Lease
shall apply to, bind and inure to the benefit of the
47
<PAGE> 48
heirs, executors, administrators, legal representatives, successors and assigns
of Landlord and Tenant, respectively.
ARTICLE XIX
PARTIAL INVALIDITY
If any term, covenant or condition of this Lease, or any application
thereof, should be held by a court of competent jurisdiction to be invalid, void
or unenforceable, all terms, covenants and conditions of this Lease, and all
applications thereof, not held invalid, void or unenforceable, shall continue in
full force and effect and shall in no way be affected, impaired or invalidated
thereby.
ARTICLE XX
SCOPE OF AGREEMENT
20.01. ENTIRE AGREEMENT. This Lease, including information incorporated
herein by reference or attached hereto, sets forth all (and is intended by the
parties to be an integration of all) of the representations, promises,
agreements, and understandings among the parties hereto. This Lease terminates
and supersedes all prior agreements, if any, between the parties hereto. There
are no representations, promises, agreements, or understandings, oral or
written, express or implied, between the parties other than as set forth or
incorporated herein. In entering into this Lease neither party has relied upon
any act or statement of any person or upon any presumption in fact or in law,
(i) with respect to this Lease, or with respect to the duration, termination, or
renewal of this Lease, or with respect to the relationship between the parties,
other than as expressly set forth in this Lease; (ii) which in any way tends to
change or modify any of the terms of this Lease or to prevent this Lease
becoming effective; or (iii) which in any way affects or relates to the subject
matter of this Lease.
20.02. NO AMENDMENT. No modification, alteration, amendment, change,
addition or waiver of any of the terms, covenants or conditions hereof shall be
effective unless reduced to writing and duly executed by the parties.
ARTICLE XXI
MEMORANDUM OF LEASE
Subject to Section 5.04 (b)(2) this Lease shall not be recorded but,
concurrently with the execution of this Lease, the parties shall execute in
recordable form a memorandum of this Lease, which either party may record. It is
understood and agreed that such memorandum shall describe generally the
existence of the Put Option and the Call Option.
48
<PAGE> 49
ARTICLE XXII
MISCELLANEOUS
22.01. WAIVER.
(a) The failure of any party to insist, in any one or more
instances, upon observance and performance of any provision of this Lease shall
not be construed as a waiver of such provision or the relinquishment of any
other right granted herein or of the right to require future observance and
performance of any such provision or right.
(b) The waiver by any party of any breach of any provision
herein contained shall not be deemed to be a waiver of such provision on account
of any other breach of the same or any other provision of this Lease.
(c) No provision of this Lease shall be deemed to have been
waived, unless such waiver be in writing and signed by the person sought to be
charged with a waiver of such provision.
22.02. ATTORNEY FEES.
(a) In the event any legal action or proceeding brought by
either party against the other to enforce any provision hereof by reason of any
alleged breach hereunder, for a declaration of rights or obligations hereunder,
or for any other remedy, the prevailing party shall be entitled to recover such
amounts as a court of competent jurisdiction may adjudge to be reasonable
attorneys' fees; and such amount shall be included in any judgment rendered in
such action or proceeding.
(b) If either party incurs any expense (including attorney
fees) (i) in furnishing any certificate for the benefit of Tenant or any
Leasehold Mortgagee, or Landlord or any Fee Mortgagee, as the case may be, (ii)
to defend title or the right to quiet possession of the Leased Property and such
party's rights under this Lease against any claim by any person claiming under
or through Tenant or Landlord, as the case may be, including without limitation
the foreclosure of any Leasehold Mortgage or Fee Mortgage, (iii) to protect and
enforce its rights pursuant to this Lease, the recovery of which is subject to
Section 22.02 (a) of this Lease if an action or proceeding between Landlord and
Tenant is involved, or (iv) with respect to any bankruptcy reorganization,
arrangement, receivership or similar proceedings in relation to insolvency
which, in any way, to any extent, pertain to or involve this Lease, the Leased
Property, Landlord, Tenant, any Permitted Assignee and/or any guarantor of this
Lease, the party incurring such expense shall be entitled to recover the same
from the other party upon demand and if such expense is incurred by Landlord,
Tenant shall immediately reimburse and pay to Landlord, as Additional Rent, an
amount equal to all such expenses so incurred.
49
<PAGE> 50
22.03. CONSTRUCTION.
(a) The captions appearing at the commencement of the various
articles and sections of this Lease are descriptive only and for convenience in
reference to this Lease and in no way whatsoever define, limit or describe the
scope or intent of this Lease, nor in any way affect this Lease.
(b) Masculine or feminine pronouns shall be substituted for
the neuter form and vice versa, and the plural shall be substituted for the
singular form and vice versa, in any place or places herein which the context
requires such substitution or substitutions.
(c) This Lease shall not be construed either for or against
Landlord or Tenant, but this Lease shall be interpreted in accordance with the
general tenor of its language.
(d) For purposes of this Lease, the term "person" shall mean
any individual, corporation, partnership, limited-liability company,
association, estate, trust, or other entity, however denominated.
(e) For purposes of this Lease the term "affiliate" of a
specified person shall mean any person (i) that, directly or indirectly (through
one or more intermediaries or otherwise), controls, is controlled by, or under
common control with such specified person.
(f) This Lease shall be interpreted to give effect to the
intent and purposes of the parties and the spirit of this Agreement.
22.04. GOVERNING LAW. The laws of the State of Nevada shall govern the
validity, construction, performance and effect of this Lease.
22.05. JOINT AND SEVERAL LIABILITY. In the event that a party shall
consist of more than one person, firm or corporation then and in such event all
of such persons, firms and corporations shall be jointly and severally obligated
under this Lease.
22.06. LANDLORD REPRESENTATIVE. If at any time Landlord shall consist
of more than one person, Landlord shall designate one person to serve as
Landlord representative under this Lease for giving and receiving notices,
granting approvals and all other purposes. Unless and until Tenant receives
notice of a new appointment from all such persons, Tenant may consider any
previously appointed Landlord representative to continue to be the Landlord
representative. At any time that Landlord consists of
50
<PAGE> 51
more than one person and Landlord has not designated a Landlord representative,
Tenant may designate any of such persons as the Landlord representative.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written.
LANDLORD:
MacGREGOR INCOME PROPERTIES WEST I,
INC., a Nevada corporation
By
----------------------------------
(signature)
----------------------------------
(name)
----------------------------------
(title)
TENANT:
CLOOBECK ENTERPRISES, a Nevada
corporation
By /s/ Stephen J. Cloobeck
----------------------------------
(signature)
Stephen J. Cloobeck
----------------------------------
(name)
President
----------------------------------
(title)
51
<PAGE> 52
more than one person and Landlord has not designated a Landlord representative,
Tenant may designate any of such persons as the Landlord representative.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written.
LANDLORD:
MacGREGOR INCOME PROPERTIES WEST I,
INC., a Nevada corporation
By /s/ Robert G. Marsico
----------------------------------
(signature)
Robert G. Marsico
----------------------------------
(name)
President
----------------------------------
(title)
TENANT:
CLOOBECK ENTERPRISES, a Nevada
corporation
By
----------------------------------
(signature)
----------------------------------
(name)
----------------------------------
(title)
51
<PAGE> 53
EXHIBIT A
TO
GROUND LEASE
(Legal Description)
Parcels One (1) and Two (2) as shown by Parcel Map in File 7 of Parcel Maps,
Page 87 and recorded on December 10, 1975 as Document No. 536501 of Official
Records, all in the Office of the County Recorder of Clark County, Nevada
<PAGE> 54
PERMITTED EXCEPTIONS
EXHIBIT B
1. Taxes for 1996-1997, a lien not yet due and payable.
2. Mineral rights, reservations, and easements in a patent, provided the same
contain no right to surface entry or to disturb improvements on the
surface.
3. An easement in favor of Nevada Power Company, for electrical lines,
recorded July 16, 1957, in Book 135 as Document No. 110695 of Clark County
Official Records.
4. An easement in favor of Nevada Power Company, for electrical lines,
recorded July 16, 1957, in Book 135 as Document No. 110699 of Clark
County Official Records.
5. Dedications and easements as shown on the recorded map in File 7 of Parcel
Maps, Page 87, of Clark County Official Records.
6. An easement in favor of County of Clark, for perpetual avigation, recorded
January 22,1976, in Book 588 as Document No. 547497 of Clark County
Official Records.
7. An easement in favor of Las Vegas Valley Water District, a Quasi-Municipal
Corporation, for pipelines, recorded September 13, 1976, in Book 659, as
Document No. 618562 of Clark County Official Records, as modified by
partial relinquishment recorded October 10, 1980, in Book 1294, as
Document No. 1253697 of Clark County Official Records.
8. An easement in favor of Nevada Power Company and Central Telephone Company
for electrical and communication facilities, recorded April 11, 1978, in
Book 871, as Document No. 830381 of Clark County Official Records.
9. An easement in favor of County of Clark, for perpetual avigation, recorded
March 27, 1986, in Book 860327, as Document No. 00478 of Clark County
Official Records.
10. Deed of Trust in favor of MacGregor Income Properties West I, Inc.,
recorded July 2, 1987, in Book 870702, as Document No. 01263 and
Assignment, recorded August 3, 1987, in Book 870803, as Document No. 00566
of Clark County Official Records.
11. Survey by John E. Forsman, filed in File 75 of Surveys at Page 31,
recorded February 21, 1995, in Book 950221, as Document No. 00649 of Clark
County Official Records.
<PAGE> 55
EXHIBIT C
TO
GROUND LEASE
(Documents and Correspondence concerning Shark Club Lease)
DATE DESCRIPTION
LA-TEX LEASE DOCUMENTS:
07/02/87 Lease
07/07/87 $25O,000 Promissory Note Secured by Deed of Trust
07/02/87 Short Form Deed of Trust and Assignment of Rents recorded in Book
870202 as Instrument No. 01263 in the Office of the Clark County
Recorder
02/17/98 First Amendment to Lease
07/12/89 Second Amendment to Lease
05/17/98 Third Amendment to Lease
08/02/91 Notice of Tenant's Election to Extend Term of Lease
03/10/92 Payment Date Modification
03/20/92 Fourth Amendment to Lease
12/22/95 Notice of Change of Address
NOTICE OF ELECTION TO SELL:
12/08/95 Notice of Election to Sell
12/19/95 Letter from Rush to Marsico requesting extension on negotiation
period
12/20/95 Letter from Sully to Rush denying extension of negotiation period
12/29/95 Letter from Rush to Sully and Marsico containing offer to
purchase property
01/04/96 Letter from Sully to La-Tex Partnership and Rush notifying that
negotiation period expired and that Landlord was free to
negotiation with other persons
Page 1 of 4
<PAGE> 56
EVICTION DOCUMENTS:
11/20/95 Seven Day Notice to Pay Rent (Replenish Security Deposit) or Quit
and Affidavits of Service
11/29/95 Affidavit of Complaint for Summary Eviction
11/30/95 Order for Summary Eviction
11/30/95 Instructions to the Constable Evictions
12/01/95 Affidavit of Charles M. Rush
12/01/95 Letter from Rush to Rivers tendering $55,334.75
12/01/95 Letter from Rivers to Rush rejecting $55,334.75 tender
12/01/95 Two letters from Rush to Rivers denying effectiveness of service
of Order for Summary Eviction
12/04/95 Defendants Emergency Ex Parte Application for Emergency Stay of
Order for Summary Eviction
12/04/95 Order Staying Summary Eviction
12/04/95 Letter from Rivers to Rush disputing denial of effectiveness of
service
12/05/95 Affidavit of David J. Rivers for Order Shortening Time and
Receipt of Copy
12/05/95 Application to Lift Stay on Shortened Time
12/05/95 Affidavit of Mailing
12/06/95 Notice of Entry of Order Shortening Time
12/12/95 Stipulation and Order to Dismiss Without Prejudice and to Vacate
Hearing
01/03/96 Letter from Sully to Williamson informing Tenant of default in
maintenance of insurance coverage
01/03/96 Letter from Rush to Sully re: Sanitation District
01/10/96 Notice of Default (assignment without consent), noncompliance
with governmental rules and failure to maintain insurance
coverage)
01/12/96 Demand for payment of interest on security deposit
01/12/96 Demand for evidence that security deposit has been segregated
Page 2 of 4
<PAGE> 57
01/17/96 Letter from Rush to Sully and Marsico providing insurance binder
01/25/96 Letter from Rivers to Rush, La-Tex Partnership, Club Concepts and
Club Investments, Inc. responding to 1/12/96 letters and 1/17/96
letter
01/26/96 Letter from Rush to Sully and Marsico requesting extension of
time to cure defaults and consent for Tenant to sublet to
Williams-McCormick, Inc.
01/29/96 Letter from Rivers to Rush, La-Tex Partnership, Club Concepts and
Club Investments, Inc. responding to Rush's 1/26/96 letter
01/30/96 Letter from Williamson to Sully and Marsico notifying Landlord
of Tenant's new address; requesting refund of sanitation fees;
etc.
01/31/96 Letter from Rush to Rivers and Marsico regarding cancellation of
Williams-McCormick, Inc. Service Agreement
01/31/96 Letter from Rush to Rivers and Marsico requesting name and
address of lender
02/05/96 Letter from Rivers to Rush, La-Tex Partnership and Club Concepts
responding to Rush's letters dated January 30 and 31, 1996
02/15/96 Letter from Rush to Sully and Marsico requesting written consent
of Landlord to sublease to Williams-McCormick, Inc.
03/18/96 Letter from Rush to Sully and Marsico demanding (1) consent to
sublease to Williams-McCormick, Inc. and (2) evidence that
security deposit is segregated and threatening declaratory relief
action
03/20/96 Letter from Rivers to Rush, La-Tex and Club Concepts responding
to Rush's 3/18/96 letter
03/29/96 Letter from Gordon to Rivers enclosing resume and personal
history concerning two principals of William-McCormick, Inc.
