<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 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 number 000-21640
STATION CASINOS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0136443
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2411 West Sahara Avenue, Las Vegas, Nevada 89102
------------------------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (702) 367-2411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
$3.50 Convertible
Preferred Stock,
$0.01 Par Value
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 registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to the Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates (all
persons other than executive officers or directors) of the registrant
as of May 30, 1997, based on the closing price per share as reported
on the New York Stock Exchange was $185,815,715.
As of May 31, 1997, the registrant has 35,318,057 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants' 1997 Annual Meeting
of Stockholders to be held July 28, 1997 (which has not been filed as
of the date of this filing) are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Station Casinos, Inc. (the "Company") is an established multi-
jurisdictional gaming company that owns and operates five distinctly-
themed casino properties, three of which are located in Las Vegas,
Nevada, one which is located in Kansas City, Missouri and one which is
located in St. Charles, Missouri. The Company also owns and provides
slot route management services in southern Nevada and Louisiana.
Management's growth strategy includes the master-planned expansion of
the Company's existing gaming facilities in Nevada and Missouri, as
well as the evaluation and pursuit of additional development
opportunities in Nevada and other emerging gaming markets.
In Las Vegas, the Company owns and operates Palace Station Hotel
& Casino ("Palace Station"), Boulder Station Hotel & Casino ("Boulder
Station") and Texas Station Gambling Hall & Hotel ("Texas Station").
Palace Station caters primarily to Las Vegas residents and repeat
visitors and aggressively markets itself as "The Local Favorite."
Located on Sahara Avenue adjacent to Interstate 15, Palace Station is
near major attractions on the Las Vegas Strip and downtown Las Vegas.
Boulder Station is situated on 40 acres along the Boulder Highway,
immediately adjacent to Interstate 515, and is strategically located
on the opposite side of Las Vegas from Palace Station. Boulder Station
caters primarily to Las Vegas residents living on the eastern side of
Las Vegas. Texas Station is strategically located on 47 acres at the
corner of Lake Mead Boulevard and Tonopah Highway in North Las Vegas
and draws customers from the rapidly growing North Las Vegas and
Summerlin residential areas. To expand its established presence in the
Las Vegas market, the Company currently is constructing Sunset Station
Hotel & Casino ("Sunset Station"), a Spanish/Mediterranean-themed
hotel-casino located in the Henderson/Green Valley area of Las Vegas.
Sunset Station, which is expected to open in June 1997, will cater
primarily to the rapidly growing Henderson/Green Valley area.
In Missouri, the Company owns and operates Station Casino Kansas
City and Station Casino St. Charles. Station Casino Kansas City, which
commenced operations in January 1997, is situated on 171 acres
immediately east of the heavily traveled Interstate 435 bridge, seven
miles east of downtown Kansas City. Station Casino Kansas City caters
to local customers within the greater Kansas City area, as well as
tourists from outside the region. Station Casino St. Charles is
situated immediately north of the Interstate 70 bridge in St. Charles,
and is strategically located to attract customers from the St. Charles
and greater St. Louis areas, as well as tourists from outside the
region. Management is employing the same operating strategies that
have been successful at the Company's properties in the competitive
Las Vegas market in order to secure a strong presence in the Missouri
markets. The Company is currently expanding Station Casino St.
Charles through an expansion project. See "Project Under Development
and Expansion of Existing Casino Property - Station Casino St.
Charles."
Management's expansion strategy includes the master-planned
expansion of the Company's existing gaming facilities in Nevada and
Missouri, as well as the evaluation and pursuit of additional
development opportunities in Nevada, Missouri, and other emerging
gaming markets. Management believes that the following factors enable
the Company to capitalize on its expertise in the local and repeat
visitor markets as well as on its reputation as a provider of a
high-quality, affordable gaming and entertainment experience.
EXPANSION STRATEGY
SELECTION CRITERIA
Management believes that a highly visible central location,
convenient access and ample parking are critical factors in attracting
local patronage and repeat visitors. Additionally, sites must be large
enough to support multi-phased master-planned growth. The Company
selects sites that are centrally located within a dense population
base so that the facility cannot be cut-off from its primary market.
These sites generally have been adjacent to high-traffic surface
streets and interstate highways. Management believes that each of its
casino properties' locations has provided the Company with a
significant competitive advantage to attract its targeted customer
base.
2
<PAGE>
MASTER-PLANNED DEVELOPMENT
Management's expansion strategy includes the master-planned
expansion of its existing and future gaming locations. In designing
project sites, the Company plans and engineers for multi-phased
facility expansion to accommodate future growth and to allow the
Company to develop dominant properties in each market place. A
project's master-planned design typically allows the option of adding
hotel rooms, casino space and non-gaming entertainment such as movie
theaters, additional restaurants, retail shops, and various other
entertainment venues.
EXPANSION AND DEVELOPMENT OPPORTUNITIES
The Company continually evaluates the timing and scope of its
master-planned developments at each of its properties and may
determine from time to time to expand the scope of, improve on or
suspend the implementation of its master plans. These decisions
are dependent upon the availability of financing, competition and
future economic and gaming regulatory environments, many of which are
beyond the Company's control.
The Company also evaluates other development opportunities in
current and emerging gaming markets, including land-based, dockside,
riverboat and Indian gaming opportunities. The Company's decision
whether to proceed with any new gaming development opportunity is
dependent upon future economic and regulatory factors, the
availability of financing and competitive and strategic considerations,
many of which are beyond the Company's control.
PROJECT UNDER DEVELOPMENT AND EXPANSION OF EXISTING CASINO PROPERTY
SUNSET STATION
The Company commenced construction of Sunset Station in late
calendar year 1995 in order to capitalize on its reputation as a
provider of a high-quality gaming experience oriented to the Las Vegas
local and repeat visitor markets. Sunset Station is positioned in the
Las Vegas market as a locals-oriented hotel and casino, strategically
located on the southeast side of Las Vegas in the rapidly growing
Henderson/Green Valley area. While Sunset Station will be
distinguished from the Company's other properties by its
interior and exterior Spanish/Mediterranean-style architecture,
management intends to employ operating strategies consistent with
those employed at its existing casino properties to attract and retain
customers from both the local and repeat visitor markets.
The Sunset Station facility will feature approximately 350,000
square feet of main facility area, plus a 20-story, 467-room hotel
tower and approximately 4,200 parking spaces. The complex will
include an approximately 80,000-square foot casino, with an
anticipated 2,700 slot and video poker machines, 40 gaming tables, a
keno lounge, a 10-table poker room and a 300-seat race and sports book.
