Grand Casinos, Inc.

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Grand Casinos, Inc.

130 Cheshire Lane
Minnetonka, Minnesota 55305-1062
U.S.A.
(612) 449-9092
Fax: (612) 449-9353
Web site: http://www.grandcasinos.com

Public Company
Incorporated: 1991
Employees: 7,300
Sales: $490.0 million (1996)
Stock Exchanges: New York
SICs: 7011 Hotels And Motels; 7993 Coin-operated Amusement Devices

Grand Casinos, Inc., one of the largest gaming companies in the United States, develops, constructs, and manages casinos and related hotel and entertainment facilities. The company parlayed early success as one of the first companies in the country to manage and develop Indian-owned casinos into company-owned dockside casinos on the Mississippi Gulf Coast, but larger ventures proved more troublesome.

Indian Casino Management Group

In 1989, the chairman of the Mille Lacs Band of Ojibwe in Minnesota asked David W. Anderson, a member of two Indian tribes and of the first national task force on Indian gaming, to help find a manager for their bingo operation. Anderson contacted Stanley M. Taube, a one-time Minneapolis developer who managed Indian bingo concerns in the South. Taube and Anderson began to develop a proposal for the Mille Lacs Band about the same time the state of Minnesota entered into negotiations with the tribes in regard to the 1988 National Indian Gaming Regulatory Act which allowed Indian bands to open casino-style gambling in states which had other forms of gambling. The men broadened their plans to include a casino and drew Lyle Berman, a high-stakes championship-level poker player and successful leather goods retailer, into the management end of the gaming business.

The men initially formed a limited partnership through which Berman, who had recently sold the Bermans The Leather Experts chain, loaned the Mille Lacs Band $3 million to expand their gaming operation located in a popular fishing and resort area north of Minneapolis/St. Paul. Grand Casino Mille Lacs opened in April 1991 to a flood of business. Under the management contract Berman’s group would receive 40 percent of the profits.

Grand Casinos, Inc. Established

Berman, Taube, and Anderson incorporated the management group in 1991. Grand Casinos, Inc. made its initial public offering (IPO) in October and brought in $12.4 million: the management contract with the Mille Lacs Band was their only significant source of income at the time. Berman recouped his $3 million investment, and the initial group retained more than 7 million shares or about 75 percent of the company at a cost of $15,000, or less than one cent a share. The Mille Lacs Band received approximately 100,000 shares, 1.2 percent of the company, and transferred the construction debt to their books.

Grand Casinos helped finance a second, much larger casino in Hinckley, Minnesota, the halfway point between the Twin Cities and Duluth on a route that saw millions of travelers during the busy tourist season. The Mille Lacs Band sought additional funding through government-guaranteed loans and banking institutions. The new casino, complete with child care center, video arcade, RV park, as well as a number of restaurants, opened in May 1992.

A secondary stock offering in May 1992 reaped $41 million at about $15 per share. The ownership share of the original three players was reduced to less than 50 percent—Berman held 26 percent and Taube and Anderson each held about 10 percent of the company. Grand Casinos expanded its operations to the South in 1992. The company received contracts to build and manage casinos for the Coushatta and Tunica-Biloxi Tribes in Louisiana. And with the legalization of dockside gambling in the state of Mississippi, Grand Casinos made plans to build its first company-owned casino in that state—the area was expected to become the third major gambling center in the U.S. after Atlantic City and Las Vegas.

Back in Minnesota, Indian-owned casinos helped reduce notoriously high unemployment rates among Indian people living on reservations, and the tribes became some of the largest employers in their areas for non-Indian people. The gaming profits helped improve education, health and public services, and housing on the reservations. Sixteen Indian-owned gaming facilities were in operation in the state by late 1992. The influx of competition cut into traffic to Grand Casino Mille Lacs, but together the two Mille Lacs Band casinos attracted 100,000 people a week and brought in over $74 million in revenues for fiscal 1992.

Chief operating officer Thomas Brosig, a key employee since the company’s founding, succeeded Berman as president in May 1993; Berman continued as chairman of the board and chief executive officer. Grand Casino Gulfport, a three-story structure on four connecting barges, with restaurants and entertainment lounges, opened in May, and Grand Casinos stock climbed above the $50 per share mark by June.

Bets Placed on Larger Ventures

With an eye toward future growth, Grand Casinos, Inc. entered into a joint venture with Minneapolis-based Gaming Corp. of America to develop the Buck Lake Gaming Resort on a 2,000-acre site in Tunica County, Mississippi, about 20 miles south of Memphis. The company also invested in its first Las Vegas gambling concern.

The Stratosphere Tower project had been conceived by Robert E. Stupak, a Las Vegas legend and owner of the 932-room Vegas World Hotel and Casino. Stupak knew Berman from poker tournaments and asked him to invest in what would be the highest observation tower in the U.S. But Berman was interested in renovating and expanding the casino and hotel as well as completing the 1,149-foot tower, and Grand Casinos eventually gained controlling interest in Stratosphere Corp.

Grand Casinos raised $134.4 million through a stock offering of 5 million shares in September 1993 to help finance new projects. But its relationship with the Mille Lacs Band had become unsettled. The tribe wanted to renegotiate the terms of its contract with Grand Casinos, but the company resisted. In a December 18, 1994, Star Tribune article, Berman defended the agreement on grounds of the risk involved in the initial investment with the asset-poor tribes. The company also provided employee training and development as well as its professional gambling expertise. In November, an Inspector General audit listed Grand Casinos among management companies said to be charging excessive fees to Indian tribes.