04/01/96 Letter from Gordon to Clark County Department of Business License
04/03/96 Letter from Gordon to Rivers enclosing copy of proposed sublease
04/11/96 Letter from Rivers to Gordon responding to Gordon's letters of
March 29, 1996 and April 3, 1996
Page 3 of 4
<PAGE> 58
04/12/96 Letter from Gordon to Rivers advocating reasonableness of
sublease to Williams-McCormick
04/23/96 Letter from Rush to Rivers informing Landlord of Snow's lack of
authority
05/01/96 Letter from Rush to Sully and Marsico enclosing copy of
commercial insurance policy
05/08/96 Letter from Williamson to Sully informing Landlord of Snow's lack
of authority
05/09/96 Letter from Rush to Sully and Marsico proposing settlement
conference
05/20/96 Letter from Rush to Sully regarding Rush's May 9, 1996 letter,
threatening declaratory relief action
05/30/96 Letter from Williamson to Sully memorializing conversation to
allow Rush to meet with Marsico
Page 4 of 4
<PAGE> 59
EXHIBIT D TO GROUND LEASE
(Supplemental Rent Amount)
<TABLE>
<CAPTION>
SUPPLEMENTAL SUPPLEMENTAL
RENT RENT
BEGINNING ENDING
MONTH BALANCE BALANCE
<S> <C> <C>
8/96 449160.08 446727.38
9/96 446727.38 444272.38
10/96 444272.38 441794.88
11/96 441794.88 439294.66
12/96 439294.66 436771.53
1/97 436771.53 434225.27
2/97 434225.27 431655.67
3/97 431655.67 429062.51
4/97 429062.51 426445.59
5/97 426445.59 423804.67
6/97 423804.67 421139.55
7/97 421139.55 418449.99
8/97 418449.99 415735.78
9/97 415735.78 412996.70
10/97 412996.70 410232.50
11/97 410232.50 407442.96
12/97 407442.96 404627.86
1/98 404627.86 401786.95
2/98 401786.95 398919.99
3/98 398919.99 396026.76
4/98 396026.76 393107.01
5/98 393107.01 390160.49
6/98 390160.49 387186.96
7/98 387186.96 384186.17
8/98 384186.17 381157.88
9/98 381157.88 378101.82
10/98 378101.82 375017.76
11/98 375017.76 371905.42
12/98 371905.42 368764.55
1/99 368764.55 365594.90
2/99 365594.90 362396.18
3/99 362396.18 359168.15
4/99 359168.15 355910.52
5/99 355910.52 352623.04
6/99 352623.04 349305.41
7/99 349305.41 345957.38
8/99 345957.38 342578.66
9/99 342578.66 339168.96
10/99 339168.96 335728.01
11/99 335728.01 332255.52
12/99 332255.52 328751.19
1/00 328751.19 325214.74
2/00 325214.74 321645.88
3/00 321645.88 318044.30
4/00 318044.30 314409.71
5/00 314409.71 310741.79
6/00 310741.79 307040.26
7/00 307040.26 303304.80
</TABLE>
Page 1 of 3
<PAGE> 60
<TABLE>
<CAPTION>
SUPPLEMENTAL SUPPLEMENTAL
RENT RENT
BEGINNING ENDING
MONTH BALANCE BALANCE
<S> <C> <C>
8/00 303304.80 299535.09
9/00 299535.09 295730.83
10/00 295730.83 291891.69
11/00 291891.69 288017.37
12/00 288017.37 284107.53
1/01 284107.53 280161.85
2/01 280161.85 276180.00
3/01 276180.00 272161.65
4/01 272161.65 268106.46
5/01 268106.46 264014.10
6/01 264014.10 259884.23
7/01 259884.23 255716.51
8/01 255716.51 251510.57
9/01 251510.57 247266.09
10/01 247266.09 242982.69
11/01 242982.69 238660.03
12/01 238660.03 234297.75
1/02 234297.75 229895.48
2/02 229895.48 225452.86
3/02 225452.86 220969.51
4/02 220969.51 216445.06
5/02 216445.06 211879.14
6/02 211879.14 207271.37
7/02 207271.37 202621.35
8/02 202621.35 197928.72
9/02 197928.72 193193.06
10/02 193193.06 188414.00
11/02 188414.00 183591.13
12/02 183591.13 178724.05
1/03 178724.05 173812.35
2/03 173812.35 168855.63
3/03 168855.63 163853.47
4/03 163853.47 158805.46
5/03 158805.46 153711.18
6/03 153711.18 148570.20
7/03 148570.20 143382.09
8/03 143382.09 138146.43
9/03 138146.43 132862.77
10/03 132862.77 127530.68
11/03 127530.68 122149.71
12/03 122149.71 116719.42
1/04 116719.42 111239.34
2/04 111239.34 105709.04
3/04 105709.04 100128.04
4/04 100128.04 94495.88
5/04 94495.88 88812.09
6/04 88812.09 83076.20
7/04 83076.20 77287.73
8/04 77287.73 71446.20
</TABLE>
Page 2 of 3
<PAGE> 61
<TABLE>
<CAPTION>
SUPPLEMENTAL SUPPLEMENTAL
RENT RENT
BEGINNING ENDING
MONTH BALANCE BALANCE
<S> <C> <C>
9/04 71446.20 65551.13
10/04 65551.13 59602.01
11/04 59602.01 53598.36
12/04 53598.36 47539.68
1/05 47539.68 41425.46
2/05 41425.46 35255.20
3/05 35255.20 29028.37
4/05 29028.37 22744.46
5/05 22744.46 16402.95
6/05 16402.95 10003.31
7/05 10003.31 3545.01
8/05 3545.01 0.00
</TABLE>
Page 3 of 3
<PAGE> 62
EXHIBIT E
TO
GROUND LEASE
GUARANTY OF GROUND LEASE
For valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the undersigned ("GUARANTOR") hereby unconditionally and
irrevocably guarantees the full and faithful performance by TENANT of all the
terms, covenants, and conditions of the foregoing Ground Lease ("Lease"),
including without limitation the payment of all Base Rent (as adjusted),
Supplemental Rent and Additional Rent when and as the same shall become due and
payable and the timely payment of the Purchase Price upon an exercise of either
the Put Option or the Call Option. This is a guaranty of payment and not merely
guaranty of collection.
This Guaranty is absolute and continuing and shall remain in full force
and effect for the term of the Lease, including any extensions or renewals,
regardless of any amendment, modification, compromise, or release of any term,
covenant, or condition of the Lease or any party thereto as the case may be.
GUARANTOR hereby covenants and agrees to indemnify, defend, and hold
LANDLORD harmless from and against any and all claims, action, damages,
liability, expenses, charges, penalties, obligations, attorneys' fees,
judgments, and demands of any kind whatsoever in connection with or arising out
of or by reason of the assertion of TENANT of any defense to its obligations
under the Lease or the assertion by GUARANTOR of any defense to its obligations
hereunder based on any action or inaction of Tenant.
GUARANTOR hereby waives any right or claim or right to cause a
marshaling of TENANT's assets as well as any right to require LANDLORD to
exhaust any remedy against TENANT before proceeding against GUARANTOR.
To the extent there is more than one guarantor of the Lease, GUARANTOR
hereby waives any right to require LANDLORD to proceed against guarantors in any
particular order.
GUARANTOR hereby agrees that any payments or performance required to be
made hereunder shall become due upon demand in accordance with the terms hereof
immediately upon the occurrence of a default under the Lease, whether or not
GUARANTOR has been given notice of such default; and GUARANTOR hereby expressly
waives notice of demand, notice of default, or other notice of any kind,
promptness in commencing suit and/or giving any notice to or in making any claim
or demand upon TENANT or TENANT's property and agrees that no act or omission of
any kind on the part of LANDLORD shall, in any event, affect or impair this
Guaranty. GUARANTOR
1
<PAGE> 63
further waives and relinquishes any defense arising out of the absence,
impairment or loss of any right of reimbursement or subrogation in any defense
arising by reason of any defense of TENANT or by reason of the cessation of the
liability of TENANT.
To the extent there is more than one guarantor of the Lease,
GUARANTOR's obligation hereunder shall be joint and several with that of all
other such guarantors.
The necessary grammatical changes required to make the provisions this
Guaranty apply in a plural sense or singular sense, where required, or to a
particular gender shall, in all instances, be assumed as though in each case
fully expressed.
GUARANTOR hereby agrees to pay all costs incurred by Landlord in
enforcing this Guaranty, including attorneys' fees, regardless of whether or not
suit is instituted.
The undersigned has caused this Guaranty to be executed this__________
day of __________________, 1996.
GUARANTOR:
_______________________________________
2
<PAGE> 64
EXHIBIT F
TO
GROUND LEASE
(Personal Property)
1. Two Crystal Chandeliers which were property of Sweet Water Restaurant.
2. Bronze plaque on front entrance wall depicting date of opening and
architect.
3. Various Sweet Water Restaurant pots.
4. Several Paintings by Bob Marsico.
<PAGE> 1
EXHIBIT 10.79
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is entered into as of the 31st day
of December, 1997, between Grand Casinos, Inc. ("GCI"), a
Minnesota corporation, and Lyle Berman ("Executive").
WHEREAS, GCI owns common stock in New Horizon's Kid Quest, Inc.
and Innovative Gaming Corporation of America (individually a
"Company" and collectively the "Companies"); and
WHEREAS, Executive is a director and officer of GCI; and
WHEREAS, Executive is also a director of each of the Companies;
and
WHEREAS, GCI desires to have Executive continue to serve as a
director of each of the Companies; and
WHEREAS, Executive is willing to continue to serve as a director
of each of the Companies on the condition that GCI provide to
Executive the indemnification described in this Agreement;
NOW THEREFORE, in consideration of the mutual promises and
agreements stated in this Agreement, GCI and Executive hereby
agree as follows:
1. Indemnification by GCI. GCI hereby acknowledges and
agrees that it is in the best interest of GCI that Executive
continue to serve as a director of each of the Companies.
Accordingly, GCI hereby agrees that the indemnification
provisions of Article 6 of GCI's Amended and Restated Bylaws (as
adopted January 15, 1991), as may from time-to-time be amended,
shall apply to Executive's acts and omissions as a director of
each Company. Such indemnification provisions shall apply to any
and all such acts and omissions with respect to each Company
during all times during which Executive is both (i) a director of
GCI, and (ii) a director of such Company.
2. Indemnification Limited. Executive hereby acknowledges
and agrees that the indemnification described in Section 1 above
is subject to such limitations and restrictions as may from
time-to-time apply to the indemnification provided by GCI with
respect to acts and omissions of GCI
1
<PAGE> 2
directors in their capacities as directors of GCI, including such limitations
and restrictions as may from time-to-time be imposed by the laws of the State
of Minnesota.
3. Determination of Eligibility. Any determination whether
Executive is entitled to indemnification under this Agreement
because Executive has complied with the applicable provisions of
the bylaws of GCI or laws of the State of Minnesota to which
Section 2 above refers shall be made by the board of directors of
GCI (the "board") by a majority of a quorum of the Board
(excluding Executive); provided, however, that if the Board fails
to make a determination or makes an adverse determination, then
Executive shall have the right to seek a determination of such
entitlement by a court of competent jurisdiction.
4. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of any and all successors, assigns,
heirs, estates, representatives and administrators of the parties
hereto.
5. Amendments. This Agreement shall not be amended or
modified expect by written amendment signed by each of the
parties hereto.
6. Other Agreements. This Agreement supplements and does
not replace and is not intended to affect any other agreement
between GCI and Executive that now exists or may in the future
exist.
7. Survival. The rights of Executive under this Agreement
shall survive and continue in effect with respect to each Company
so long as Executive is a director of GCI and such Company.
After Executive ceases to be a director of GCI, this Agreement
shall survive and continue in effect for the acts and omissions
of Executive as a director of each Company, which acts or
omissions occurred prior to the time at which Executive ceases to
be a director of GCI.
8. Savings. If any provision or application of this
Agreement is found to be unlawful or unenforceable, then the
other provisions and all other applications of this Agreement
shall, to the fullest extent permitted by applicable law, remain
in full force and effect.
9. Governing Law. This Agreement shall be interpreted under
and governed by the laws of the State of Minnesota.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have signed this Agreement
as of the effective date stated above.
Grand Casinos, Inc. Lyle Berman
By /s/ Thomas J. Brosig /s/ Lyle Berman
--------------------------- ---------------------
Name: Thomas J. Brosig
Title: CEO and President
3
<PAGE> 1
EXHIBIT 13
<TABLE>
<CAPTION>
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 date.
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenues
(owned & managed properties) $1,094,949 $1,057,284 $ 776,913 $ 506,413 $ 268,264
Net revenues $ 607,421 $ 490,019 $ 372,872 $ 285,774 $ 117,032
Operating cash flow(1) $ 187,150 $ 142,946 $ 140,214 $ 69,338 $ 37,562
Earnings from opertions $ 137,659 $ 97,408 $ 116,315 $ 51,859 $ 29,328
Basic earnings (loss) per share
before extraordinary charge $ 1.58 $ (2.43) $ 2.05 $ .87 $ .71
Diluted earnings (loss) per share
before exraordinary charge $ 1.54 $ (2.43)(2) $ 1.98 $ .87 $ .71
Total assets $1,333,737 $1,122,816 $1,128,108 $ 483,883 $ 426,644
Long-term debt $ 566,434 $ 511,742 $ 459,070 $ 123,126 $ 118,561
Shareholders' equity $ 502,616 $ 439,673 $ 526,100 $ 276,861 $ 247,864
Shares outstanding at year-end $ 41,966 $ 41,796 $ 40,988 $ 33,447 $ 33,415
Casino space (square footage)(3) $ 594,450 $ 561,186 $ 421,000 $ 321,000 $ 165,000
</TABLE>
[BAR GRAPH]
<TABLE>
<CAPTION>
================================================================================
Total Revenues Net Revenues Operating Cash Flow(1)
Dollars in thousands Dollars in thousands Dollars in thousands
<S> <C> <C> <C>
1993 $ 268,264 $117,032 $ 37,562
1994 $ 506,413 $285,774 $ 69,338
1995 $ 776,913 $372,872 $140,214
1996 $1,057,284 $490,019 $142,946
1997 $1,094,949 $607,421 $187,150
================================================================================
</TABLE>
1. Earnings from operations before depreciation and amortization expenses.
2. Earnings per share excluding the effect of Stratosphere are $1.14 per share.
3. Includes managed and owned casinos.
3
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The management contract for Grand Casino Mille Lacs will
expire in April 1998 and will not be renewed. No decision has been made with
respect to renewal of the management contract for Grand Casino Hinckley, which
expires in June 1999.
RESULTS OF OPERATIONS
Results of operations for the years ended December 28, 1997 (1997), and
December 29, 1996 (1996), reflect 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 (Stratosphere) from January 2, 1995, to
December 20, 1995, on a consolidated basis and on an equity method of accounting
from December 21, 1995, to December 28, 1997. The Company wrote off its
investment in Stratosphere as of December 29, 1996, and the Company has not
recorded any results of Stratosphere operations in 1997.
The Company's operating results include management fee income from all
managed properties and gaming operations from Grand Casino Biloxi and Grand
Casino Gulfport for all periods presented.
1997 COMPARED WITH 1996
OVERVIEW
The Company's net earnings (loss) increased to $66.2 million, or $1.54 per
diluted share, for 1997 compared with a loss of $(101.0) million, or a loss of
$(2.43) per diluted share, for 1996. The 1996 net loss includes a charge related
to the Company's investment in Stratosphere in the amount of $149.4 million, or
$3.59 per diluted share. The Company recorded additional charges to 1996 net
earnings related to amortization of preopening expenses in the amount of $11.6
million and charges for corporate reorganization and project write-downs of
$13.6 million.