The complex will also include five full-service restaurants, themed
to capitalize on the restaurants at the Company's other properties,
an entertainment lounge, additional bars, a tenant buildout for a
microbrewery, a gift shop, a non-gaming video arcade, tenant lease
space for additional restaurants, a high-quality 13-screen movie
theater complex (which opened in May 1996), a child-care facility,
an outdoor swimming pool and an amphitheater, as well as several
fast-food outlets and franchises. The Company entered into a 25-year
lease agreement with Act III Theaters ("Act III"), a premier
national theater operator, whereby Act III has provided all
interior theater construction, operates the theaters and pays the
Company a percentage of the monthly gross sales. The lease prohibits
Act III from operating or developing theaters at gaming facilities
in Las Vegas other than the Company's facilities and provides the
Company the right to participate in future Act III theater developments
at non-gaming facilities in Las Vegas on similar terms. Sunset
Station is expected to open in June 1997.
Patrons will enjoy convenient access to Sunset Station, which is
located on a nearly 100-acre parcel at the intersection of Interstate
515 and Sunset Road. Multiple access points will provide customers
convenient access to the gaming complex and parking areas. Situated in
the path of development along Interstate 515, the major thoroughfare
into Las Vegas from Boulder City and Arizona, the project will have
prominent visibility from the freeway and the Sunset commercial
corridor. In February 1996, a 1.2 million-square foot retail
shopping development opened directly north of the Sunset Station
property. Management believes that this shopping development is the
largest retail mall in Nevada. In addition, several retail "power
centers" are under various stages of development in the vicinity of
Sunset Station which include nationally recognized anchor tenants.
Sunset Station is located approximately nine miles east of McCarran
International Airport and eight miles southeast of Boulder Station.
3
<PAGE>
The Company anticipates that the total cost of the Sunset Station
project will be approximately $198 million (excluding net construction
period interest and preopening expenses). The cost of the project has
increased $38 million from the previous estimate of $160 million. The
increased cost is primarily attributable to the Company's decision to
expand the project to include an increase in the number of slot and
video poker machines from 2,300 to 2,700 machines, a tenant buildout
for a microbrewery, enhancements to the streetscape facades, sky
ceilings, stained glass, landscaping and other general interior
upgrades, an increased number of hotel suites, an enhanced outdoor
pool and an amphitheater. In addition, the Company experienced
increased construction costs due in part to the high level of overall
construction activity in Las Vegas. Management believes that the
enhanced project will position the Company as the premier entrant in
the Henderson/Green Valley area and allow the Company to market the
property more effectively and offer its guests a more complete
entertainment experience. The construction of Sunset Station is being
financed through $110 million of non-recourse debt and a $40 million
operating lease provided by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Description of Certain Indebtedness and Capital Stock." At March 31,
1997, the Company had contributed $54 million of equity to the project
and plans to fund all of the remaining construction costs primarily
through additional equity contributions of approximately $33 million.
All such amounts were contributed subsequent to March 31, 1997.
The Company believes that growth in the Henderson/Green Valley
area of Las Vegas will fuel significant growth and expansion
opportunities at Sunset Station that can be implemented on an
incremental basis. The Sunset Station master plan includes a total
of approximately 2,000 hotel rooms, additional restaurants, meeting
space, a parking structure, additional casino space and other
entertainment amenities. The development of the additional facilities
is subject to numerous uncertainties, including future market
conditions, regulatory approvals and ultimate financial viability.
As with any major construction effort, the development of Sunset
Station involves many risks, including shortages of materials or
skilled labor, unforeseen engineering, environmental or geological
problems, work stoppages, labor disputes, weather interferences,
floods and unanticipated cost increases, any of which could give rise
to delays or cost overruns. Construction, equipment or staffing
problems or difficulties in obtaining any of the requisite licenses,
permits, allocations and authorizations from regulatory authorities
could also increase the cost or delay or prohibit the construction of
Sunset Station or otherwise affect the design and features of the
project.
STATION CASINO ST. CHARLES
The Company has commenced construction on certain elements of the
Station Casino St. Charles master plan. In May 1996, the Company
completed construction of an elevated roadway and a 4,000-space
parking garage. In Fall 1996, the Company commenced construction of
the next phase of development at Station Casino St. Charles consisting
of two new gaming vessels which will be located in a newly-formed
backwater protective basin as well as a uniquely designed retail and
entertainment complex (the "St. Charles Expansion Project").
Management estimates that the St. Charles Expansion Project will be
completed by mid-summer of 1998.
Upon completion, the new gaming facility at Station Casino St.
Charles will feature two new gaming vessels which will be located in
the newly-formed backwater basin adjacent to the Missouri River and
the 4,000-space parking garage. Both of the new gaming vessels will be
132 feet wide by 350 feet long and offer gaming on each of two levels,
similar to the Station Casino Kansas City vessels. Combined, the new
vessels will have approximately 3,000 slot and video poker machines
and 190 gaming tables and will comprise over 140,000 square feet of
casino space (compared to 47,000 square feet at the existing vessels).
The new gaming facilities are designed to offer guests a more complete
entertainment experience.
The Company has entered into a non-binding letter of intent with
Gordon Group Holdings, Ltd. (the "Gordon Group") pursuant to which the
Gordon Group will lease from the Company a substantial portion of the
new retail and entertainment complex. The Company selected the Gordon
Group for this project based upon its experience in developing unique
shopping and entertainment destinations, including experience as the
developer of the successful Forum Shops at Caesars Palace. The
Company anticipates that between $50 million and $70 million of
financing will be required by the Gordon Group for the development of
a uniquely styled shopping and entertainment area, including a variety
of specialty retail stores, restaurants and entertainment attractions.
The Company will retain certain space in the entertainment facility
for selected restaurant concepts, a high-quality movie theater, a gift
shop and other customer services as well as passenger ticketing and
back of the house facilities. The gaming facilities and retail and
entertainment space will be accessible from the adjacent 4,000-space
parking structure and elevated roadway. The
4
<PAGE>
Company believes that the St. Charles Expansion Project will enable the
Company to leverage the success of its current operations at Station
Casino St. Charles and position itself as the premier facility in the
St. Louis marketplace.
The Company anticipates that the Company's cost for the St.
Charles Expansion Project will be approximately $190 million (excluding
net construction period interest and preopening expenses). Upon
completion of the St. Charles Expansion Project, the new facilities
will replace the existing riverboat, gaming barge and restaurant
facilities. More than one-half of the associated construction costs
are anticipated to be incurred by June 1997. The scope and timing of
this expansion project depend upon several factors, including, but not
limited to, the Company's ability to draw amounts under the reducing
revolving loan agreement, the execution of a definitive development
agreement with the Gordon Group, the Gordon Group's ability to secure
financing, the cash flow generated by the Company's operations
including Station Casino Kansas City, regulatory requirements unique
to the state of Missouri and gaming in general and construction risks.