Grand Casinos became the major gaming operator in Mississippi when it opened Grand Casino Biloxi, the world’s largest floating casino, in January 1994. But the $600-million Buck Lake project being developed through the Mississippi Casino Development Corp. (MCDC) faced a challenging business climate. Attendance figures had been falling off in three of five casinos operating in Tunica County, and more competitors were in line to open in the area. The company said Buck Lake was closer to the main north/south highway out of Memphis than its competitors and would be a resort facility with amenities such as a theme park, theaters, and golf course, as well as gambling site.

Bill Dorn wrote in a May 1994 Corporate Report Minnesota article, “Grand Casinos has come this far this fast by using Lyle Berman’s disciplines from chain retailing—centralized management to provide continuity and consistency of product.” Dorn also mentioned management talent, casino location, and facilities as additional ingredients to the company’s success.

Changes on the Horizon

Citing personal reasons, Brosig cut back his level of involvement with the company and was succeeded as president by Pat Cruzen, a former Las Vegas executive with experience in the gambling and hospitality industries. Josephine Marcotty, in an August 17, 1994 Star Tribune article, said, “Cruzen is assuming responsibility at a critical time for Grand.” Its two casinos on the Mississippi Gulf Coast and the casino-resort complex being developed in Tunica County were facing very competitive markets. The Stratosphere Tower, located off the main strip and away from downtown Las Vegas, had been viewed as controversial from its conception. In addition, the company was in the midst of building hotels next to a number of its existing casinos at a time when financing for gambling concerns was tight.

In September, Grand Casinos announced that both the Buck Lake and the Stratosphere projects would be delayed. And while Grand Casino Avoyelles opened in 1994, negotiations to develop and manage casinos for tribes in California and Canada had fallen through. Stock was trading in the low teens at year-end.

Grand Casinos, Inc. ranked sixth in the gaming industry by total gaming footage, approximately 365,000 square feet, and by number of gaming devices, about 9,000 slot machines and nearly 400 game tables; the company was larger than Mirage Resorts, Inc., the Trump organization, and Bally Entertainment Corp. Net revenue for 1994 rose to $285.8 million, a 144 percent increase over the previous year; net earnings were $29 million or $1.30 per share.

Grand Casinos, Inc., which topped Fortune magazine’s list of “America’s 100 Fastest Growing Companies” in April 1995, held interest in related concerns including: Casino Data Systems, which developed player tracker and marketing systems; New Horizon Kids Quest, Inc., which operated child care centers at casinos; Innovative Gaming Corporation, which developed interactive video games for casinos; and Casino Hospitality Corp., which ran hotels at casinos.

Indian-owned casinos brought in a significant portion of operating income in 1994, but the Indian-gaming situation was changing. In addition to increased competition for contracts, the best locations and situations had already been developed and federal guidelines were tightening. Grand Casino Coushatta opened in January 1995, drawing guests from Houston and the surrounding area. The Indian-owned casino generated $12 to $14 million a month in revenue in its first two months of operation.

In mid-1995, Grand Casinos moved to jumpstart the Tunica County casino-resort project—renamed Diamond Lake—by infusing it with new loans and investments. The company then acquired full ownership of the project by merging with the other two players, Gaming Corp. of America and Grand Gaming Corp. (formerly known as MCDC). Other activity for the year included new financing for the Stratosphere Corporation, refinancing of Grand Casinos, Inc., and a three-for-two stock split. Grand Casinos, Inc. was named one of the best small companies in America by Forbes magazine in November and ended the year with net revenues of $372.9 million, but profit margins had been shrinking.

Stratosphere tower and casino complex opened in April 1996. The tower itself quickly became a top paid tourist attraction, but gambling revenue was lower than expected. In a September 1996 Business Week article Richard A. Melcher wrote, “Unless Berman can win a sharp reduction in Stratosphere’s debt—talks with bond holders began in late August— he may put the company into bankruptcy.” Stratosphere Corp. stock plummeted and shareholders filed law suits. Grand Casinos, Inc. stock was hurt by the fallout.

Grand Casino Tunica, the third largest casino in the U.S. behind MGM Grand in Las Vegas and Foxwoods Casino in Connecticut, opened in June 1996 to slower than expected traffic. Brosig, who had been working part time in investor relations, replaced Cruzen and returned the position of president in September 1996. To lure in more gamblers, the Grand Casino implemented new marketing strategies, such as more favorable odds, first at Stratosphere and later in Tunica.

The Mississippi Gulf Coast floating casinos, located 15 miles apart, had gained more than 40 percent of its market with 30 percent of the gaming capacity, but Mirage and Circus Circus had casinos under construction. Net revenues for 1996 reached $490 million, but earnings were hurt by nearly $150 million in writeoffs of investments in the Stratosphere Corporation. Stockholders lost $2.43 per share on the year.

Future Uncertainties

The Stratosphere Corp. filed for Chapter 11 bankruptcy in January 1997; Grand Casinos, Inc. held about 42 percent of the stock. Berman and two other Grand Casinos board members resigned from the Stratosphere board in July. Jim McCartney wrote in an August 1, 1997, St. Paul Pioneer Press article, “The move was prompted by Stratosphere Corp.’s independent directors statement a week ago that they now prefer a reorganization plan proposed by corporate raider Carl Icahn to a competing proposal from Minnetonka-based Grand Casinos.” The company said the resignations were made to avoid potential conflicts of interest.

On the up side, the Clinton administration recognized Grand Casinos in May 1997 for its efforts in hiring and training unemployed and underemployed people, and gaming grew at Grand Casino Tunica with the addition of a 568-room hotel and helped boost the company’s second quarter revenues. Grand Casinos remained among the top Indian-owned casino management companies, but the lucrative contracts were set to begin expiring beginning in 1998.