Grand Casino Tunica was open for all of 1997 compared to being open
approximately two quarters in 1996. Grand Casino Tunica also opened various
amenities during 1997 and, as a result, has increased its share of the Tunica
gaming market by approximately 10% in 1997 compared with 1996.
The Mississippi Gulf Coast gaming market continues to be highly
competitive. 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 is likely to continue, due
to the Company's strategy of building 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 Biloxi and Grand Casino Gulfport implemented a new
marketing campaign for approximately the first half of 1997. This campaign
increased the level of play, however, it made only a slight impact on win due to
lower win percentages in table games and slots.
12
<PAGE> 3
The combined occupancy of guest rooms for Company-owned properties for 1997
(including occupancy on a complimentary basis) was 92%, with a combined average
rate of approximately $68. The combined occupancy of guest rooms for
Company-owned properties for 1996 (including occupancy on a complimentary basis)
was 96% with a combined average rate of approximately $73.
REVENUES
During 1997, revenues increased $117.4 million to $607.4 million. The
increase is primarily attributable to an increase in revenues generated by Grand
Casino Tunica in the amount of $111.6 million, revenues in excess of 1996
amounts for the combined results of Grand Casino Biloxi and Grand Casino
Gulfport in the amount of $4.5 million for a total of $352.8 million, and an
increase in combined management fee income earned in the amount of $1.3 million
for a total of $78.5 million.
The increase in revenues at Grand Casino Tunica is primarily attributable
to the property being open all of 1997 and to the opening of a 600-room hotel in
March 1997 and a convention center in July 1997.
Management fee income from Grand Casino Mille Lacs, whose management
contract expires April 2, 1998, was $14.0 million for 1997. Management expects
the Louisiana, Minnesota, and western Wisconsin markets to remain highly
competitive.
COSTS AND EXPENSES
Costs and expenses during 1997 increased $77.2 million to $469.8 million.
The increase is primarily attributable to increased costs and expenses for Grand
Casino Tunica in the amount of $79.8 million, increased costs and expenses for
the combined results of Grand Casino Biloxi and Grand Casino Gulfport in the
amount of $11.1 million, and a decrease in corporate expenses in the amount of
$13.8 million relating primarily to corporate reorganization and project
write-downs during 1996.
Casino expenses increased $35.4 million to $161.6 million for 1997,
compared with $126.1 million for 1996. Grand Casino Tunica accounted for $30.3
million of the casino expense increase as a result of being open for all of
1997, with the balance of the increase attributable to Grand Casino Biloxi and
Grand Casino Gulfport. The increase in food and beverage expenses of $6.7
million in 1997 over 1996 is primarily attributable to Grand Casino Tunica being
open a full year in 1997 and approximately two quarters in 1996.
Depreciation and amortization expense in 1997 increased $4.0 million over
1996. The increase is partially due to an increase at Grand Casino Tunica in the
amount of $1.2 million, which is the result of an increase in depreciation and
amortization of assets in the amount of $11.5 million and a decrease in
amortization relating to preopening costs in the amount of $10.3 million. The
combined increase at Grand Casino Biloxi and Grand Casino Gulfport amounted to
$2.9 million, and there was a slight decrease in depreciation and amortization
associated with corporate expenses.
Selling, general, and administrative expenses in 1997 increased $26.7
million over 1996. The increase is comprised of an increase at Grand Casino
Tunica in the amount of $38.9 million, a combined increase of $1.4 million at
Grand Casino Biloxi and Grand Casino Gulfport, and a decrease of $13.3 million
in corporate expenses. The increase at Grand Casino Tunica is primarily
attributed to being open for all of 1997. The decrease in corporate expenses is
a result of corporate reorganization expenses and project write-downs incurred
in 1996.
OTHER
Interest expense for 1997, net of capitalized interest, was $42.8 million,
or an increase of $10.1 million from 1996. The increase is due primarily to
interest expense relating to the Company's $115.0-million Senior Unsecured
Notes, additional interest expense on the advance under the Company's
$120.0-million Capital Lease facility, and a reduction in capitalized interest.
Capitalized interest decreased $3.1 million to $12.9 million for 1997. The
decrease is a result of fewer qualifying construction projects for capitalizing
interest.
13
<PAGE> 4
Interest income decreased by $3.7 million to $13.4 million for 1997,
compared with $17.1 million for 1996. This decrease is primarily attributable to
lower cash balances for most of 1997, due to construction at Grand Casino Biloxi
and Grand Casino Tunica.
1996 COMPARED WITH 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 diluted share for 1996
compared with $70.1 million, or $1.98 per diluted share, for 1995.
The 1996 net loss includes a charge related to the Company's investment in
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 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.
The Company believes that Grand Casino Biloxi and Grand Casino Gulfport earn a
disproportionate share of the Mississippi Gulf Coast gaming market and that this
trend will continue because 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.
The Company's long-term plan continues to be to develop Grand Casino Tunica
into a destination resort with the development of hotels and other amenities.
The combined occupancy of guest rooms for Company-owned properties for 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 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 1995 due to the early retirement
of long-term debt.
REVENUES
During 1996, revenues increased $117.1 million to $490.0 million. The
increase is 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.
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 1996 compared with $45.8 million in 1995.
Management expects the Louisiana, Minnesota, and western Wisconsin markets to
remain highly competitive.
COSTS AND EXPENSES
Costs and expenses during 1996 increased $136.1 million to $392.6 million.
The increase 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
14
<PAGE> 5
corporate reorganization and project write-downs of $13.6 million during 1996
compared with none in 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 1996,
compared with $82.0 million for 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 $7.0 million in 1996 over 1995 is primarily
attributable to the opening of Grand Casino Tunica. Depreciation and
amortization expense in 1996 increased $21.6 million over 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 1996 related to assets for the Grand
Casino Gulfport Hotel, which opened in October 1995.
Selling, general, and administrative expenses in 1996 increased $54.0
million over 1995. Included in selling, general, and administrative expenses for
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 and
other programs, increases in indirect expenses for Grand Casino Biloxi and Grand
Casino Gulfport in the amount of $9.9 million, and expenses in 1996 related to
corporate reorganization and project write-downs of $13.6 million.
OTHER
Interest expense for 1996, net of capitalized interest, was $32.8 million,
or an increase of $6.6 million from 1995. The increase is due primarily to the
effect of interest expense relating to the Company's $450.0 million of First
Mortgage Notes outstanding for the entire year and the advances under the
Company's $120.0-million Capital Lease facility net of capitalized interest.
Interest income increased by $1.1 million to $17.1 million for 1996,
compared with $16.0 million for 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 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 1996 of $161.8 million.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At December 28, 1997, the Company had $238.6 million in cash and cash
equivalents, including $99.6 million planned to be used to pay off an existing
capital lease facility and related interest in March 1998.
Net cash provided by operating activities totaled $123.7 million in 1997,
compared with $121.4 million in 1996 and $114.1 million in 1995. The Company's
working capital increased $28.2 million in 1997 to $122.0 million. The increase
is primarily due to increased cash generated by operations, and the
$115.0-million Senior Unsecured Note offering, offset by construction
expenditures at Grand Casino Biloxi and Grand Casino Tunica.
Long-term debt and capital lease obligations at December 28, 1997, and
December 29, 1996, totaled $566.4 million and $511.7 million, respectively, or
53% of the Company's total capital each year. On October 14, 1997, the Company
secured $115.0 million in Senior Unsecured Notes for refinancing an existing
capital lease facility.
As of December 28, 1997, $97.4 million remains outstanding on the capital
lease facility and is classified as a current liability on the December 28,
1997, balance sheet. The balance is currently planned to be paid in full on
March 31, 1998. The Company also secured a $100.0-million revolving Capital
Lease facility for continued development of Grand Casino Gulfport and Grand
Casino Tunica. As of December 28, 1997, no advance relating to this financing
had been made.
At December 28, 1997, the Company's long-term debt included 10.125% First
Mortgage Notes due in 2003 in the amount of $450.0 million and 9% Senior
Unsecured Notes in the amount of $115.0 million due in
15
<PAGE> 6
2004. The First Mortgage Notes are redeemable on December 1, 1999, or thereafter
based on a stated premium that declines ratably to par value. The Senior
Unsecured Notes are redeemable on October 15, 2001, or thereafter based on a
stated premium that declines ratably to par value.
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.
During 1997, 1996, and 1995 the Company's capital expenditures totaled
$162.8 million, $308.5 million, and $186.0 million, respectively. Included in
1997 capital expenditures were $80.8 million related to construction of a
600-room hotel and other resort-related amenities at Grand Casino Tunica and
$57.9 million of construction expenditures at Grand Casino Biloxi related to
additional hotel rooms and other resort-related amenities currently under
construction. The remaining capital expenditures of $24.1 million during fiscal
1997 primarily reflect various enhancement projects, land purchases, and
maintenance capital spending at Grand Casino Gulfport.
The Company believes in developing first-class facilities to maximize
long-term shareholder value. Based on projects currently planned, the Company's
level of capital expenditures during 1998 are expected to be approximately
$200.0 million; however, there can be no assurance that all projects will be
completed as planned.
The primary construction projects scheduled at Grand Casino Tunica include
a second 600-room hotel, an entertainment facility, and a golf course clubhouse.
The capital expenditures for Grand Casino Tunica are anticipated to be
approximately $95.0 million. In addition, during 1998, the Company expects
capital expenditures to be approximately $75.0 million related to construction
of a hotel with approximately 600 rooms and other resort-related amenities at
Grand Casino Gulfport.
Capital expenditures forecasted for 1998 for Grand Casino Biloxi are $32.0
million related to completion of a 500-room hotel and other resort-related
amenities. Grand Casino Biloxi and Grand Casino Gulfport are jointly
constructing a Jack Nicklaus-designed golf course. The Company expects to fund
the 1998 planned capital expenditures through cash and cash equivalents and
internally generated cash.
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 commitments on the planned
projects enumerated above, there can be no assurance that the Company will have
available the financial resources to complete all such projects.
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 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.
16
<PAGE> 7
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)
contain statements that are forward-looking, such as plans for future expansion
and other business development activities as well as other statements regarding
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, actual 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, and
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 28, 1997.
17
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS), EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 238,635 $ 147,254
Current installments of notes receivable.................. 6,856 7,792
Accounts receivable....................................... 15,644 13,463
Deferred income taxes..................................... 13,399 9,910
Other current assets...................................... 15,087 15,335
---------- ----------
Total Current Assets........................................ 289,621 193,754
---------- ----------
Property and Equipment -- net............................... 941,022 821,827
---------- ----------
OTHER ASSETS:
Cash and cash equivalents -- restricted................... 4,967 10,276
Securities available for sale............................. 13,110 23,603
Notes receivable -- less current installments............. 26,979 30,772
Investments in and notes from unconsolidated affiliates... 8,180 8,823
Debt issuance and deferred licensing costs -- net......... 26,000 22,851
Other long-term assets.................................... 23,858 10,910
---------- ----------
Total Other Assets.......................................... 103,094 107,235
---------- ----------
TOTAL ASSETS................................................ $1,333,737 $1,122,816
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade and construction................ $ 12,947 $ 20,002
Current installments of long-term debt.................... 3,509 4,101
Current installments of capital lease obligations......... 97,376 15,358
Accrued interest.......................................... 5,817 5,486
Accrued payroll and related expenses...................... 25,555 23,418
Other accrued expenses.................................... 22,398 31,542
---------- ----------
Total Current Liabilities................................... 167,602 99,907
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt -- less current installments............... 566,434 455,002
Capital lease obligations -- less current installments.... -- 56,740
Deferred income taxes..................................... 97,085 71,494
---------- ----------
Total Long-term Liabilities................................. 663,519 583,236
---------- ----------
TOTAL LIABILITIES........................................... 831,121 683,143
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 8, 11, AND 12)
SHAREHOLDERS' EQUITY:
Capital stock, $.01 par value; 100,000 shares authorized;
41,966 and 41,796 issued and outstanding............... 420 418
Additional paid-in-capital................................ 413,631 412,576
Net unrealized gains (losses) on securities available for
sale................................................... (2,947) 1,358
Retained earnings......................................... 91,512 25,321
---------- ----------
Total Shareholders' Equity.................................. 502,616 439,673
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,333,737 $1,122,816
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 9
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS), EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Casino................................................. $462,756 $ 361,844 $270,683
Hotel.................................................. 35,242 25,017 10,908
Food and beverage...................................... 63,685 47,650 33,640
Management fee income.................................. 78,515 77,198 68,474
Retail and other income................................ 13,294 11,133 8,022
-------- --------- --------
Gross Revenues............................................ 653,492 522,842 391,727
Less: Promotional allowances........................... (46,071) (32,823) (18,855)
-------- --------- --------
NET REVENUES................................................ 607,421 490,019 372,872
-------- --------- --------
COSTS AND EXPENSES
Casino................................................. 161,565 126,132 82,003
Hotel.................................................. 8,764 6,203 3,593
Food and beverage...................................... 33,122 26,436 19,486
Other operating expenses............................... 12,709 11,971 8,394
Depreciation and amortization.......................... 49,491 45,538 23,899
Lease expense.......................................... 18,757 17,713 14,574
Selling, general, and administrative................... 185,354 158,618 104,608
-------- --------- --------
Total Costs and Expenses.................................. 469,762 392,611 256,557
-------- --------- --------
EARNINGS FROM OPERATIONS.................................... 137,659 97,408 116,315
-------- --------- --------
OTHER INCOME (EXPENSE)
Interest income........................................ 13,430 17,055 15,984
Interest expense....................................... (42,847) (32,767) (26,187)
Other.................................................. (285) 28 4,781
Project write-downs.................................... (942) (164,947) (408)
-------- --------- --------
Total Other Expense -- Net................................ (30,644) (180,631) (5,830)
-------- --------- --------
Earnings (loss) before income taxes, minority interest and
extraordinary charge................................... 107,015 (83,223) 110,485
Provision for income taxes................................ 40,824 17,746 42,974
-------- --------- --------
Earnings (loss) before minority interest and extraordinary
charge................................................. 66,191 (100,969) 67,511
Minority interest......................................... -- -- 2,594
-------- --------- --------
Earnings (loss) before extraordinary charge............... 66,191 (100,969) 70,105
Extraordinary charge -- net of income taxes............... -- -- (17,097)
-------- --------- --------
NET EARNINGS (LOSS)......................................... $ 66,191 $(100,969) $ 53,008
======== ========= ========
Basic earnings (loss) per share -- before extraordinary
charge.................................................... $1.58 $(2.43) $2.05
Basic loss per share -- extraordinary charge................ -- -- (0.50)
-------- --------- --------
BASIC EARNINGS (LOSS) PER SHARE............................. $1.58 $(2.43) $1.55
======== ========= ========
Diluted earnings (loss) per share -- before extraordinary
charge.................................................... $1.54 $(2.43) $1.98
Diluted loss per share -- extraordinary charge.............. -- -- (0.49)
-------- --------- --------
DILUTED EARNINGS (LOSS) PER SHARE........................... $1.54 $(2.43) $1.49
======== ========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 41,899 41,578 34,224
======== ========= ========
WEIGHTED AVERAGE COMMON AND DILUTED SHARES OUTSTANDING...... 43,037 41,578 35,476