Additionally, the letter of intent is subject to a 90-day due
diligence period, which expires June 19, 1997, with various
termination provisions. If the Gordon Group fails to proceed with
development of the retail and entertainment complex, the Company plans
to complete a smaller-scale build-out of the retail and entertainment
complex for an estimated cost of $16 million (net of construction
period interest and preopening expenses). No assurances can be given
that the Company and the Gordon Group will enter into a definitive
development agreement with respect to the project, that the Gordon
Group will be able to obtain the necessary financing, that the Gordon
Group will complete the build-out of the complex within the Company's
estimated completion time of mid-summer 1998 or that the Gordon Group
will be able to develop and operate the project successfully.
OPERATING STRATEGY
Management believes that the following key principles have been
integral to its success as a gaming operator and intends to continue
to employ these strategies at each of its various operations.
TARGETED CUSTOMER BASE
The Company's operating strategy emphasizes attracting and
retaining customers primarily from the local and repeat visitor
markets. Palace Station, Boulder Station, Texas Station, Station
Casino Kansas City and Station Casino St. Charles (collectively
the "Casino Properties") attract customers from their local markets
through innovative, frequent and high-profile promotional programs,
focused marketing efforts and convenient locations, and from the
repeat visitor market through aggressive marketing and the development
of strong relationships with specifically targeted travel wholesalers.
Although perceived value initially attracts a customer to the Casino
Properties, actual value generates customer satisfaction and loyalty.
Management believes that actual value becomes apparent during the
customer's visit through an enjoyable, affordable and high-quality
entertainment experience. Las Vegas, which is and has been one of the
fastest growing cities in the United States, is characterized by a
strong economy and demographics which include an increasing number of
retirees and other active gaming customers. This strategy applies as
well to the Missouri markets. The Company believes that its visitor
patrons are also discerning customers who enjoy the Company's value-
oriented, high-quality approach. This is particularly true in Las
Vegas where patrons view the Company's hotel and casino product as a
preferable alternative to attractions located on the Las Vegas Strip
and downtown Las Vegas.
PROVIDE A HIGH-VALUE EXPERIENCE
Because the Company targets the repeat customer, management is
committed to providing a high-value entertainment experience for its
customers in its restaurants, hotels and casinos. Management believes
that the value offered by restaurants at each of the Casino Properties
is a major factor in attracting its local gaming customers, as dining
is a primary motivation for casino visits by many locals. Through
their restaurants, each of which has a distinct theme and
style of cuisine, the Company's Casino Properties offer generous
portions of high-quality food at reasonable prices. In addition, the
Company's operating strategy focuses on slot and video poker machine
play. The Company's target market consists of frequent gaming patrons
who seek not only a friendly atmosphere and convenience, but also
higher than average payout rates. Because locals and repeat visitors
demand variety and quality in their slot and video poker machine play,
the Casino Properties offer the latest in slot and video poker
technology, including several games designed exclusively for the
Company.
As part of its commitment to providing a quality entertainment
experience for its patrons, the Company is dedicated to ensuring a
high level of customer satisfaction and loyalty by providing attentive
customer service in a friendly, casual atmosphere. Management
recognizes that consistent quality and a comfortable atmosphere stem
from
5
<PAGE>
the collective care and friendliness of each employee. The
Company, which began as a family-run business, has maintained close-
knit relationships among its management and endeavors to instill among
its employees this same sense of loyalty. Toward this end, management
takes a hands-on approach through active and direct involvement with
employees at all levels. An indication of the value of this approach
is seen by the number of Las Vegas residents seeking employment with
the Company.
MARKETING AND PROMOTION
The Company employs an innovative marketing strategy that utilizes
frequent, high-profile promotional programs in order to attract
customers and establish a high level of name recognition. In addition
to aggressive marketing through television, radio and newspaper
advertising, the Company has created and sponsored such promotions as
the annual Car-A-Day in MayTM, "Paycheck Bonanza" and the "Great
Giveaway," a popular football season contest. These promotions have
become a tradition in the locals market and have had a positive impact
upon the Company's patronage during their respective promotion
periods.
LAS VEGAS CASINO PROPERTIES
PALACE STATION
Palace Station is situated on 39 acres strategically located at
the intersection of Sahara Avenue and Interstate 15, one of Las Vegas'
most heavily traveled areas, and a short distance from the McCarran
International Airport and from major attractions on the Las Vegas Strip
and downtown Las Vegas. With Palace Station's ample parking and its
convenient location, customers are assured easy access to the hotel
and casino, a factor that management believes is particularly
important in attracting and retaining its customers. The Palace
Station complex has approximately 287,000 square feet of main
facility area and features a turn-of-the-century railroad station
theme. The complex includes a 1,028-room hotel, an approximately
84,000-square foot casino, two swimming pools, 3,700 parking spaces
(including 1,900 spaces in two multi-level parking structures), an
approximately 20,000-square foot banquet and convention center, five
full-service restaurants, two fast-food outlets, a 24-hour gift shop
and a non-gaming video arcade. The casino offers approximately 2,220
slot and video poker machines, 53 gaming tables, two keno lounges,
a poker room, a bingo parlor, and a race and sports book.
The hotel features 587 rooms in a modern 21-story tower. Guests in
the tower enjoy a view of the Las Vegas Strip, downtown Las Vegas and
the surrounding mountains. The remaining 441 hotel rooms are located
in low-rise buildings adjoining the tower and casino. Palace Station's
hotel rooms are spacious and well-appointed. Standard tower rooms
average approximately 377 square feet and include a king or queen-size
bed, a vanity and a sitting area. These amenities are offered to
visitors at rates that compare favorably to those at other Las Vegas
hotels. Each of the hotel's two landscaped courtyard areas includes a
swimming pool and a jacuzzi.
Palace Station's five full-service restaurants have a total of over
1,225 seats. These restaurants offer a variety of high-quality food at
reasonable prices, including the 24-hour Iron Horse Cafe (featuring a
Chinese menu in addition to American fare), an all-you-can-eat buffet
known as "The Feast," the Broiler (a steak and seafood restaurant),
the Pasta Palace (an Italian restaurant) and the Guadalajara Bar &
Grille (a Mexican restaurant). Palace Station guests also may take
advantage of the Palace Saloon Piano Bar and the Loading Dock Lounge
which provide music, dancing and entertainment. Quick service meals
and snacks are offered at the Pizza Palace, Samueli's Deli, and Burger
King.
In planning the 1991 addition of the hotel tower, management
created a master plan that provides for the addition of 1,500 new
tower rooms and improved recreational facilities, replacing 441
existing low rise rooms. This, added to the existing 587 tower rooms,
would result in approximately 2,100 hotel rooms at Palace Station.
With this master plan in mind, management reconfigured the facility
and developed a significant portion of the overall infrastructure in
conjunction with the 1991 expansion in order to achieve economies of
scale, reduce costs and minimize disruptions that might be experienced
with future expansion.
