Grand Casinos (GND) reported 1996 results that were anything but grand Tuesday.

After a $149 million writeoff of its investment in the troubled


(TOWVQ:Nasdaq) casino in Las Vegas, Grand posted a loss of $101 million, or $2.43 per share, for the year, compared with a profit of $1.98 per share in 1995. Before the Stratosphere writeoff, 1996 operating earnings were 89 cents, less than analysts' consensus estimate of 95 cents, according to

First Call


But even more troubling than the Stratosphere writeoff, which had been expected, was a sharp drop in Grand's cash flow and profitability in the fourth quarter, caused by ballooning expenses at the company's newly opened casino in Tunica, Miss. Indeed, these new figures strip the glow from

The Street's

rosy outlook on Grand, presented in a

Jan. 7 story.

The numbers tell the tale: Grand, which had pretax and interest income of $25.7 million on revenues of $95.6 million during the last three months of 1995,


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$269,000 in the same period in 1996 on revenues of $126.8 million. General and administrative expenses more than doubled, from $27.9 million to $56.1 million, while food and beverage costs tripled, from $2.4 million to $7.9 million.

As a result, Grand's cash flow, or earnings before interest, taxes, depreciation and amortization, actually dropped in the fourth quarter, from $32.8 million in 1995 to $17 million last year.

To be sure, investors have taken note of Grand's problems, knocking the stock down from 35 in May to 11 3/8 Tuesday. At that price, even Tuesday's ugly earnings numbers probably won't scare too many investors away. Still, a 50% year-over-year fall in cash flow leaves Grand a long way from the end of the tunnel.

Grand communications director Jaye Snyder didn't try to put a happy face on the bad news.

The company lost about 13 cents on its Tunica operations in the fourth quarter, she says. "Our main focus right now is obviously to get the cost side under control at Tunica," she says. "We are putting out the product that we want, but we have to do it more efficiently."

Snyder says the company's spiraling general and administrative expenses came mostly from higher accounting and legal fees and from severance costs related to a corporate restructuring. But she couldn't offer an estimate about how much of the G&A increase came from one-time expenses and how much would continue.

Snyder also wouldn't predict whether Grand would show a year-over-year cash flow increase for the first quarter of 1997, though she says she expects the company to turn the corner on cash flow by the second quarter.

What about Stratosphere, which filed for Chapter 11 bankruptcy last month? The Las Vegas casino tower's future remains in jeopardy. Grand has agreed to invest as much as $75 million more in Stratosphere, but that infusion is contingent on Stratosphere's earning $2.3 million in cash flow per month in the months leading up to the bankruptcy confirmation. So far, Stratosphere hasn't come close.

Snyder didn't exactly say Grand would jump to Stratosphere's defense. "They're not meeting that (cash flow) number for December and January," she says. If the casino can't, "we would have to re-evaluate our agreement with the bondholders -- obviously, Grand's not going to move forward if we're not in a position to do that profitably."

For Grand shareholders, that attitude would be a nice change from the heady expansion that gave the company serious indigestion in 1996.

By Alex Berenson