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS
(LOSSES)
COMMON STOCK ADDITIONAL ON SECURITIES TOTAL
---------------- PAID-IN AVAILABLE RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL FOR SALE EARNINGS EQUITY
------ ------- ---------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 gain 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 2,102 126,290 526,100
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 1,358 25,321 439,673
Issuance of stock on options
exercised -- net.............. 170 2 1,055 -- -- 1,057
Unrealized loss on securities
available for sale -- net of
income taxes.................. -- -- -- (4,305) -- (4,305)
Net earnings..................... -- -- -- -- 66,191 66,191
------ ---- -------- ------- --------- --------
BALANCE, DECEMBER 28, 1997......... 41,966 $420 $413,631 $(2,947) $ 91,512 $502,616
====== ==== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings (loss) before extraordinary charge............... $ 66,191 $(100,969) $ 70,105
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 45,865 42,748 20,359
Amortization of original issue discount and debt
issuance costs........................................ 3,626 2,790 6,035
Gain on sale of investment.............................. -- -- (4,781)
Project write-downs..................................... 942 164,947 408
Deferred income taxes................................... 24,239 (6,775) 5,900
Minority interest....................................... -- -- (2,594)
Changes in operating assets and liabilities:
Current assets........................................ (3,430) (9,113) (2,594)
Accounts payable...................................... (7,055) 1,281 8,258
Accrued expenses...................................... (6,676) 26,492 12,974
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 123,702 121,401 114,070
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property and equipment....................... (162,751) (308,537) (185,964)
Increase in notes receivable.............................. (1,797) -- (28,530)
Proceeds from repayment of notes receivable............... 7,618 15,981 18,381
Investment in and notes receivable from unconsolidated
affiliates.............................................. (339) (60,244) (13,319)
Cash acquired upon mergers................................ -- -- 14,642
Decrease in cash due to deconsolidation of Stratosphere
Corporation............................................. -- -- (107,184)
Sales (purchases) of securities available for sale........ 4,045 (12,330) 3,881
Decrease (increase) in cash and cash
equivalents -- restricted and other..................... 5,309 (3,374) (120,887)
Costs paid related to mergers............................. -- -- (3,134)
Increase in other long-term assets........................ (14,807) (11,823) (275)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... (162,722) (380,327) (422,389)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................. 160,088 74,912 688,101
Payments on long-term debt and capital lease
obligations............................................. (23,970) (14,369) (177,946)
Increase in accounts payable -- construction.............. -- -- 16,277
Proceeds from issuance of common stock -- net............. 1,057 15,286 1,615
Proceeds from Stratosphere Corporation warrants exercised
and public offering..................................... -- -- 113,604
Debt issuance costs and deferred financing costs.......... (6,774) (4,421) (28,357)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 130,401 71,408 613,294
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 91,381 (187,518) 304,975
Cash and cash equivalents -- beginning of year.............. 147,254 334,772 29,797
--------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 238,635 $ 147,254 $ 334,772
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of capitalized interest of $12,930,
$16,065, and $19,480 in fiscal years 1997, 1996, and
1995, respectively)................................... $ 55,446 $ 31,310 $ 19,113
Income taxes............................................ 27,627 17,042 29,792
Noncash investing and financing activities:
Notes issued in exchange for property and casino
development costs..................................... -- -- 2,875
Increase in noncash assets through stock issued for
merger................................................ -- -- 150,852
Decrease in various accounts upon deconsolidating
Stratosphere Corporation:
Property and equipment................................ -- -- (163,691)
Cash and cash equivalents -- restricted (other
assets)............................................ -- -- (118,366)
Other long-term assets................................ -- -- (28,611)
Other liabilities..................................... -- -- (40,631)
Long-term debt........................................ -- -- (203,000)
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Grand Casinos, Inc. and Subsidiaries (the "Company") develop, construct,
and manage land-based and dockside casinos and related hotel and entertainment
facilities in emerging and established 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. As of December 28, 1997, the Company owns approximately 41% of the
common stock of Stratosphere Corporation (Stratosphere), which owns the
Stratosphere Tower, Casino and Hotel in Las Vegas, Nevada. Stratosphere is, as
of such date, the subject of Chapter 11 bankruptcy proceedings.
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.
Year-End
The Company has a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year. Periods presented are for the years ended
December 28, 1997 (1997), December 29, 1996 (1996), and December 31, 1995
(1995).
Principles of Consolidation
The consolidated financial statements include the accounts of Grand
Casinos, Inc. and its wholly-owned and majority-owned subsidiaries. Investments
in unconsolidated affiliates representing between 20% and 50% of voting
interests are accounted for on the equity method. All material intercompany
balances and transactions have been eliminated in consolidation. The
accompanying consolidated financial statements include the accounts of
Stratosphere through December 20, 1995, the date on which the Company owned less
than 50% of the voting interests of Stratosphere.
The Company made total capital contributions to the Stratosphere project of
approximately $107.6 million and has outstanding loan advances to Stratosphere
of $50.0 million. The Company had written off or reserved for these investments
and other related costs in the Stratosphere project as of December 29, 1996, in
the amount of $161.8 million and included this amount in the Company's 1996
results on the accompanying Consolidated Statements of Earnings in project
write-downs. The Company has not recorded any results of Stratosphere's
operations in 1997.
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
22
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
allowances. The estimated costs of providing such complimentaries, which are
classified as expenses on the accompanying Consolidated Statements of Earnings,
are as follows (in thousands):
ESTIMATED COSTS OF PROVIDING COMPLIMENTARIES
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
FOOD & BEVERAGE HOTEL OTHER
<S> <C> <C> <C>
1997........................................................ $27,294 $2,579 $8,921
1996........................................................ 20,7$48 $1,360 $5,804
1995........................................................ $11,919 $ 781 $3,334
</TABLE>
Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.
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. Restricted cash and cash
equivalents consist primarily of funds restricted for workers' compensation
benefits.
Inventories
Inventories consisting primarily of food and beverage, goods to be sold at
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.
Amortization for 1997, 1996 and 1995, includes approximately $1.3 million,
$11.9 million, and $1.4 million of preopening amortization expense,
respectively. As of December 28, 1997, and December 29, 1996, preopening
expenses included in other current assets are $0.3 million and $0.5 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.
Depreciation and amortization of property and equipment is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Building and leasehold improvements......................... 15-40 years
Furniture and equipment..................................... 3-15 years
Land improvements........................................... 15 years
</TABLE>
The Company capitalizes 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 $12.9 million,
$16.1 million, and $19.5 million during 1997, 1996, and 1995, 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
23
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
not be recoverable, the Company estimates 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. Deferred debt issuance costs, net of accumulated
amortization, amounting to $5.5 million were written off during 1995 with
respect to the early retirement of outstanding debt (see Note 7).
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 Company-owned
casinos. Included in casino development costs are amounts related to an
approximately 15-acre site in Las Vegas that the Company currently controls.
Casino development costs for Company-managed casinos are amortized over the
lives of the related management contracts as each becomes effective. Included in
other long-term assets at December 28, 1997, and December 29, 1996, are net
casino development costs of $21.4 million and $8.3 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 28, 1997, and December 29, 1996, includes
$2.9 million of net unrealized loss and $1.4 million of net unrealized gain,
respectively (net of income taxes), 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 (loss) per share have been retroactively
adjusted to reflect the stock split.
24
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
Earnings (Loss) Per Share
Earnings (loss) per common share are computed by dividing net earnings
(loss) by the weighted average number of common shares and common stock
equivalents outstanding (see Note 8).
The Company adopted the Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128) effective December 28, 1997. As a result, all
prior periods presented have been restated to conform to the provisions of SFAS
No. 128, which requires the presentation of basic and diluted earnings per
share. Basic earnings per share are computed by dividing net earnings available
to common shareholders by the weighted average number of common shares
outstanding during each year.
Diluted earnings per share are computed under the treasury stock method and
are calculated to compute the dilutive effect of outstanding stock options.
Options to purchase 4,194,277 shares of common stock at $3.03 to $32.125 per
share were outstanding at December 29, 1996, but were not included in the
computation of diluted earnings per share as they were anti-dilutive. A
reconciliation of these amounts is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings (loss) available to common shareholders before
extraordinary charge...................................... $66,191 $(100,969) $ 70,105
Extraordinary charge -- net of income taxes................. -- -- (17,097)
------- --------- --------
Earnings (loss) available to common shareholders............ $66,191 $(100,969) $ 53,008
======= ========= ========
Weighted average number of common stock
outstanding -- basic...................................... 41,899 41,578 34,224
Dilutive effect of Option Plans............................. 1,138 -- 1,252
------- --------- --------
Common and potential common shares outstanding -- diluted... 43,037 41,578 35,476
======= ========= ========
Basic net earnings per share before extraordinary charge.... $1.58 $(2.43) $2.05
Diluted net earnings per share before extraordinary
charge.................................................... 1.54 (2.43) 1.98
Basic net earnings per share................................ 1.58 (2.43) 1.55
Diluted net earnings per share.............................. 1.54 (2.43) 1.49
</TABLE>
NOTE 2 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. The results of operations of GCA and BLD, since November
30, 1995, are included in the Company's consolidated results.
NOTE 3 MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS
The Company entered into 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. The management contract
for the gaming facility in Onamia will not be renewed. No decision has been made
with respect to renewal of the management contract for the Hinckley facility.
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
25
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
of Louisiana for a gaming facility in Kinder, Louisiana, that expires on January
16, 2002. See additional discussion in the Company's 1997 Annual Report on Form
10-K regarding the tribal-state compacts that authorize gaming activities by the
Tunica-Biloxi Tribe of Louisiana and the Coushatta Tribe of Louisiana.
The Company holds notes receivable at December 28, 1997, and December 29,
1996, from the Coushatta Tribe in the amounts of $22.7 million and $23.8
million, respectively, and from the Tunica-Biloxi Tribe in the amounts of $10.4
million and $12.6 million, respectively. The notes bear interest at a defined
reference rate plus 1% (not to exceed 16%). The notes are expected to be fully
paid off at the expiration of each respective management contract.
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 commenced with the signing
of the respective contracts and continued until the casinos opened for business;
thereafter, the management portion of the respective management contracts
continues for a 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 Louisiana 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 restated management contracts for the Onamia and Hinckley, Minnesota,
casinos have not been approved by the NIGC and the Company believes the NIGC
will not approve the contracts prior to their expiration. While the Company
believes that all of the management contracts meet all requirements of the
Indian Gaming Regulatory Act of 1988 (IGRA), the BIA or the NIGC may attempt to
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.
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).
NOTE 4 PROPERTY AND EQUIPMENT -- NET
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvements, including land held for
development........................................... $ 190,216 $176,569
Buildings and improvements.............................. 554,871 446,459
Furniture and equipment................................. 171,355 140,643
Construction in progress................................ 129,038 120,264
---------- --------
1,045,480 883,935
Less accumulated depreciation and amortization.......... (104,458) (62,108)
---------- --------
Property and equipment -- net........................... $ 941,022 $821,827
========== ========
</TABLE>
26
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
Included in property and equipment at December 28, 1997, and December 29,
1996, are assets recorded under capital leases of $120.5 million and $92.2
million, respectively. Accumulated depreciation and amortization at December 28,
1997, and December 29, 1996, includes amounts recorded for capital leases of
$12.9 million and $13.6 million, respectively.
NOTE 5 INCOME TAXES
The provision for income taxes attributable to earnings before
extraordinary loss on early retirement of debt for 1997, 1996, and 1995
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CURRENT:
Federal.......................................... $19,278 $21,185 $33,744
State............................................ 2,146 3,336 3,330
------- ------- -------
21,424 24,521 37,074
DEFERRED:.......................................... 19,400 (6,775) 5,900
------- ------- -------
$40,824 $17,746 $42,974
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
actual rate based on earnings (loss) before income taxes for 1997, 1996, and
1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate............................ 35.0% (35.0)% 35.0%
State income taxes -- net of federal income tax
benefit............................................. 1.3 2.5 2.0
Valuation allowance on Stratosphere net operating loss
carryforward and write-down of Stratosphere
investment.......................................... -- 49.8 2.0
Other -- net.......................................... 1.8 4.0 (.1)
---- ----- ----
38.1% 21.3% 38.9%
==== ===== ====
</TABLE>
Examinations of the federal income tax returns filed for the period August
3, 1992 through January 1, 1995 are currently under review by the IRS appeals
office. Examinations of the federal income tax returns filed for the periods
January 2, 1995 through December 29, 1996 are currently in process. In the
opinion of management, the resolution of any matters arising from the current
examination will not have a material adverse effect on the Company's financial
position or results of operations.
27
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
The Company's deferred income tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NONCURRENT DEFERRED TAXES:
Tax depreciation in excess of book depreciation........... $ 52,109 $ 29,115
Financial reporting bases in excess of tax reporting bases
of land acquired in GCA and GGC mergers................ 40,600 40,600
Net operating and capital losses related to Stratosphere
investment and GGC..................................... (54,000) (54,000)
Other temporary differences............................... 4,376 1,779
-------- --------
Net noncurrent deferred taxes............................. 43,085 17,494
Less: valuation allowance................................. 54,000 54,000
-------- --------
Net noncurrent deferred taxes............................. $ 97,085 $ 71,494
-------- --------
CURRENT DEFERRED TAXES:
Preopening expenses-net of amortization................... $ 3,503 $ 4,975
Accruals, reserves, and other............................. 9,896 4,935
-------- --------
Net current tax asset..................................... 13,399 9,910
-------- --------
Net deferred tax liability................................ $ 83,686 61,584
======== ========
</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 for the applicable deferred tax assets. At December 28,
1997, the Company had net operating and capital loss carryforwards of
approximately $154.3 million, which expire at various times through December
2011.
NOTE 6 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, 1997, through June 30,
2002, and contains renewal options totaling 40 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 $25.0 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 $50.0 million per year, plus
10% of net profits from certain other nongaming-related activities.
The Company also entered into a 15-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 15-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.
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.
28
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
On May 10, 1996, the Company completed a $120.0-million Capital Lease
facility. The five-year facility, with varying interest rates ranging from 1.75%
to 2.50% over the LIBO Rate, is being used for the continued development of the
Company's Grand Casino Tunica project, located in northern Mississippi, just
outside of Memphis, Tennessee.