The Company has received approvals from the City of Las Vegas for
an expansion of an additional 1,200 hotel rooms and up to 195,000 square
feet of additional public space at Palace Station. With the assistance
of its architectural design consultant, the Company will develop
detailed construction plans and budgets for the Palace Station
expansion project. The Company anticipates that it will engage one or
more general contractors to perform the required construction in
accordance with the Company's plans and budgets. To date, there are
neither definitive construction plans nor budgets
6
<PAGE>
for the project, nor has any general contractor been engaged, and the
scope of the project may vary significantly from that which is currently
anticipated. While a significant portion of the requisite infrastructure
is already in place, and the Palace Station site has the capacity for
significant expansion, the Company's decision to complete this expansion
and the master plan is subject to future market and strategic
considerations and the availability of capital.
BOULDER STATION
Boulder Station, which opened in August 1994, is situated on 40
acres strategically located on the opposite side of Las Vegas from
Palace Station. Patrons enjoy convenient access to this facility which
is located on the Boulder Highway and immediately adjacent to the
Interstate 515 interchange. Interstate 515 and the Boulder Highway are
the major thoroughfares into Las Vegas for visitors from Arizona.
Management believes that its highly visible location at this well-
traveled intersection offers a competitive advantage relative to
existing hotels and casinos located on the Boulder Highway. Boulder
Station is located approximately four miles east of the Las Vegas
Strip and approximately four miles southeast of downtown Las Vegas.
The Boulder Station complex has approximately 337,000 square feet of
main facility area and, like Palace Station, features a turn-of-the-
century railroad station theme. The complex includes a 300-room
hotel, an approximately 86,000-square foot casino, 4,350 parking
spaces (including a 1,900-space multi-level parking structure), five
full-service restaurants, several fast-food outlets, a 280-seat
entertainment lounge, eight additional bars, a high-quality 11-screen
movie theater complex, a child-care facility, a swimming pool, a non-
gaming video arcade and a gift shop. The casino offers approximately
2,950 slot and video poker machines, 38 gaming tables, a keno lounge,
a poker room, a bingo parlor and a race and sports book.
Boulder Station's five full-service restaurants have a total of
over 1,400 seats. These restaurants offer a variety of high-quality
food at reasonable prices. Restaurant themes and menus are similar to
Palace Station's, allowing Boulder Station to benefit from the
market acceptance and awareness of this product. Restaurants include
the 24-hour Iron Horse Cafe (featuring a Chinese menu in addition to
American fare), an all-you-can-eat buffet known as "The Feast," the
Broiler (a steak and seafood restaurant), the Pasta Palace (an
Italian restaurant), and the Guadalajara Bar & Grille (a Mexican
restaurant). In addition to these restaurants which are similar to the
offerings at Palace Station, Boulder Station offers fast-food outlets,
including Pizza Palace, Viva Salsa, and China Express. Additionally,
the Company leases space to the operators of such restaurants as
Burger King and Starbuck's Coffee to enhance the customers' dining
selection. Boulder Station's restaurants and bars are located in open
settings that are designed to intermingle the dining and gaming
experience. Boulder Station also is master-planned for expansion,
but the Company's decision to complete this expansion and the master
plan is subject to future market and strategic considerations and the
availability of capital. The Company has delayed commencement of
construction on a 507-room hotel project at Boulder Station.
Management is currently evaluating the timing of this project which
depends significantly on the operating results of the Company,
including Station Casino Kansas City, as well as the Las Vegas
market's ability to absorb significantly increased hotel capacity.
TEXAS STATION
Texas Station, which commenced operations in July 1995, is situated
on 47 acres strategically located at the corner of Lake Mead Boulevard
and Tonopah Highway in North Las Vegas. The facility features a
friendly, "down-home" Texas atmosphere, highlighted by the distinctive
early Texas architecture. Texas Station has approximately 258,000
square feet of main facility area in a low rise complex plus a six
story, 200-room hotel tower and approximately 4,000 parking spaces
(including a recently opened 1,500-space covered parking structure).
The complex includes an approximately 75,000-square foot casino, five
full-service restaurants, several fast-food outlets, a 132-seat
entertainment lounge, seven additional bars, a high-quality 12-screen
movie theater complex, a swimming pool, a non-gaming video arcade and
a gift shop. The casino offers approximately 1,985 slot and video
poker machines, 36 gaming tables, a keno lounge, a poker room, a bingo
parlor which opened in May 1996, and a race and sports book.
Management believes that the theater complex provides a competitive
advantage for the property and is an additional attraction that draws
a significant number of patrons to the facility. Texas Station has
entered into a 25-year lease agreement with Act III with terms
substantially the same as the Sunset Station agreement noted above.
Texas Station's five full-service restaurants have a total of over
1,300 seats. These restaurant facilities offer a variety of high-
quality food at reasonable prices, including the 24-hour Yellow Rose
Cafe (a 24-hour coffee shop), the Stockyard Steakhouse, the Laredo
Cantina and Cafe (a Mexican restaurant), the San Lorenzo (an Italian
restaurant) and the Market Street Buffet (featuring seven different
food stations). In addition to the Texas Station themed restaurants,
guests may also take advantage of the unique features of the Whiskey
Bar with a seven-foot high bronco rider, which
7
<PAGE>
rotates on a pedestal and may be viewed by patrons on all sides,
the Garage Bar which features a 1976 fire-engine red Cadillac
Eldorado with seven-foot Texas long-horns on the hood, or the
Armadillo Honky Tonk where a 3,000 piece cut glass armadillo is
the centerpiece of a dance hall. The facility also offers fast-food
outlets, including a pizza kitchen and deli. Management believes
that the quality and variety of the restaurants offered at the
facility are a major draw in the rapidly growing North Las Vegas
and Summerlin markets.
In December 1996, the Company completed construction of an
approximately $7 million multi-level parking structure which added
approximately 1,500 parking spaces. This addition was designed to
alleviate parking constraints during peak periods and has resulted in
improved customer traffic at the facility. To accommodate future
expansion, Texas Station has been master-planned for additional hotel
rooms, casino space and entertainment facilities.
MISSOURI CASINO PROPERTIES
STATION CASINO KANSAS CITY
Station Casino Kansas City commenced operations in January 1997.
