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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(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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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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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
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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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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.
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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....................................................... **
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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.)
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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).)
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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).)
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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)
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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)
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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> 9
<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> 10
<TABLE>
<CAPTION>
<S> <C>
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 ** Selected portions of the 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 ** Restated Financial Data Schedule
99 *** Consolidated Financial Statements of Stratosphere
Corporation
</TABLE>
- -------------------------
* Management Compensatory Plan or Arrangement.
** Filed herewith.
*** Previously filed.
(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> 11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GRAND CASINOS, INC.
Registrant
By: /s/ TIMOTHY J. COPE
------------------------------------
Name: Timothy J. Cope
Title: Executive Vice President, Chief
Financial Officer and Secretary
Date: October 13, 1998
41
<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
Earnings from operations $ 137,659 $ 93,508 $ 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 extraordinary charge $ 1.54 $ (2.43)(1) $ 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)(2) $ 594,450 $ 561,186 $ 421,000 $ 321,000 $ 165,000
</TABLE>
[BAR GRAPH]
<TABLE>
<CAPTION>
======================================================
Total Revenues Net Revenues
Dollars in thousands Dollars in thousands
<S> <C> <C>
1993 $ 268,264 $117,032
1994 $ 506,413 $285,774
1995 $ 776,913 $372,872
1996 $1,057,284 $490,019
1997 $1,094,949 $607,421
======================================================
</TABLE>
1. Earnings per share excluding the effect of Stratosphere are $1.14 per share.
2. 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 $73.2 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, litigation costs
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 $22.8
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 $17.2 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 $11.6
million and charges for corporate reorganization and project write-downs of
$13.6 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 $140.0 million to $396.5 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, litigation costs and project write-downs totalling
$13.6 million during 1996 compared with none in 1995.
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 $57.9
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 $160.9 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.
The Company owns approximately 41% of the common stock issued by
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 Statrosphere'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 matter of law. The Official Committee has stated that
it intends to appeal the Bankruptcy Court's decision.
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................... 185,354 162,518 104,608
-------- --------- --------
Total Costs and Expenses.................................. 469,762 396,511 256,557
-------- --------- --------
EARNINGS FROM OPERATIONS.................................... 137,659 93,508 116,315
-------- --------- --------
OTHER INCOME (EXPENSE)
Interest income........................................ 13,430 17,055 15,984
Interest expense....................................... (42,847) (32,767) (26,187)
Other.................................................. (1,227) (96) 4,373
Stratosphere write-downs............................... -- (160,923) --
-------- --------- --------
Total Other Expense -- Net................................ (30,644) (176,731) (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..................................... -- 160,923 --
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...................................... (5,734) 30,516 13,382
--------- --------- ---------
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 except for the Company's
investment in Stratosphere which has been accounted for under the cost method
since the date Stratosphere filed for reorganization under Chapeter 11 of the
United States Bankruptcy Code. 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 $160.9 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. Management
periodically evaluates the recoverability of such notes receivable based on
the current and projected operating results of the underlying facility and
historical collection experience. No impairment losses on such notes receivable
have been recognized through December 28, 1997.
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 (4,169)
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
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<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> 396,511
<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>