Approximately $90.0 million of the facility was used for furniture,
fixtures, and equipment for the 340,000-square-foot casino complex. The balance
of approximately $30.0 million was used to construct a 600-room hotel at Grand
Casino Tunica. As of December 28, 1997, $97.4 million was the balance owing
under the capital lease facility (See Note 7).
On September 30, 1997, the Company closed on $100.0 million in bank
financing. The five-year capital lease facility, with interest rates ranging
from 1.75% to 2.50% over the LIBO Rate, will be used for the continued
development of Grand Casino Tunica and Grand Casino Gulfport, as well as other
general corporate purposes. As of December 28, 1997, no advances relating to
this financing had been made.
The terms of the Capital Lease facilities 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
and mergers. The Company was in compliance with all such covenants as of
December 28, 1997.
In addition to the aforementioned land leases, the Company leases certain
other property and equipment under noncancelable operating leases. Future
minimum lease payments, excluding contingent rentals, due under noncancelable
operating and capital leases as of December 28, 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
----------- -------------- ----------------
<S> <C> <C>
1998........................................................ $ 99,430 $ 11,570
1999........................................................ -- 11,405
2000........................................................ -- 10,634
2001........................................................ -- 10,396
2002........................................................ -- 10,461
Thereafter.................................................. -- 618,602
-------- --------
Total minimum lease payments................................ $ 99,430
Less: amounts representing interest at 8.219%............... (2,054)
-------- --------
Present value of minimum capital lease payments............. $ 97,376
Less: current installments.................................. (97,376)
-------- --------
Obligations under capital leases-less current liabilities... $ --
======== ========
</TABLE>
Rent expense, under noncancelable operating leases, exclusive of real
estate taxes, insurance, and maintenance expense for 1997, 1996, and 1995 was
approximately $19.8 million, $19.0 million, and $16.2 million, respectively.
Percentage rental expense for 1997, 1996, and 1995 was $14.6 million, $12.8
million, and $11.3 million, respectively.
29
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
NOTE 7 LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
First Mortgage Notes due December 1, 2003................... $450,000 $450,000
Senior Unsecured Notes due October 16, 2004................. 115,000 --
Various notes payable in varying installments of principal
and interest with interest from 9.0% to 10.75%, maturing
through December 2002..................................... 4,943 9,103
-------- --------
569,943 459,103
Less current installments................................. (3,509) (4,101)
-------- --------
Long-term debt-less current installments.................... $566,434 $455,002
======== ========
</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 purchase
$115.0 million aggregate principal amount of 12.5% First Mortgage Notes due on
February 1, 2000 (including accrued interest of $4.8 million and $12.8 million
related to a tender offer premium and expenses), and $25.3 million to retire all
outstanding principal and interest due under a credit facility with First
Interstate Bank of Nevada, N.A. (F.I.B. Note).
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 are secured by substantially all the
assets of Grand Casino Biloxi and Grand Casino Gulfport, Grand Casino Tunica
assets included in Phase 1 development (as defined in the loan documents),
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.
On October 14, 1997, the Company closed on a $115.0-million, 9.0%,
seven-year, Senior Unsecured Note offering due 2004, realizing net cash proceeds
of approximately $111.8 million after underwriting and other related offering
costs. The proceeds from the offering are planned to be used to refinance the
$120.0-million Capital Lease Facility (See Note 6). The notes require
semi-annual payments of interest only on April 15 and October 15 of each year
commencing April 15, 1998, until October 15, 2004, at which time the entire
principal plus accrued interest is due and payable. The notes may be redeemed in
whole or in part, anytime after October 15, 2001, at a premium, declining
ratably thereafter to par value on October 15, 2003.
The terms of the 10.125% First Mortgage Notes and the 9.0% Senior Unsecured
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 all such covenants as of December 28, 1997.
30
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
The future aggregate annual maturities of long-term debt at December 28,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998........................................................ $ 3,509
1999........................................................ 56
2000........................................................ 60
2001........................................................ 66
2002........................................................ 71
Thereafter.................................................. 566,181
--------
$569,943
</TABLE>
NOTE 8 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.
Information with respect to the stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
OPTIONS AVAILABLE OPTION PRICE RANGE
OUTSTANDING FOR GRANT PER SHARE
----------- ------------- ------------------
<S> <C> <C> <C>
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)
Granted............................................ 1,431,050 (1,431,050) (9.25-15.63)
Canceled........................................... (483,980) 483,980 (8.08-32.125)
Exercised.......................................... (170,421) -- (3.03-11.00)
--------- ---------- --------------
Balance at December 28, 1997....................... 4,970,926 474,969 $ (3.03-32.125)
========= ========== ==============
Exercisable at December 28, 1997................... 1,660,734
========= ========== ==============
</TABLE>
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
31
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
Statement No. 123, the Company's net earnings (loss) and earnings (loss) per
share would have been as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss):......................... As reported $66,191 $(100,969) $53,008
Pro forma 57,862 (107,316) 51,533
Earnings (loss)
Per share:................................... As reported-basic $ 1.58 $ (2.43) $ 1.55
As reported-diluted 1.54 (2.43) 1.49
Pro forma-basic 1.38 (2.58) 1.51
Pro forma-diluted 1.34 (2.58) 1.45
</TABLE>
Statement No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, thus 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 fair value of the options issued in 1997
range from $7.15 per share to $11.78 per share. The following assumptions were
used to estimate the fair value of options:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate...................... 6.04%-6.98% 5.68%-6.95% 5.96%-7.58%
Expected life................................ 10 year 10 year 10 year
Expected volatility.......................... .563-.629 .528-.613 .625-.665
Expected dividend yield...................... 0 0 0
</TABLE>
NOTE 9 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
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.
Notes Receivable
The notes receivable are generally advances made to Indian tribes for the
development of gaming properties managed by the Company. The repayment terms are
specific to each tribe and are largely dependent upon the operating performance
of each gaming property.
The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values of these notes
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.
32
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
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 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:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $243,602 $243,602 $157,530 $157,530
Accounts receivable........................ 15,644 15,644 13,463 13,463
Notes receivable........................... 33,835 33,835 38,564 38,564
Securities available for sale.............. 13,110 13,110 23,603 23,603
Accounts payable........................... 12,947 12,947 20,002 20,002
First Mortgage Notes....................... 450,000 482,625 450,000 455,063
Senior Unsecured Notes..................... 115,000 115,000 -- --
Other long-term debt....................... 4,943 4,943 9,103 9,103
Capital lease obligation................... 97,376 97,376 72,098 72,098
</TABLE>
NOTE 10 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 28, 1997, and December 29, 1996, accounts and
notes receivable are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REGIONS:
Louisiana (Indian)........................................ 76.0% 86.9%
Minnesota (Indian)........................................ 5.6 2.9
Mississippi (dockside).................................... 18.4 10.2
----- -----
100.0% 100.0%
</TABLE>
NOTE 11 EMPLOYEE RETIREMENT PLAN
The Company has a section 401(k) employee savings plan for all full-time
employees. 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 1997, 1996, and 1995 were $0.5 million, $0.4 million, and $0.1
million, respectively.
33
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
NOTE 12 COMMITMENTS AND CONTINGENCIES
Stratosphere Corporation
The Company owns approximately 41% of the common stock issued by
Stratosphere Corporation ("Stratosphere"). Stratosphere and its wholly-owned
operating subsidiary developed and operate the Stratosphere Tower, Hotel and
Casino in Las Vegas, Nevada. In January 1997, Stratosphere and its wholly-owned
operating subsidiary filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code.
In October 1997, the Company announced that it had not been able to reach
an agreement with holders of a significant portion of Stratosphere's First
Mortgage Notes for a consensual reorganization of Stratosphere that would
involve the Company's participation. The Company also announced that it had no
intention of participating in any plan of reorganization for Stratosphere.
In March 1995, in connection with Stratosphere's issuance of its First
Mortgage Notes, the Company entered into a Standby Equity Commitment Agreement
(the "Standby Equity Commitment") between Stratosphere and the Company. The
Company agreed in the Standby Equity Commitment, subject to the terms and
conditions stated in the Standby Equity Commitment, to purchase up to $20.0
million of additional equity in Stratosphere during each of the first three
years Stratosphere is operating (as defined in the Standby Equity Commitment) to
the extent Stratosphere's consolidated cash flow (as defined in the Standby
Equity Commitment) during each of such years does not exceed $50.0 million.
Based on provisions of the U.S. Bankruptcy Code that the Company contends
apply to the Standby Equity Commitment, the Company has asserted that the
enforceability of the Standby Equity Commitment is in question. Both the
Official Committee of Noteholders in the Stratosphere Bankruptcy case (the
"Official Committee") and the current trustee under the indenture pursuant to
which Stratosphere issued its First Mortgage Notes (the "Trustee") claim that
the Standby Equity Commitment is enforceable.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which the Company is a party in (i) the Stratosphere Bankruptcy
case (as a result of a motion brought by the Official Committee), and (ii) the
U. S. District Court for the District of Nevada (as a result of an action
brought by the Trustee). On February 19, 1998, the Bankruptcy Court ruled that
the Standby Equity Commitment is not enforceable in the Stratosphere bankruptcy
proceeding as a matter of law. The Official Committee has stated that it intends
to appeal the Bankruptcy Court's decision.
Loan Guaranty Agreements
The Company has guaranteed two loan and security agreements entered into by
the Tunica-Biloxi Tribe of Louisiana for $14.1 million for the purpose of
financing casino equipment and for $16.5 million for the purpose of purchasing a
hotel and additional casino equipment. The agreements extend through 1998 and
2000, respectively, and as of December 28, 1997, the amounts outstanding were
$3.0 million and $12.7 million, respectively.
The Company has also guaranteed loan and security agreements entered into
by the Coushatta Tribe of Louisiana for $22.3 million for the purpose of
financing casino equipment. The agreements are for three years and have various
maturity dates through 1998, and as of December 28, 1997, the amounts
outstanding were $3.7 million.
In addition, on May 1, 1997, the Company entered into a guaranty agreement
related to a loan agreement entered into by the Coushatta Tribe of Louisiana in
the amount of $25.0 million, for the purpose of constructing a hotel and
acquiring additional casino equipment. The guaranty will remain in effect until
the loan is paid. The loan term is approximately five years. No advances had
been made relating to this loan at December 28, 1997.
34
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
Litigation
A description of litigation which, if determined adversely to the Company,
could have a material adverse effect follows.
Stratosphere Securities Litigation
The Company and certain persons who have been indemnified by the Company
(including certain Company officers and directors) are, as of February 6, 1998,
defendants in legal actions pending in the state court and in the federal court
in Nevada. These actions arise out of the Company's involvement in the
Stratosphere Tower, Casino and Hotel project (the "Stratosphere Project") in Las
Vegas, Nevada.
The plaintiffs in the actions who are current and/or former Stratosphere
Corporation shareholders, seek to pursue the actions as class actions, and make
various claims against the Company and the Company-related defendants, including
securities fraud. The Company and the Company-related defendants have submitted
a motion to dismiss the federal action. As of February 6, 1998, the motion has
not been decided. The state court action has been stayed pending resolution of
the federal court action.
The Company intends to vigorously defend itself and the other
Company-related defendants against the claims made in both the state and the
federal action.
Grand Securities Litigation
The Company and certain of the Company's current and former officers and
directors are, as of February 6, 1998, defendants in a legal action pending in
the federal court in Minnesota. This action arises out of the Company's
involvement in the Stratosphere Project.
The plaintiffs in the action who are current and/or former Company
shareholders, seek to pursue the action as a class action, and make various
claims against the Company and the other defendants, including securities fraud.
The Company and the Company-related defendants submitted a motion to dismiss the
plaintiff's claims. That motion was granted in part and denied in part. As of
February 6, 1998, the plaintiffs and the Company and the other defendants are
engaged in discovery in the action.
The Company intends to vigorously defend itself and the other defendants
against the claims that survived the Company's motion to dismiss.
Derivative Action
Certain of the Company's officers and directors are, as of February 6,
1998, defendants in a legal action pending in the state court of Minnesota. This
action arises out of the Company's involvement in the Stratosphere Project.
The plaintiffs in the action who are current and/or former Company
shareholders, seek to pursue the action against the defendants on behalf of the
Company, and make various claims that the defendants failed to fulfill claimed
duties to the Company. The Company is providing the defense for the defendants
pursuant to the Company's indemnification obligations to the defendants.
The Company's board of directors appointed an independent special
litigation committee under Minnesota law to evaluate whether the Company should
pursue the claims made by the plaintiffs. That committee has completed its
evaluation and has recommended to the court that the plaintiffs' claims not be
pursued.
The defendants in the action have asked that the court dismiss the action
based on the recommendation of the independent special litigation committee. As
of February 6, 1998, that motion has not been decided.
35
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 -- (CONTINUED)
The Company believes that the action should be dismissed under applicable
Minnesota law.
Other Litigation
The Company is involved in various other inquiries, administrative
proceedings, and litigation relating to contracts and other matters arising in
the normal course of business. While any proceeding or litigation has an element
of uncertainty, management currently believes that the final outcome of these
matters are not likely to have a material adverse effect upon the Company's
consolidated financial position or its results of operations.
NOTE 13 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................................ $142,170 $150,837 $167,580 $146,834
Earnings from operations............................ 30,863 38,956 44,618 23,222
Net earnings........................................ 14,581 18,316 22,164 11,130
Earnings per share:
Basic............................................. .35 .44 .53 .27
Diluted........................................... .34 .43 .51 .26
STOCK PRICE:
High.............................................. $14.38 $16.13 $17.19 $15.32
Low............................................... 9.00 9.13 13.82 12.00
</TABLE>
Year ended December 29, 1996 (in thousands), except per share amounts:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues....................................... $103,836 $112,977 $146,725 $ 126,481
Earnings (loss) from operations.................... 27,365 37,258 33,054 (269)
Net earnings (loss)................................ 17,647 19,408 3,504 (141,528)
Earnings (loss) per share:
Basic............................................ .43 .47 .08 (3.39)
Diluted.......................................... .41 .45 .08 (3.39)
STOCK PRICE:
High............................................. $35.63 $35.75 $26.63 $17.88
Low.............................................. 23.00 25.38 13.50 12.00
</TABLE>
36
<PAGE> 27
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 28, 1997 and
December 29, 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 28, 1997. 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.
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 28, 1997 and December 29, 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended December 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 6, 1998
37
<PAGE> 1
EXHIBIT 21
Subsidiaries of Grand Casinos, Inc.
1. Grand Casinos Resorts, Inc.
(i) Grand Casinos of Mississippi, Inc. - Gulfport
(ii) Grand Casinos of Mississippi, Inc. - Biloxi
(iii) Grand Casinos & Resorts of Canada, Inc.