This facility is a master-planned gaming and entertainment destination
facility featuring a historic Missouri riverboat theme and is
strategically located to attract customers from the greater Kansas
City area as well as tourists from outside the region. The facility
is located on a 171-acre site immediately east of the heavily traveled
Interstate 435 bridge, seven miles east of downtown Kansas City, one
mile south of Worlds of Fun and Oceans of Fun Amusement Parks, six
miles north of the Truman Sports Complex, which includes Arrowhead
Stadium and Kauffman Stadium, and 12 miles from the Kansas City
International Airport. Station Casino Kansas City's marketing
programs are specifically designed to effectively target and capture
repeat customer demand from the local customer base and also emphasize
the strong visitor and overnight markets. Management believes that
Station Casino Kansas City has specific advantages relative to both
existing and future riverboat facilities in the region and that it is
the premier facility in the Kansas City market. The site is adjacent
to the Interstate 435 bridge, which supports traffic flow of
approximately 71,000 cars per day. Interstate 435 is a six-lane, north-
south expressway offering quick and easy accessibility to the site,
and also provides direct visibility of the site. The high visibility
and easy access to the Station Casino Kansas City site helps attract
auto travelers who are visiting the theme parks and sports facilities
along this entertainment corridor.
The Station Casino Kansas City facility features two continuously
docked gaming vessels situated in a man-made protective basin. The
two gaming facilities feature approximately 140,000 square feet of
gaming space that offers approximately 3,300 slot and video poker
machines and 190 gaming tables and a poker room. Station Casino
Kansas City is the fourth largest casino in the United States in terms
of casino square footage and the Company believes the facility offers
the first Las Vegas-style gaming experience in the Midwest. The
gaming facilities are docked adjacent to a land-based entertainment
facility with approximately 526,000 square feet of main facility area
which includes a 200-room hotel, seven full-service restaurants,
several fast-food outlets, 11 bars and lounges, a 1,400-seat Grand
Pavillion featuring headline entertainment, a Kid's Quest child-care
facility, a gift shop and parking for 5,000 vehicles. Act III is
currently constructing a high-quality 18-screen movie theater complex
adjacent to the facility pursuant to a long-term ground lease and the
Company is completing a 5,700-square foot non-gaming video arcade and
midway operated by Sega Game Works both of which are scheduled to open
in July 1997.
Station Casino Kansas City's restaurants offer a variety of high-
quality food at reasonable prices. Restaurants include an all-you-can-
eat live action buffet "Feast Around the World," featuring Italian,
Mexican, Chinese, barbecue, and traditional American fare, Bugatti's
Little Italy Cafe, featuring fine Italian cuisine and a wine bar with
an extensive selection, Pancho Villa's Cantina, featuring southwestern
foods guided by culinary sensation Mark Miller of Sante Fe, the
Orleans Seafood Co. and Oyster Bar, featuring fresh Louisiana style
seafood, managed by renowned Chef Paul Prudhomme and the Hafbrauhaus
Brewery & Biergarten featuring a wide selection of micro-brewed
lagers, an assortment of American and Bavarian cuisine and live
entertainment. In addition, Station Casino Kansas City leases space
to two well-known Kansas City favorites, Arthur Bryant's Barbeque and
The Phoenix Piano Bar & Grill, known as one of the best jazz clubs in
the city. Additionally, the complex offers the Morning Glory Coffee
Cafe and Bakery featuring Starbuck's Coffee and fresh-baked goods and
the Royal Chieftan Cigar Co., offering a wide variety of fine cigars
and cigar accessories.
The Company believes that Station Casino Kansas City offers
significant growth and expansion opportunities that can be implemented
on an incremental basis. The project is master-planned for multi-
phased growth including additional
8
<PAGE>
hotel rooms, restaurants and other entertainment facilities. The
development of the additional facilities is subject to numerous
uncertainties, including future market conditions, regulatory
approvals and ultimate financial viability.
STATION CASINO ST. CHARLES
Station Casino St. Charles commenced operations in May 1994. Station
Casino St. Charles is a master-planned gaming and entertainment
complex featuring a historic riverboat theme. Station Casino St.
Charles is situated immediately north of the Interstate 70 bridge in
St. Charles on approximately 52 acres owned by the Company. The
Station Casino St. Charles complex is strategically located to attract
customers from the St. Charles and greater St. Louis area, as well as
tourists from outside the region. Management believes that this
location offers the Company certain competitive advantages relative to
both existing and future riverboat facilities in the region. The site
is adjacent to the Interstate 70 bridge. Interstate 70 is a 10-lane,
east-west expressway offering quick and easy accessibility to and
direct visibility of the Station Casino St. Charles site. Furthermore,
the Station Casino St. Charles location is approximately seven miles
from St. Louis' airport, offering convenience to the air traveler and
access to the large number of hotel rooms in the area, approximately
4,750 of which surround the airport.
Station Casino St. Charles currently features two gaming vessels - a
292-foot long by 74-feet wide gaming riverboat known as "The Station
Casino Belle" and a floating two-story, 105,000-square foot gaming and
entertainment facility. The two current gaming vessels have 47,000
square feet of gaming space with capacity for 4,000 gaming customers,
as well as food and beverage and other related facilities. Station
Casino St. Charles offers approximately 1,810 slot and video poker
machines, 85 gaming tables and a poker room. Station Casino St.
Charles features a 250-seat all-you-can-eat buffet known as "The
Feast," as well as an 80-seat specialty steakhouse known as "The
Broiler." In addition to the casinos and restaurants, the facility
offers seven bars, a fast-food court, an entertainment lounge, a
lobby, a ticketing facility and a gift shop. The Company has
commenced the St. Charles Expansion Project, which is ultimately
intended to replace the existing facilities at Station Casino St.
Charles upon completion of such project.
Capitalizing on its operating experience in Las Vegas, the facility
has emphasized convenience in offering two separate gaming facilities.
In doing so, the Company is able to stagger its two hour cruises to
begin each hour of the day from nine in the morning until two the
following morning, seven days a week. With a 45 minute boarding time,
the longest a customer has to wait is 15 minutes to enter a gaming
facility. Additionally, the Company received approval for continuously
docked gaming on each of the gaming facilities. In Missouri,
continuously docked gaming requires "simulated cruising," which allows
customers to board only at certain specified times, however, the
customer may leave at any time, which is significantly more convenient
for the customer.
In furtherance of the Station Casino St. Charles master plan, the
Company completed construction of a new elevated roadway and a 4,000-
space five-story parking structure in May 1996. This project includes
a turn-around deck and porte-cochere. The parking facility is
constructed above the existing flood plain and provides the
infrastructure for the current facilities as well as the St. Charles
Expansion Project. The elevated roadway and parking structure provide
improved access to the current and new gaming facilities and
significantly diminish Station Casino St. Charles' susceptibility to
closure during the spring flooding season. This was evidenced in May
1996 when flooding on the Missouri River occurred and the parking
garage and elevated roadway served one of its intended purposes in
minimizing business disruption caused by the flood.