(iv) Grand Casinos Biloxi Theater, Inc.
(v) Grand Casinos Mississippi Development, Inc.
(vi) Riverfront Entertainment Corporation
2. Grand Resorts de Mexico, S.A. de C.V.
3. Grand Casinos Ontario, Inc.
4. BL Development Corp.
(i) BL Utility Corp.
5. GCA Acquisition Subsidiary, Inc.
(i) Riverfront Renaissance Corp.
(ii) Dells Development Corp.
(iii) Gulf Coast Vehicle Services, Inc.
(iv) Mississippi Delta Gaming Company
(v) Gaming Corporation of America - Bay St. Louis, Inc.
(vi) Golden Nickel Casinos, Inc.
6. Grand Casinos Nevada I, Inc.
7. Mille Lacs Gaming Corporation
8. Grand Casinos of Louisiana, Inc. -- Tunica-Biloxi
9. Grand Casinos of Louisiana, Inc. - Coushatta
(i) Magnum Investments of Lake Charles, Inc.
(1) R&W Investments of Lake Charles, Inc.
10. Grand Casinos Pechanga, Inc.
11. Grand Casinos of Washington, Inc.
12. Grand Media & Electronic Distributing, Inc.
13. Grand Media Buying, Inc.
14. BL Resorts I, LLC
15. GCG Resorts I, LLC
<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. 333-39009, 333-24845, and
333-24837.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 25, 1998
<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-4, File No. 333-39009 and Form S-8,
File Nos. 333-24845, and 333-24837.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada,
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 243,602
<SECURITIES> 13,110
<RECEIVABLES> 15,644
<ALLOWANCES> 0
<INVENTORY> 6,443
<CURRENT-ASSETS> 289,621
<PP&E> 1,045,480
<DEPRECIATION> 104,459
<TOTAL-ASSETS> 1,333,737
<CURRENT-LIABILITIES> 167,602
<BONDS> 566,434
0
0
<COMMON> 420
<OTHER-SE> 502,196
<TOTAL-LIABILITY-AND-EQUITY> 1,333,737
<SALES> 607,421
<TOTAL-REVENUES> 653,492
<CGS> 216,160
<TOTAL-COSTS> 469,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,847
<INCOME-PRETAX> 107,015
<INCOME-TAX> 40,824
<INCOME-CONTINUING> 66,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,191
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> MAR-30-1997
<CASH> 128,556
<SECURITIES> 0
<RECEIVABLES> 15,094
<ALLOWANCES> 0
<INVENTORY> 5,766
<CURRENT-ASSETS> 181,200
<PP&E> 920,307
<DEPRECIATION> 71,498
<TOTAL-ASSETS> 1,132,378
<CURRENT-LIABILITIES> 98,253
<BONDS> 454,606
0
0
<COMMON> 418
<OTHER-SE> 452,571
<TOTAL-LIABILITY-AND-EQUITY> 1,132,378
<SALES> 142,170
<TOTAL-REVENUES> 152,339
<CGS> 51,345
<TOTAL-COSTS> 111,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,646
<INCOME-PRETAX> 23,742
<INCOME-TAX> 9,161
<INCOME-CONTINUING> 14,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,581
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 132,601
<SECURITIES> 0
<RECEIVABLES> 16,536
<ALLOWANCES> 0
<INVENTORY> 5,844
<CURRENT-ASSETS> 184,971
<PP&E> 902,720
<DEPRECIATION> 82,229
<TOTAL-ASSETS> 1,186,987
<CURRENT-LIABILITIES> 94,125
<BONDS> 454,600
0
0
<COMMON> 419
<OTHER-SE> 470,907
<TOTAL-LIABILITY-AND-EQUITY> 1,186,987
<SALES> 293,007
<TOTAL-REVENUES> 315,129
<CGS> 105,147
<TOTAL-COSTS> 223,188
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,617
<INCOME-PRETAX> 53,583
<INCOME-TAX> 20,686
<INCOME-CONTINUING> 32,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,897
<EPS-PRIMARY> .79
<EPS-DILUTED> .77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> SEP-28-1997
<CASH> 140,333
<SECURITIES> 0
<RECEIVABLES> 17,407
<ALLOWANCES> 0
<INVENTORY> 6,053
<CURRENT-ASSETS> 192,569
<PP&E> 1,027,266
<DEPRECIATION> 93,061
<TOTAL-ASSETS> 1,227,660
<CURRENT-LIABILITIES> 116,988
<BONDS> 454,498
0
0
<COMMON> 420
<OTHER-SE> 494,099
<TOTAL-LIABILITY-AND-EQUITY> 1,227,660
<SALES> 460,586
<TOTAL-REVENUES> 495,360
<CGS> 162,539
<TOTAL-COSTS> 346,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,572
<INCOME-PRETAX> 89,563
<INCOME-TAX> 34,503
<INCOME-CONTINUING> 55,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,060
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.28
</TABLE>
<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> (100,969)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> (2.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> MAR-31-1996
<CASH> 305,553
<SECURITIES> 0
<RECEIVABLES> 16,354
<ALLOWANCES> 0
<INVENTORY> 2,638
<CURRENT-ASSETS> 342,562
<PP&E> 663,953
<DEPRECIATION> 39,536
<TOTAL-ASSETS> 1,176,972
<CURRENT-LIABILITIES> 83,769
<BONDS> 457,805
0
0
<COMMON> 416
<OTHER-SE> 559,260
<TOTAL-LIABILITY-AND-EQUITY> 1,176,972
<SALES> 103,836
<TOTAL-REVENUES> 109,961
<CGS> 33,222
<TOTAL-COSTS> 76,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,725
<INCOME-PRETAX> 27,816
<INCOME-TAX> 10,169
<INCOME-CONTINUING> 17,647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,647
<EPS-PRIMARY> .43
<EPS-DILUTED> .41
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> JUN-30-1996
<CASH> 201,173
<SECURITIES> 0
<RECEIVABLES> 18,662
<ALLOWANCES> 0
<INVENTORY> 4,327
<CURRENT-ASSETS> 246,608
<PP&E> 772,962
<DEPRECIATION> 45,445
<TOTAL-ASSETS> 1,214,362
<CURRENT-LIABILITIES> 101,256
<BONDS> 457,439
0
0
<COMMON> 416
<OTHER-SE> 579,908
<TOTAL-LIABILITY-AND-EQUITY> 1,214,362
<SALES> 216,814
<TOTAL-REVENUES> 230,134
<CGS> 68,830
<TOTAL-COSTS> 152,190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,566
<INCOME-PRETAX> 59,657
<INCOME-TAX> 22,601
<INCOME-CONTINUING> 37,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,056
<EPS-PRIMARY> .89
<EPS-DILUTED> .85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1997
<PERIOD-END> SEP-29-1996
<CASH> 126,290
<SECURITIES> 0
<RECEIVABLES> 19,611
<ALLOWANCES> 0
<INVENTORY> 5,491
<CURRENT-ASSETS> 179,819
<PP&E> 837,657
<DEPRECIATION> 53,213
<TOTAL-ASSETS> 1,230,131
<CURRENT-LIABILITIES> 105,005
<BONDS> 468,121
0
0
<COMMON> 418
<OTHER-SE> 582,098
<TOTAL-LIABILITY-AND-EQUITY> 1,230,131
<SALES> 363,539
<TOTAL-REVENUES> 386,500
<CGS> 121,942
<TOTAL-COSTS> 265,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,733
<INCOME-PRETAX> 74,451
<INCOME-TAX> 33,892
<INCOME-CONTINUING> 40,559
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,559
<EPS-PRIMARY> .98
<EPS-DILUTED> .93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 341,674
<SECURITIES> 14,200
<RECEIVABLES> 10,864
<ALLOWANCES> 0
<INVENTORY> 2,725
<CURRENT-ASSETS> 379,869
<PP&E> 577,023
<DEPRECIATION> 34,185
<TOTAL-ASSETS> 1,128,108
<CURRENT-LIABILITIES> 55,315
<BONDS> 459,070
0
0
<COMMON> 410
<OTHER-SE> 525,690
<TOTAL-LIABILITY-AND-EQUITY> 1,128,108
<SALES> 372,872
<TOTAL-REVENUES> 391,727
<CGS> 113,476
<TOTAL-COSTS> 256,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,187
<INCOME-PRETAX> 110,485
<INCOME-TAX> 42,974
<INCOME-CONTINUING> 70,105
<DISCONTINUED> 0
<EXTRAORDINARY> 17,097
<CHANGES> 0
<NET-INCOME> 53,008
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.49
</TABLE>
<PAGE> 1
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 24
Consolidated Balance Sheets at December 28, 1997 and
December 29, 1996......................................... 25
Consolidated Statements of Operations for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 26
Consolidated Statements of Shareholders' Equity for the
period from January 1, 1995 to December 28, 1997.......... 27
Consolidated Statements of Cash Flows for the fiscal years
ended December 28, 1997, December 29, 1996 and December
31, 1995.................................................. 28
Notes to Consolidated Financial Statements.................. 30
</TABLE>
23
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Stratosphere Corporation:
We have audited the accompanying consolidated balance sheets of
Stratosphere Corporation (a Delaware corporation) and subsidiaries ("the
Company"), debtors-in-possession, as of December 28, 1997 and December 29, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years ended December 28, 1997, 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 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for the years ended
December 28, 1997, 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 10. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 6, 1998
24
<PAGE> 3
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 20,326,317 $ 22,558,804
Cash and cash equivalents -- restricted................... 471,273 --
Investments -- restricted................................. 3,139,469 2,678,344
Securities available for sale............................. -- 2,000,905
Accounts receivable, net.................................. 2,479,512 4,575,490
Other current assets...................................... 5,753,608 6,127,325
------------- -------------
Total Current Assets........................................ 32,170,179 37,940,868
------------- -------------
Property and Equipment, Net................................. 122,381,979 130,000,000
------------- -------------
Other Assets:
Deferred financing costs -- net........................... 624,156 12,339,097
Related party receivable -- net........................... 800,000 800,000
------------- -------------
Total Other Assets.......................................... 1,424,156 13,139,097
------------- -------------
TOTAL ASSETS................................................ $ 155,976,314 $ 181,079,965
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable-trade.................................... $ 1,124,425 $ 1,250,786
Accounts payable-construction............................. -- 858,665
Current installments of long-term debt.................... 148,017 429,103
Current installments of capital lease obligations......... -- 8,684,360
Accrued interest.......................................... 263,457 18,644,462
Accrued payroll and related expenses...................... 5,778,505 5,005,047
Affiliate payable......................................... -- 1,878,717
Other accrued expenses.................................... 6,156,276 9,231,792
------------- -------------
Total Current Liabilities................................... 13,470,680 45,982,932
------------- -------------
Long-term Liabilities:
Long-term debt -- less current installments............... -- 203,000,000
Long-term note payable -- less current installments....... 296,033 --
Capital lease obligations -- less current installments.... -- 19,539,815
Note payable to affiliate................................. -- 50,000,000
------------- -------------
Total Long-Term Liabilities................................. 296,033 272,539,815
------------- -------------
Liabilities Subject to Compromise........................... 299,208,988 --
------------- -------------
TOTAL LIABILITIES........................................... 312,975,701 318,522,747
------------- -------------
Commitments and Contingencies
Shareholders' 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 at December
28, 1997 and December 29, 1996......................... 583,931 583,931
Additional paid-in-capital................................ 218,546,069 218,787,643
Accumulated deficit....................................... (376,129,387) (356,814,356)
------------- -------------
Total Shareholders' Deficit................................. (156,999,387) (137,442,782)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $ 155,976,314 $ 181,079,965
============= =============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 4
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Casino...................................... $ 62,981,160 $ 47,901,144 $ --
Hotel....................................... 24,006,537 19,698,730 --
Food and beverage........................... 33,143,254 26,825,729 --
Tower, retail and other income.............. 30,339,898 25,541,729 59,864
------------ ------------- ------------
Gross Revenues................................ 150,470,849 119,967,332 59,864
Less: Promotional allowances................ 12,955,013 11,228,465 --
------------ ------------- ------------
NET REVENUES.................................. 137,515,836 108,738,867 59,864
------------ ------------- ------------
COSTS AND EXPENSES:
Casino...................................... 27,838,121 21,474,255 --
Hotel....................................... 8,554,553 7,082,100 --
Food and beverage........................... 25,552,348 22,416,703 --
Other operating expenses.................... 11,755,549 9,444,697 --
Depreciation and amortization............... 7,843,230 11,477,925 --
Pre-opening costs amortization.............. -- 23,909,146 --
Impairment of long-lived assets............. -- 295,946,633 --
Selling, general and administrative......... 53,166,758 48,153,596 947,008
------------ ------------- ------------
Total Costs and Expenses................. 134,710,559 439,905,055 947,008
------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS................. 2,805,277 (331,166,188) (887,144)
------------ ------------- ------------
OTHER INCOME (EXPENSE):
Interest income............................. 47,674 3,992,108 8,361,087
Interest expense (Contractual Interest for
fiscal year 1997 estimated at
$42,132,407)............................. (5,491,686) (21,761,565) (11,970,178)
Gain on sale of assets...................... 14,186 93,025 (166,815)
------------ ------------- ------------
Total Other Expense, net................. (5,429,826) (17,676,432) (3,775,906)
------------ ------------- ------------
Loss Before Reorganization Items and Income
Taxes....................................... (2,624,549) (348,842,620) (4,663,050)
------------ ------------- ------------
Reorganization Items:......................... (16,690,482) -- --
Loss Before Income Taxes...................... (19,315,031) (348,842,620) (4,663,050)
------------ ------------- ------------
Income Taxes.................................. -- -- --
------------ ------------- ------------
NET LOSS...................................... $(19,315,031) $(348,842,620) $ (4,663,050)
============ ============= ============
LOSS PER COMMON SHARE......................... $(0.33) $(6.00) $(0.12)
============ ============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 58,393,105 58,134,811 37,583,065
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 5
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PREFERRED PAID-IN ACCUMULATED EQUITY
STOCK STOCK CAPITAL DEFICIT (DEFICIT)
------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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
purchase warrants................ 816 -- 722,590 -- 723,406
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)
Net loss........................... -- -- -- (19,315,031) (19,315,031)
Vegas World acquisition (leasehold
settlement) cost................. -- -- (240,000) -- (240,000)
Unrealized holding loss on
investment....................... -- -- (1,574) -- (1,574)
-------- ---- ------------ ------------- -------------
Balances at December 28, 1997...... $583,931 $ -- $218,546,069 $(376,129,387) $(156,999,387)
======== ==== ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 6
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(19,315,031) $(348,842,620) $ (4,663,050)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 8,404,853 13,407,234 1,718,209
Amortization of pre-opening costs....................... -- 23,909,146 --
Reorganization Items:
Write-off of debt issuance costs...................... 11,210,108 -- --
Professional Fees..................................... 5,500,000 -- --
Management Retention Expense.......................... 820,000 -- --
Interest Earned on Accumulated Cash During Chapter 11
Proceedings......................................... (839,626) -- --
Provision for doubtful accounts......................... 272,481 3,166,829 --
Impairment of long-lived assets......................... -- 295,946,633 --
(Gain) loss on sale or disposal of assets............... (14,186) 214,495 166,815
Changes in operating assets and liabilities:
Accounts receivable................................... 1,992,195 (278,951) (4,485,681)
Other current assets.................................. 373,717 (4,070,428) (2,051,650)
Accounts payable--trade (pre-petition)................ (902,924) -- --
Accounts payable--trade (post-petition)............... 1,124,425 912,041 499,630
Other accrued expenses (pre-petition)................. (7,715,597) -- --
Other accrued expenses (post-petition)................ 8,340,789 28,931,755 3,928,575
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES BEFORE
REORGANIZATION ITEMS...................................... 9,251,204 13,296,134 (4,887,152)
------------ ------------- ------------
Increases (decreases) to Cash Resulting from
Reorganization Items:
Professional fees paid.................................. (2,679,802) -- --
Management Retention Disbursements...................... 217,250 -- --
Interest Earned on Accumulated Cash During Chapter 11
Proceedings........................................... 839,626 -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) REORGANIZATION ITEMS......... (1,622,926) -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 7,628,278 13,296,134 (4,887,152)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to stockholder................................... -- -- (4,411,798)
Change in cash and cash equivalents-restricted............ (472,847) 109,913,662 (115,268,775)
Change in investments-restricted.......................... (461,125) 2,678,344 --
Change in securities available for sale................... 2,000,905 3,140,045 (5,140,950)
Payments for property and equipment....................... (1,403,341) (191,301,881) (124,470,643)
Change in construction payables........................... (544,133) (32,664,947) 29,883,865
Pre-opening costs......................................... -- (18,112,284) (5,796,862)
Increase in related party receivable and other............ (168,697) (3,777,687) --
Cash proceeds from sale of property and equipment......... 1,585,827 -- 928,134
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 536,589 (130,124,748) (224,277,029)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net................ -- 1,296,446 84,470,097
Proceeds from exercise of stock options/common stock
purchase warrants....................................... -- -- 34,304,112
Costs of secondary stock offering......................... -- (248,046) --
Debt issuance and deferred financing costs................ (6,250) (760,707) (11,221,825)
Change in prepaid offering costs.......................... -- -- 935,395
Proceeds from issuance of long-term debt.................. -- 1,170,375 216,493,456
Payments on long-term debt................................ (429,103) (741,272) (3,737,763)
Payments on capital lease obligations subject to
compromise.............................................. (10,266,760) (5,000,000) --
Increase in affiliate payable............................. 544,759 1,074,852 --
Proceeds from the issuance of debt to affiliate........... -- 50,000,000 --
Vegas World acquisition (leasehold settlement) costs...... (240,000) -- --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (10,397,354) 46,791,648 321,243,472
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents........ (2,232,487) (70,036,966) 92,079,291
Cash and cash equivalents -- beginning of period............ 22,558,804 92,595,770 516,479
------------ ------------- ------------
Cash and cash equivalents -- end of period.................. $ 20,326,317 $ 22,558,804 $ 92,595,770
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 7
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest-net of capitalized interest................ $2,097,540 $ 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 equipment through capital lease......... $ 444,050 $33,224,175 $ --
Purchase of land, buildings, furniture and equipment
from stockholder (principally Vegas World assets)
as follows:
Purchase price................................. $ -- $ -- $ 1,000,000
Cash paid...................................... -- -- --
---------- ----------- ------------
Note payable to stockholder.................... -- -- 1,000,000
Preferential distribution to stockholder....... (240,000) -- 1,226,841
---------- ----------- ------------
Predecessor cost of assets acquired for
non-cash consideration.................... $ (240,000) $ -- $ 2,226,841
========== =========== ============
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
Issuance of preferred stock to parent in payment of
notes payable.................................... $ -- $ -- $ 33,524,860
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 8
STRATOSPHERE CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
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 39.4% 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 "Tower"). The Company
commenced operations of the resort facility on April 29, 1996.
On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, 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 ("Bankruptcy
Court") 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. The fiscal year 1997 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 and
continue as a going concern.
BASIS OF PRESENTATION
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
1 cases are in process, Stratosphere Corporation and SGC continue in possession
of their properties and operate and manage their business as a
debtor-in-possession pursuant to the Bankruptcy Code.
In addition, as a result of the restructuring (See Note 10), the Company
has implemented the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" in the preparation of the accompanying December 28,
1997 consolidated financial statements. The Company has not separately reported
financial statements of the non-debtor subsidiaries as it has determined such
disclosure is not material to the consolidated financial statements.
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.
30
<PAGE> 9
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Food and Beverage.......................................... $4,795 $3,339
Rooms...................................................... 1,220 458
Other...................................................... 358 59
------ ------
$6,373 $3,856
====== ======
</TABLE>
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 as of December
28, 1997, consist primarily of funds escrowed pursuant to the Management
Retention Agreements.
INVESTMENTS RESTRICTED
Investments restricted in fiscal years 1997 and 1996 consist primarily of
funds pledged for workers' compensation benefits.
SECURITIES AVAILABLE FOR SALE
The Company invested 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. There
were no such investments as of December 28, 1997.
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
and depreciated over their useful lives. 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.
31
<PAGE> 10
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of property and equipment is computed using
the straight-line method over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 39 years
Furniture, fixtures and equipment........................... 3-15 years
Land improvements........................................... 15 years
</TABLE>
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
and $13,223,121 during the fiscal years 1996 and 1995 respectively. There was no
capitalized interest during fiscal year 1997.
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, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121)". 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 (See Note 4). 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 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. Prior to the Petition Date such
amount was amortized using the straight line method over the term of the First
Mortgage 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 fiscal year ended
December 31, 1994. On the Petition Date the Company expensed unamortized
deferred debt issuance costs. The total write-off classified as "Reorganization
Items" on the consolidated statement of operations was $11.2 million or $0.19
per common share.
PRE-OPENING COSTS
Pre-opening costs incurred prior to the opening were 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 year ended December 28, 1997 or any
fiscal years ending prior to 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 11 to the asset and liability method of
32
<PAGE> 11
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE ("EPS")
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128") in 1997. However, there is no effect on the EPS calculation as all
Common Stock equivalents are anti-dilutive. Under the Restated Second Amended
Plan, all existing equity interests (including Common Stock, options, and
warrants) would be canceled.
RECLASSIFICATIONS
Certain reclassifications, having no effect on net losses, have been made
to the prior years consolidated financial statements to conform with the current
fiscal 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 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Hotel and related........................................... $ 664 $3,691
Gaming...................................................... 947 554
Other....................................................... 1,162 519
------ ------
Total....................................................... 2,773 4,764
Less allowance for doubtful accounts........................ (293) (189)
------ ------
$2,480 $4,575
====== ======
</TABLE>
33
<PAGE> 12
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) OTHER CURRENT ASSETS
Other current assets consists of the following as of December 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Inventory................................................... $2,781 $3,270
Prepaid expenses............................................ 2,973 2,408
Other....................................................... -- 449
------ ------
$5,754 $6,127
====== ======
</TABLE>
(4) PROPERTY AND EQUIPMENT -- NET
Property and equipment consist of the following as of December 28, 1997 and
December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvement, including land held for
development............................................ $ 21,427 $ 21,128
Building and improvements................................ 66,717 66,673
Furniture, fixtures and equipment........................ 36,732 37,717
Construction in progress................................. 16,263 15,919
-------- --------
141,139 141,437
Less accumulated depreciation............................ (18,757) (11,437)
-------- --------
$122,382 $130,000
======== ========
</TABLE>
Included in property and equipment at December 28, 1997 and December 29,
1996, are assets recorded under capital leases of $31.4 million and $33.5,
respectively. Accumulated depreciation and amortization at December 28, 1997 and
December 29, 1996, includes amounts recorded for capital leases of $6,547,165
and $3,073,185, respectively.
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 on December 29, 1996. The impairment loss was measured as the
amount by which the carrying value of the long-lived assets exceeded their
estimated fair market value. Management made an assessment of the fair market
value of each long-lived asset category to reflect the impairment loss. As a
result of the reduced carrying amount of the impaired assets, depreciation and
amortization expense has been reduced for future periods. Based on management's
assessment of the estimated fair market value of each long-lived asset category,
as of December 28, 1997, there was no impairment losses realized during fiscal
year 1997 pursuant to SFAS 121.
Future adjustment of asset carry amounts is likely with the anticipated
adoption of "Fresh-Start Reporting" upon the effective date of a plan of
reorganization confirmed by the Bankruptcy Court.
34
<PAGE> 13
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER ACCRUED EXPENSES
Other accrued expenses, exclusive of pre-petition liabilities subject to
compromise for fiscal year 1997, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued liabilities......................................... $4,278 $5,147
Deposits.................................................... 506 444
Accrued taxes............................................... 710 1,437
Other....................................................... 662 2,204
------ ------
$6,156 $9,232
====== ======
</TABLE>
(6) LONG TERM DEBT
A summary of debt outstanding, exclusive of amounts classified to
"Liabilities subject to compromise" for fiscal year 1997, is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
14 1/4% First Mortgage Notes due April 1, 2002 (see
description following).................................... $ -- $203,000
Other....................................................... 444 429
----- --------
444 203,429
Less current portion........................................ (148) (429)
----- --------
Long-term debt-less current portion......................... $ 296 $203,000
===== ========
</TABLE>
The prime rate of interest was 8.5% and 8.25% at December 28, 1997 and
December 29, 1996, respectively.
14 1/4% 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 semi-annual periods (as defined
in the Indenture) ending March 31, once operational. The fair market value of
the First Mortgage Notes at December 29, 1996, was $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. As of
December 28, 1997 and December 29, 1996, the Company was in default of the
Indenture covenants. The First Mortgage Notes are collateralized by
substantially all of the Company's real property. 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 Company 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 principal balance and accrued interest was $203,000,000 and $20,661,467,
respectively. Since the Petition Date, both principal and interest have been
reclassified to "Liabilities subject to compromise" on the consolidated balance
sheet (See Note 9). As of December 28, 1997, the Company accrued interest of
$20,661,467 and the fair market value of the First Mortgage Notes was
approximately $113,680,000.
35
<PAGE> 14
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future aggregate annual maturities of non-affiliate long-term debt at
December 28, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $148
1999........................................................ 148
2000........................................................ 148
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
----
Total.................................................. $444
====
</TABLE>
(7) 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 terms of 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. On July 17, 1997, the Company reduced its capital
lease obligations by an additional $1.6 million. The funds were generated by the
sale of 410 warehoused slot machines and the net proceeds were applied to future
principal payments on a pro rata basis pursuant to the terms of the lease
agreement.
Since the Petition Date, the capital lease obligation has been classified
to "Liabilities subject to compromise." The Company anticipates the continuation
of payments on its capital lease obligations pursuant to the pre-petition
Standstill Agreement and an order entered by the Bankruptcy Court on March 4,
1997 approving a stipulation for adequate protection (See Note 9).
Future minimum lease payments, excluding contingent rentals, due under
non-cancelable operating and capital leases for the five years subsequent to
December 28, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1998....................................................... $ 9,922 $1,818
1999....................................................... 9,616 826
2000....................................................... -- 164
2001....................................................... -- 55
2002....................................................... -- --
Thereafter................................................. -- --
-------
Total minimum lease payments............................... 19,538
Less: amounts representing interest @ 8.38%................ (1,580)
Present value of minimum capital lease payments............ 17,958
Less: current installment.................................. (8,684)
-------
Obligations under capital leases $ 9,274
=======
</TABLE>
Rent expense from the operating leases was $2,131,440, $1,298,569, and $0
in fiscal years 1997, 1996 and 1995, respectively.
36
<PAGE> 15
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) MINIMUM LEASE INCOME
The Company has entered into a number of operating leases in relation to
food and beverage and retail outlets. The future minimum lease income receivable
under these leases for the five years subsequent to December 28, 1997, consisted
of the following (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,023
1999........................................................ 1,000
2000........................................................ 1,000
2001........................................................ 1,000
2002........................................................ 1,000
Thereafter.................................................. 13,333
-------
$18,356
=======
</TABLE>
(9) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under reorganization proceedings consist
of the following as of December 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Accounts payable trade...................................... $ 348
Accrued payroll and related expenses........................ 58
Affiliate payable........................................... 2,423
Other accrued expenses...................................... 4,761
Capital lease obligations................................... 17,958
14 1/4% First Mortgage Notes -- including accrued interest
through 1/27/97........................................... 223,661
Notes payable to affiliate.................................. 50,000
--------
$299,209
========
</TABLE>
The Company ceased accruing interest on the 14 1/4% First Mortgage Notes
and the note payable to affiliate as of the Petition Date. Although classified
to "Liabilities subject to compromise," the Company anticipates the continuation
of payments on its capital lease obligations pursuant to a pre-petition
Standstill Agreement and an order entered by the Bankruptcy Court on March 4,
1997, approving a stipulation for adequate protection. The December 28, 1997,
consolidated balance sheet does not reflect as liabilities the total amount of
the claims as filed against the Debtors in the bankruptcy proceedings since a
reasonable estimate of additional bankruptcy claims and pre-petition liabilities
and the settlement value of certain contingent and/or disputed bankruptcy claims
could not be made at December 28, 1997. No liabilities were classified as
subject to compromise as of December 29, 1996.
(10) RESTRUCTURING
On January 27, 1997, Stratosphere Corporation and its wholly-owned
subsidiary Stratosphere Gaming Corp. 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 to operate their business subject to Bankruptcy Court supervision.
The Debtors and Grand Casinos, Inc. ("Grand") filed a Joint Plan of
Reorganization (the "Plan") on January 27, 1997.
The Plan and the various underlying agreements upon which it was
predicated, included several conditions for it to become effective, some of
which the Debtors could not ultimately satisfy. Because certain
37
<PAGE> 16
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
closing conditions could not be satisfied, the Debtors and Grand commenced
discussions in early May 1997 regarding possible alternatives to the Plan. Grand
and the Debtors ultimately agreed upon the terms of an alternative restructuring
plan. On June 20, 1997, the Debtors filed their First Amended Plan of
Reorganization ("First Amended Plan") to implement the terms of this agreement.
The First Amended Plan reserved the right for the Company's Board of
Directors to entertain and accept competing proposals which would be
economically more advantageous to the creditors of the Debtors' estates. On or
about July 15, 1997, the Debtors received a competing restructuring proposal
from High River Limited Partnership and American Real Estate Partners, L.P.