In addition, Station Casino St. Charles has been chosen by the City of
St. Charles, Missouri as the redeveloper of a designated Redevelopment
Project Area (the "TIF District") totaling approximately 107 acres
adjacent to Station Casino St. Charles. In connection with this
redevelopment, Station Casino St. Charles has entered into an
agreement for property acquisition with the City of St. Charles that
allows for the acquisition by Station Casino St. Charles of the
property within the TIF District. This agreement designated Station
Casino St. Charles as the city's agent to acquire property using the
city's power of eminent domain, and required, subject to certain
limitations, Station Casino St. Charles to initiate eminent domain
proceedings on all property in the TIF District by March 22, 1997.
Station Casino St. Charles has initiated, completed or, with the
consent of the City of St. Charles, dismissed eminent domain
proceedings on all land in the designated Phase I of the TIF District
(approximately 40 acres). This land has been or may be acquired for
the construction of a mixed-use development, which may include retail
space, a hotel, office space, convention space, or restaurants.
Eminent domain proceedings on all land in the designated Phase II and
III of the TIF District have been postponed or suspended in light of
the condemnation awards in the Phase I proceedings. The property
acquisition agreement provides Station Casino St. Charles with the
right to terminate this agreement in the event the cost to purchase
the property, relocate existing tenants and demolish existing
structures exceeds $13.7 million.
9
<PAGE>
THE SOUTHWEST COMPANIES
The Company provides slot route management services to numerous food
and beverage establishments and commercial businesses in southern
Nevada and Louisiana through its subsidiary, Southwest Gaming
Services, Inc. (''SGSI''). (SGSI, together with Southwest Services,
Inc. (''SWSI") and their respective subsidiaries, the ''Southwest
Companies'').
SGSI commenced its slot route business in southern Nevada in December
1990. Management combined its gaming experience with its route
management abilities from SWSI to capitalize on the rapidly expanding
slot route business. SGSI has approximately 720 machines in service
throughout southern Nevada. In July 1992, SGSI entered into a
joint venture with a corporation owned by certain Louisiana residents
to form Southwest Gaming of Louisiana (''SGLA''), in which SGSI owns a
49% equity interest. SGLA operates approximately 90 video poker machines
at Louisiana Downs Race Track (''Louisiana Downs'') and over 210 machines
at other locations in Louisiana. The Company's contract with Louisiana
Downs expires in June 1997 and will not be renewed. Due to the addition
of three riverboat gaming facilities in Shreveport Louisiana, revenues
and operating cash flows from the Company's Louisiana joint venture have
significantly declined.
COMPETITION
The gaming industry includes land-based casinos, dockside casinos,
riverboat casinos, casinos located on Indian reservations and other
forms of legalized gaming. There is intense competition among
companies in the gaming industry, many of which have significantly
greater resources than the Company. Certain states have recently
legalized, and several other states are currently considering
legalizing, casino gaming in designated areas. Legalized casino
gaming in such states and on Indian reservations will provide strong
competition to the Company and could adversely affect the Company's
operations, particularly to the extent that such gaming is conducted
in areas close to the Company's operations.
Palace Station, Boulder Station and Texas Station face competition
from all other casinos and hotels in the Las Vegas area, including to
some degree, from each other. Sunset Station will face similar
competition. Such competition includes at least eight hotel-casinos
targeted primarily towards local residents and repeat visitors, as
well as numerous non-hotel gaming facilities targeted towards local
residents. The Company competes with other locals oriented hotel-
casinos by focusing on repeat customers and attracting these customers
through innovative marketing programs, which include the annual Car-A-
Day in MayTM promotion. The Company's value-oriented, high-quality
approach is designed to generate repeat business. Additionally, the
casino properties are strategically located and designed to permit
convenient access and ample parking, which are critical factors in
attracting local visitors and repeat patrons. In recent months,
several of the Company's direct competitors who cater to the "locals"
market have completed major expansion projects, and other expansions
are in progress or are planned. Currently, there are approximately 27
major gaming properties located on or near the Las Vegas Strip, 14
located in the downtown area and several located in other areas of Las
Vegas. In the past year, four large hotel-casinos have opened on or
near the Las Vegas Strip. In addition, nine new hotel-casinos and
three hotel-casino expansions are under construction or have been
announced, which will add approximately 21,000 rooms to the Las Vegas
area over approximately the next two years. Five of the new hotel-
casinos are major resorts with a theme and an attraction which are
expected to draw significant numbers of visitors. These new
facilities could have a positive effect on Palace Station, Boulder
Station, Texas Station and Sunset Station if more visitors are drawn
to Las Vegas. Any other major additions, expansions or enhancements
of existing properties or the construction of new properties by
competitors, could have a material adverse effect on the businesses of
Palace Station, Boulder Station, Texas Station and Sunset Station.
The additional capacity has had little, if any, impact on Palace
Station's, Boulder Station's or Texas Station's hotel occupancy or
casino volume to date, although there can be no assurance that hotel
occupancy or casino volume will not be adversely affected in the
future.
The Company's Las Vegas casino properties face more direct competition
from eight hotel-casinos primarily targeted to the local and the
repeat visitor markets. Many of these competitors have completed
major expansions and existing competitors and new entrants into these
markets are in the planning stages or well under construction.
Although the Company has competed strongly in these marketplaces,
there can be no assurance that this additional capacity will not have
a negative impact on the Company.
10
<PAGE>
The Missouri Gaming Commission has been empowered to determine the
number of gaming licenses supportable by the region's economic
situation. As of March 31, 1997, 38 applications for gaming licenses
had been filed with the State of Missouri, including 12 applications
to operate in the St. Louis marketplace. 16 of these 38 applicants
have been granted a license, permitting gaming operations in St.
Louis, Kansas City, St. Joseph and Caruthersville, Missouri. Station
Casino St. Charles competes primarily with other gaming operations in
and around St. Louis, Missouri. Currently, in addition to Station
Casino St. Charles, there are four facilities operating in the St.
Louis market, including a facility in Maryland Heights which opened in
March 1997. In particular, the Company expects that Station Casino
St. Charles will be directly impacted by competition from the facility
located in Maryland Heights due to its size, quality and close
proximity. While the Company has experienced a decline in revenues at
Station Casinos St. Charles since the opening of the Maryland Heights
facility, the Company is taking steps to mitigate the effects of such
competition, including undertaking the St. Charles Expansion Project.
Additionally, two of the four competitors operating in the St. Louis
market are located in Illinois, which does not impose a $500 loss
limit. Gaming also has been approved by local voters in jurisdictions
near St. Louis, including St. Charles, Jefferson City and other cities
and counties along the Mississippi and Missouri Rivers. Any new
gaming operations developed near St. Louis would likely provide
significant competition to Station Casino St. Charles. Gaming laws in
surrounding states and in other areas may be amended in ways that
would increase the competition to Station Casino St. Charles. This
increasing competition could have a material adverse effect on the
Company's business.
Recently, Davis Gaming was selected for investigation for
licensure for a gaming operation which it intends to develop in
Boonville, Missouri, a city in central Missouri near Jefferson City
and Columbia, and Mark Twain Casino L.L.C. was selected for
investigation for licensure for a gaming operation which it intends to
develop in LaGrange, Missouri, a city in northeastern Missouri.
Neither area is currently served by a Missouri gaming facility.
Station Casino Kansas City competes primarily with other gaming
operations in and around Kansas City, Missouri. Currently there are
five gaming facilities operating in the Kansas City market. Earlier
entrants to the Kansas City market may have an advantage over the
Company due to their ability to establish early market share. Gaming
has been approved by local voters in jurisdictions near Kansas City,
including St. Josephs (which currently has one riverboat gaming
operation), Jefferson City and other cities and counties along the
Missouri River. Any new gaming operations developed near Kansas City
would likely provide significant competition to Station Casino Kansas
City.
Several companies are engaging in riverboat gaming in states
neighboring Missouri. Illinois sites, including Alton, East St.
Louis, and Metropolis, enjoy certain competitive advantages over
Station Casino St. Charles because Illinois, unlike Missouri, does not
impose limits on the size of losses and places fewer restrictions on
the extension of credit to customers. In contrast, Missouri gaming
law provides for a maximum loss of $500 per player on each cruise and
prohibits the extension of credit (except credit cards and checks).
Unlike Illinois gaming law, the Missouri gaming law places no limits
on the number of gaming positions allowed at each site. As of March
31, 1997, Illinois had approved a total of ten licenses. While
riverboats currently are the only licensed form of casino-style gaming
in Illinois and the number of licenses is restricted to ten, possible
future competition may arise if gaming is legalized in or around
Chicago, which was specifically excluded from the legislation
permitting gaming in Illinois.
The Company's Missouri gaming operations also compete to a lesser
extent with the riverboat and floating gaming facilities in
Mississippi, Louisiana, Iowa and Indiana. Like Illinois, neither
Mississippi nor Louisiana gaming legislation imposes limits on wagers
or losses. Mississippi had 33 licensed riverboats and three pending
applications as of March 31, 1997. In addition, Mississippi has one
land-based casino located on Indian lands. In Louisiana, 15 licenses
for gaming vessels have been granted, which is the maximum number of
licenses currently authorized in the state, and 12 vessels have
commenced operations. The opening of three riverboat gaming
facilities in Shreveport, Louisiana, has had a negative impact on the
revenues and cash flows of the Company's Louisiana joint venture.
Gaming laws in these surrounding states and in other areas may be
amended in ways that would increase the competition to the Company's
Missouri gaming operations.
To a lesser extent, the Company's operations compete with gaming
operations in other parts of the state of Nevada, such as Reno,
Laughlin and Lake Tahoe, with facilities in Atlantic City, New Jersey
and other parts of the world and with state-sponsored lotteries, on-
and-off-track pari-mutuel wagering, card parlors and other forms of
legalized gambling.
11
<PAGE>
REGULATION AND LICENSING
NEVADA GAMING REGULATIONS
The ownership and operation of casino gaming facilities, the operation
of gaming device routes and the manufacture and distribution of gaming
devices in Nevada are subject to: (i) the Nevada Gaming Control Act
and the rules and regulations promulgated thereunder (collectively,
the ''Nevada Act''); and (ii) various local ordinances and
regulations. The Company's gaming operations are subject to the
licensing and regulatory control of the Nevada Gaming Commission
(''Nevada Commission''), the Nevada State Gaming Control Board
(''Nevada Board''), the City of Las Vegas, the Clark County Liquor and
Gaming Licensing Board (the ''Clark County Board''), the City of North
Las Vegas, the City of Henderson and certain other local regulatory
agencies. The Nevada Commission, the Nevada Board, the City of Las
Vegas, the Clark County Board, the City of North Las Vegas, the City
of Henderson, and certain other local regulatory agencies are
collectively referred to as the ''Nevada Gaming Authorities.''
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are
concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity; (ii) the establishment and
maintenance of responsible accounting practices and procedures; (iii)
the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal controls and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state
and local revenues through taxation and licensing fees. Change in
such laws, regulations and procedures could have an adverse effect on
the Company's gaming operations.
The Company's direct and indirect subsidiaries that conduct gaming
operations in Nevada are required to be licensed by the Nevada Gaming
Authorities. The gaming licenses require the periodic payment of fees
and taxes and are not transferable. SGSI is licensed as a distributor
and as an operator of a slot machine route. Palace Station, Boulder
Station, Texas Station, and Sunset Station have received licenses to
conduct nonrestricted gaming operations. Town Center Amusements, Inc.
("TCAI") has been licensed to conduct nonrestricted gaming operations
at Barley's Casino & Brewing Company, a micro brewery and casino
located in Southeast Las Vegas. The Company's ownership in TCAI is
held through an intermediary company known as Green Valley Station,
Inc. ("GVSI") which is licensed as a member and Manager of TCAI. The
Company is registered by the Nevada Commission as a publicly traded
corporation (a ''Registered Corporation'') and has been found suitable
to own the stock of Palace Station, Boulder Station, Texas Station,
Sunset Station, GVSI, and SGSI. The Company is also licensed as a
manufacturer and distributor. Palace Station, Boulder Station, Texas
Station, Sunset Station, GVSI and SGSI are each a corporate gaming
licensee and TCAI is a limited liability company licensee
(individually a ''Gaming Subsidiary'' and collectively the ''Gaming
Subsidiaries'') under the terms of the Nevada Act. As a Registered
Corporation, the Company is required periodically to submit detailed
financial and operating reports to the Nevada Commission and the
Nevada Board and furnish any other information which the Nevada
Commission or the Nevada Board may require. No person may become a
stockholder or holder of an interest of, or receive any percentage of
profits from the Gaming Subsidiaries without first obtaining licenses
and approvals from the Nevada Gaming Authorities. The Company and the
Gaming Subsidiaries have obtained from the Nevada Gaming Authorities
the various registrations, findings of suitability, approvals, permits
and licenses (collectively, the "Gaming Licenses") required in order
to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered
Corporation, such as the Company or the Gaming Subsidiaries, which
holds a license, in order to determine whether such individual is
suitable or should be licensed as a business associate of a Registered
Corporation or a gaming licensee. Officers, directors and certain key
employees of the Gaming Subsidiaries must file applications with the
Nevada Gaming Authorities and may be required to be licensed or found
suitable by the Nevada Gaming Authorities. Officers, directors and
key employees of the Company who are actively and directly involved in
gaming activities of the Gaming Subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for
any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed
personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in
licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a
finding of suitability or licensure, the Nevada Gaming Authorities
have jurisdiction to disapprove a change in corporate position.