(collectively "High River"), holders of a substantial portion of the Company's
First Mortgage Notes. High River is controlled by New York financier, Carl
Icahn. After analyzing the High River proposal and negotiating certain
modifications thereto, the independent members of the Company's Board of
Directors preliminarily concluded that the High River proposal was preferable to
the First Amended Plan and thereafter determined not to proceed with the First
Amended Plan. On November 7, 1997, the Debtors filed their Second Amended Plan
of Reorganization ("Second Amended Plan"). The filing of the Second Amended Plan
followed substantial negotiation among the Debtors, High River and Grace
Brothers, Ltd. (the remaining representative of the official committee of First
Mortgage Note Holders). High River and Grace Brothers, Ltd. could not reach
agreement amongst themselves on the terms of a plan of reorganization which they
would find to be mutually acceptable. Rather than wait for the outcome of
protracted negotiations between High River and Grace Brothers, Ltd., with no
guarantee that such negotiations would result in a proposal acceptable to such
parties and to the Debtors, the Debtors filed the Second Amended Plan. On
February 13, 1998, the Debtors filed their Restated Second Amended Plan of
Reorganization ("Restated Second Amended Plan") which included the results of
subsequent negotiations between High River and Grace Brothers, Ltd. Among other
things, under the Restated Second Amended Plan, the secured portion of the
Company's First Mortgage Notes (estimated at $120.0 million) would be converted
into one hundred percent (100%) of the equity of reorganized Stratosphere
Corporation, and all currently outstanding Common Stock of the Company and all
other existing equity interests (including stock options and warrants) of the
Company would be canceled. The remaining portion of the First Mortgage Notes
claim (approximately $104.0 million) would be treated as a general unsecured
claim. In addition to the deficiency claim arising from the First Mortgage
Notes, the general unsecured class of claims would include the balance of the
Grand note (approximately at $52.4 million) and other general unsecured claims.
The Restated Second Amended Plan assumes that the general unsecured class of
claims would participate in a pro rata share of approximately $6.0 million in
full settlement of their related claims. In addition, the Restated Second
Amended Plan assumes that the reorganized Stratosphere Corporation will continue
to make payments pursuant to its capital lease and operating lease agreements. A
copy of the Restated Second Amended Plan and disclosure statement is included
herein as an exhibit. The disclosure statement accompanying the Restated Second
Amended Plan was approved, with certain modifications, by the Bankruptcy Court
on February 26, 1998, and a confirmation hearing has been scheduled on May 15,
1998. There can be no assurance that the Restated Second Amended Plan will be
confirmed by the Bankruptcy Court. In the event a plan of reorganization cannot
be confirmed, the Company may be forced to liquidate its assets.
The Company has implemented the guidance provided by AICPA Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" and, accordingly, expenses reorganization items as incurred
(See Note 11). These items include professional fees, management retention
compensation, interest income earned and any other costs and expenses deemed to
have resulted from reorganization efforts since the Petition Date. All
professional fees require approval by the Bankruptcy Court prior to the Company
making payment in respect thereof.
Under Chapter 11 Reorganization, actions to enforce claims against the
Debtors or Debtors' property are stayed pending further order of the Bankruptcy
Court if those claims arose, or are based on events that occurred, on or before
the Petition Date, and such claims can not be paid or restructured prior to the
38
<PAGE> 17
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conclusion of the Chapter 11 proceedings or approval of the Bankruptcy Court.
Other liabilities may arise or be subject to compromise as a result of rejection
of executory contracts, including leases, or the Bankruptcy Court's resolution
of claims for contingencies and other disputed amounts. Liabilities subject to
compromise, included in the accompanying consolidated balance sheets, represent
the Company's estimate of the Debtors' pre-petition liabilities which are
subject to compromise (See Note 9).
(11) REORGANIZATION ITEMS
Reorganization items consisted of the following for the twelve month period
ended December 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Write-off of debt issuance costs............................ $11,210
Professional fees........................................... 5,500
Interest earned on accumulated cash during Chapter 11
proceedings............................................... (840)
Management retention compensation........................... 820
-------
$16,690
=======
</TABLE>
Costs and expenses related to the reorganization of the Company have been
classified as Reorganization items in the consolidated statement of operations
since the Petition Date. Prior to the Petition Date, such costs and expenses
were classified as selling, general and administrative in the consolidated
statement of operations. Such expenses totaled approximately $1.0 million during
fiscal year 1996.
(12) SHAREHOLDERS' 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 commission 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 Bob Stupak
Enterprises ("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 13).
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
39
<PAGE> 18
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operated on a stand alone basis during the periods presented. 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 13).
- 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 13), 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 also agreed that it would 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 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, former Chief Executive Officer and a former 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 former director of the Company and a former 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 is used to facilitate a 500-car
parking lot. The Company issued 1,050,000 shares of Common
40
<PAGE> 19
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
There were no additional issuances of Common Stock or other equity during
1997. As of December 28, 1997, the Company had 58,393,105 shares of Common Stock
issued and outstanding. Under the terms and conditions of the Restated Second
Amended Plan, all currently outstanding Common Stock and all other existing
equity interests of the Company would be canceled.
STOCK OPTION PLANS
The Company has reserved for issuance of 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"). The Company does not plan
to issue additional stock options under either plan since all outstanding stock
is anticipated to be canceled upon Bankruptcy Court confirmation of a plan of
reorganization.
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,
non-qualified 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 28, 1997, 1,083,000 shares were available for granting further
options and options for 1,542,167 shares were outstanding at $4.00 to $8.00 per
share, of which options for 1,040,167 were exercisable. During 1997 10,000
shares became void upon employee separations. There was no exercises of stock
options during fiscal year 1997. During fiscal year 1996, 134,833 shares were
exercised at $4.25 per share and options for 527,500 shares became void upon
employee separations. There were no exercises of stock options during fiscal
years 1995 and 1994. The Company anticipates that all options will be canceled
upon Bankruptcy Court confirmation of a plan of reorganization. The Company does
not expect any issuance or exercise of additional stock options.
41
<PAGE> 20
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Director's Plan may not be exercised more than ten years after the date of
adoption of the Director' 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 28, 1997, 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 180,000 were exercisable. No options were exercised
during 1997. Options for 10,000 shares were exercised during fiscal year 1996
and no options were exercised during fiscal years 1995 and 1994. The Company
anticipates that all options will be canceled upon 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 stock options
pursuant to the restructuring described in Note 10, no Financial Accounting
Standards Board No. 123 "Accounting for Stock-Based Compensation" pro forma
disclosures have been made.
(13) 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 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
amounted to $19,222,963, 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
42
<PAGE> 21
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisting of goods and services (cash, casino action, hotel room nights,
beverages at casino bars, show tickets, admissions to the 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 Tower project so long
as the escrow remains in good standing. The arrangement anticipated the Company
invoicing and being reimbursed by the escrow fund for "one visit" vacation
packages 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 charged the actual cost of providing goods and services for "multiple
visit" vacation packages. Certain goods and services (agreed upon numbers of
hotel room nights, admissions to the Tower and beverages at casino bars) were
provided by Stratosphere without reimbursement. In conjunction with Stupak
providing all other benefits relating to these vacation packages. 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, as a result of
insufficient assets to the escrow. 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 Stupak being able to make adequate arrangements
that would be subject to Bankruptcy Court approval.
(14) 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. From the
opening on April 29, 1996, upon the Company's request, Grand continued to
provide consulting services until such services were terminated as of the
Petition Date.
(15) INCOME TAXES
The income tax benefit attributable to losses from operations for the years
ended December 28, 1997, December 29, 1996 and December 31, 1995 differed from
the amounts computed by applying the federal income tax rate of 35% as a result
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current.......................................... $ -- $ -- $ --
Deferred benefit................................. (6,104) (122,095) (1,632)
Increase in deferred tax asset valuation
allowance...................................... 6,104 122,095 1,632
------- --------- -------
$ -- $ -- $ --
======= ========= =======
</TABLE>
43
<PAGE> 22
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities for the Company is as follows at December 28, 1997
and December 29, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for doubtful accounts..................... $ 103 $ 66
Progressive jackpots................................ 108 258
Accrued vacation, workers' compensation............. (511) 1,753
Outstanding chip and token liability................ 80 189
Other............................................... (897) --
--------- ---------
(1,117) 2,266
--------- ---------
Long-term:
Depreciation........................................ (11,017) (1,060)
Pre-opening costs................................... 5,579 7,252
Allowance for doubtful accounts..................... 1,101 1,042
Excess of tax over book basis of assets acquired in
connection with Vegas World Asset Purchase....... 6,850 6,850
Excess of tax over book basis of assets due to write
down of assets................................... 98,338 103,581
Net operating loss carryforward..................... 35,932 9,631
--------- ---------
136,783 127,296
--------- ---------
Total deferred taxes................................ 135,666 129,562
Valuation allowance................................. (135,666) (129,562)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The Company recorded a valuation allowance at December 28, 1997, December
29, 1996 and December 31, 1995, relating to recorded tax benefits because of the
significant uncertainty as to whether such benefits will ever be realized.
The provision (benefit) for income taxes differs from the amount computed
at the federal statutory rate as a result of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................. (35)% (35)% (35)%
Permanent differences...................................
Increase in deferred tax asset valuation allowance...... 35% 35% 35%
--- --- ---
--% --% --%
=== === ===
</TABLE>
As of December 28, 1997, the Company has a net operating loss carryforward
of approximately $102.7 million. 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.
(16) 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 accrued interest at the rate of 14 1/4% up to the
Petition Date.
44
<PAGE> 23
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This liability is classified under the caption liabilities subject to compromise
in the consolidated balance sheet at December 28, 1997.
Further, pursuant to the Memorandum of Agreement, Grand also entered into a
Standby Equity Commitment with the Company pursuant to which Grand 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, up to
$20.0 million of additional equity 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 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 would retain the
right to obtain the equity funds which would otherwise be provided by the
Standby Equity Commitment through other means deemed appropriate.
On February 19, 1998, the Bankruptcy Court determined that the Standby
Equity Commitment was an executory contract that the Company could not assume
due to its inability to perform and therefore, it was determined that the
Company could not compel Grand to perform under its obligation pursuant to the
agreement.
In connection with the Management and Development Agreement previously
discussed in Note 14, 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 during fiscal year 1997.
In connection with the construction of the Company's facility and its
normal operations, approximately $187,041, $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 28, 1997,
December 29, 1996 and December 31, 1995, respectively.
During 1996 the Company billed Stupak $4,777,687, of which $1,000,000 was
paid for amounts related to the Company providing its facility to service
Stupak's vacation packages. Accordingly, the Company has reserved the unfunded
amount of $2,977,687 in 1996. Stupak has disputed the billing and the escrow
account set up to satisfy these obligations remains unfunded. The amount of the
net receivable is classified as a related party receivable under other assets in
the consolidated balance sheets.
(17) COMMITMENTS
On July 30, 1997, the Bankruptcy Court approved management retention
agreements ("Retention Agreements") for eleven of the Company's executives. The
executives are divided into two groups for purposes of computing retention
compensation pursuant to the Retention Agreement. The "Group One" executives
consists of nine individuals who will receive additional monthly retention
compensation of 5% of their annual salary effective May 1, 1997. The first three
months of retention compensation is placed in escrow for the executive and is
payable on the earlier of (i) an involuntary termination or, (ii) ninety days
after a sale of the Company or confirmation of a plan of reorganization by the
Bankruptcy Court. After the initial three month period, the amount of continuing
retention compensation is accrued monthly and paid quarterly until the earlier
of the termination of the executive, the sale of the Company or confirmation of
a plan of reorganization by the Bankruptcy Court. In addition, the executive is
entitled to receive three months base salary upon an involuntary termination or
if the executive's title or job responsibilities are substantially diminished
upon conclusion of a change in ownership.
On January 23, 1998, the Bankruptcy Court approved Retention Agreements for
"group two" executives. The group two executives (two individuals) will have an
amount equal to 100% of their annual compensation as of May 1, 1997, placed in
escrow as additional compensation payable on the earlier of (i) an involuntary
45
<PAGE> 24
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination or, (ii) ninety days after a sale of the Company or (iii) upon
confirmation of a plan of reorganization by the Bankruptcy Court. Consistent
with group one, the executives are not entitled to the compensation upon a
voluntary termination.
The Company began reflecting the costs associated with the Retention
Agreements in its consolidated financial statements beginning July 30, 1997, at
which time the Company believes the benefits of such agreements began to be
realized. The expenses recorded in connection with the Retention Agreements is
classified to "Reorganization items."
(18) CONTINGENCIES
On January 27, 1997, the Company and its wholly-owned subsidiary
Stratosphere Gaming Corporation 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 bankruptcy
estates, and are authorized as such to operate their business subject to
bankruptcy court supervision.
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 (a former officer and
director of the Company and officer and director of Grand), Robert E. Stupak (a
former officer and director of the Company), Thomas A. Lettero (an officer and
current director 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 22, 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 former director of the Company and also a former 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
and because any claims of plaintiffs against the Company will be resolved in the
bankruptcy proceedings. On February 25, 1997, Grand and certain individual
defendants filed a motion to dismiss the complaint. The court on May 21, 1997,
dismissed the complaint finding that plaintiffs complaint failed to specifically
allege facts supporting claims made by plaintiffs in connection with certain
documents issued as certain public statements made by the Company. On July 25,
1997, the court amended its May 21 order providing plaintiffs with the
opportunity to submit an amended complaint. The plaintiffs have since filed an
46
<PAGE> 25
STRATOSPHERE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amended complaint and the defendants named in the amended complaint have again
filed a motion to dismiss complaint. 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 States 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 was scheduled to begin on May 5, 1997, but was canceled.
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 and Stanley Taube. 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 the IPO Units in the IPO rather than one
plaintiff class, and that this alleged conduct caused a second dealer to lose
out on other profits it allegedly deserved. The Court of Appeals affirmed 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. The parties have stipulated to dismiss this suit.
On or about June 15, 1995, the case of City of Las Vegas Downtown
Redevelopment Agency vs. Crockett et al. and on or about November 8, 1995, the
court in the case of City of Las Vegas Downtown Redevelopment Agency vs. Mouldon
et al. dismissed these complaints based upon the City's lack of legal
justification to condemn these properties. Both cases appealed to the Nevada
Supreme Court where a decision is pending. On January 23, 1998, the Supreme
Court issued an Order of Limited Remand ordering an evidentiary hearing on
whether the Company intends to reject or accept the Owner Participation
Agreement and should the Company reject, whether the City intends to purchase
the subject properties.
The Company, based in part on the advice of its counsel, believes that it
has meritorious defenses and does not believe the above described legal actions
will have a material adverse effect on the consolidated financial statements. In
addition, in the ordinary course of business, the Company is party to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
47