12
<PAGE>
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue to
have a relationship with the Company or the Gaming Subsidiaries, the
companies involved would have to sever all relationships with such
person. In addition, the Nevada Commission may require the Company or
the Gaming Subsidiaries to terminate the employment of any person who
refuses to file the appropriate applications. Determinations of
suitability or questions pertaining to licensing are not subject to
judicial review in Nevada.
The Company, Palace Station, Boulder Station, Texas Station, Sunset
Station, TCAI and SGSI are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing
transactions by Palace Station, Boulder Station, Texas Station, Sunset
Station, TCAI and SGSI must be reported to or approved by the Nevada
Commission and/or the Nevada Board.
If it were determined that the Nevada Act was violated by a Gaming
Subsidiary, the gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company, the
Gaming Subsidiaries and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate Palace Station, Boulder
Station, Texas Station, Sunset Station, and Barley's Casino and, under
certain circumstances, earnings generated during the supervisor's
appointment (except for reasonable rental value of the casino) could
be forfeited to the State of Nevada. Limitation, conditioning or
suspension of the gaming licenses of the Gaming Subsidiaries or the
appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect the Company's gaming
operations.
Any beneficial owner of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have their suitability as a beneficial owner of the
Company's voting securities determined if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent
with the declared policies of the state of Nevada. The applicant must
pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act provides that persons who acquire beneficial ownership
of more than 5% of the voting securities of a Registered Corporation
must report the acquisition to the Nevada Commission. The Nevada Act
also requires that beneficial owners of more than 10% of the voting
securities of a Registered Corporation must apply to the Nevada
Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such
filing. An ''institutional investor,'' as defined in the Nevada
Commission's regulations, which acquires beneficial ownership of more
than 10%, but not more than 15% of the Company's voting securities
may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities
for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of
business as an institutional investor and not for the purpose of
causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management policies or operations
of the Company, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the
Company's voting securities for investment purposes only. Activities
which are not deemed to be inconsistent with holding voting securities
for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management,
policies or operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found
suitable is a corporation, partnership or trust, it must submit
detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the
Nevada Commission or the Chairman of the Nevada Board, may be found
unsuitable. The same restrictions apply to a record owner if the
record owner, after request, fails to identify the beneficial owner.
Any stockholder who is found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the common stock beyond such
period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary
action if, after it receives notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or
the Gaming Subsidiaries, the Company (i) pays that person any dividend
or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pay remuneration in any
form to that person for services rendered or otherwise, or (iv) fails
to pursue all lawful efforts to require such unsuitable person
to relinquish his voting
13
<PAGE>
securities including, if necessary, the immediate purchase of said
voting securities for cash at fair market value. Additionally, the Clark
County Board has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
If the Nevada Commission determines that a person is unsuitable to own
such security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its approvals, if
without the prior approval of the Nevada Commission, it: (i) pays to
the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person
in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
The Nevada Commission may, in its discretion, require the holder of
any debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a
Registered Corporation if the Nevada Commission has reason to believe
that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. If the Nevada Commission determines
that a person is unsuitable to own such security, then pursuant to the
Nevada Act, the Registered Corporation can be sanctioned, including
the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time.
If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make
such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance
in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates
to bear a legend indicating that the securities are subject to the
Nevada Act. However, to date, the Nevada Commission has not imposed
such a requirement on the Company.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. On March 20, 1997, the Nevada
Commission granted the Company prior approval to make offerings under
a Shelf Registration for a period of two years, subject to certain
conditions (''Shelf Approval''). However, the Shelf Approval may be
rescinded for good cause without prior notice upon the issuance of an
interlocutory stop order by the Chairman of the Nevada Board and must
be renewed at the end of the two year approval period. The Shelf
Approval also applies to any affiliated company wholly-owned by the
Company (an ''Affiliate'') which is a publicly traded corporation or
would thereby become a publicly traded corporation pursuant to a
public offering. The Shelf Approval also includes approval for the
Gaming Subsidiaries to guarantee any security issued by, or to
hypothecate their assets to secure the payment or performance of any
obligations issued by, the Company or an Affiliate in a public
offering under the Shelf Approval. The Shelf Approval does not
constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act
or conduct by a person whereby such person obtains control, may not
occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy
the Nevada Board and the Nevada Commission that they meet a variety of
stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate
defense tactics affecting Nevada corporate gaming licensees, and
Registered Corporations that are affiliated with those operations, may
be injurious to stable and productive corporate gaming. The Nevada
Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Nevada's
gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form;
14
<PAGE>
and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before a
Registered Corporation can make exceptional repurchases of voting
securities above the current market price thereof and before a
corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization
proposed by the Registered Corporation's Board of Directors in response
to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the state of Nevada and
to the counties and cities in which the Nevada licensee's respective
operations are conducted. Depending upon the particular fee or tax
involved, these fees and taxes are payable either monthly, quarterly
or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or
(iii) the number of table games operated. A casino entertainment tax
is also paid by casino operations where entertainment is furnished in
connection with the selling of food or refreshments. Nevada licensees
that hold a license as an operator of a slot route, or manufacturer's
or distributor's license also pay certain fees and taxes to the state
of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively, ''Licensees''), and who proposes to become
involved in a gaming venture outside of Nevada, is required to deposit
with the Nevada Board, and thereafter maintain, a revolving fund in
the amount of $10,000 to pay the expenses of investigation by the
Nevada Board of their participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of
the Nevada Commission. Thereafter, licensees are required to comply
with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada
Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards
of honesty and integrity required of Nevada gaming operations, engage
in activities that are harmful to the state of Nevada or its ability
to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in
Nevada on the grounds of personal unsuitability. The loss or
restriction of the Company's gaming licenses in Nevada would have a
material adverse effect on its business and could require the Company
to cease gaming operations in Nevada.
NEVADA LIQUOR REGULATIONS
The sale of alcoholic beverages at Palace Station and Boulder Station
are subject to licensing, control and regulation by the City of Las
Vegas and the Clark County Board, respectively. Texas Station is
subject to licensing control and regulation of the City of North Las
Vegas. Sunset Station is subject to the licensing, control and
regulation of the City of Henderson. Barley's Casino is subject to
licensing control and regulation of the City of Henderson and the
Department of Treasury, Bureau of Alcohol, Tobacco and Firearms. All
licenses are revocable and are not transferable. The agencies
involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation
would) have a material adverse effect on the operations of the Gaming
Subsidiaries.
MISSOURI GAMING REGULATIONS
Gaming was originally authorized in the State of Missouri and the City
of St. Charles on November 3, 1992, although no governmental action
was taken to enforce or implement the original law. On April 29, 1993,
Missouri enacted the Missouri Gaming Law which replaced the original
law and established the Missouri Gaming Commission, which is
responsible for the licensing and regulation of riverboat gaming in
Missouri. The Missouri Gaming Commission has discretion to approve
gaming license applications for both permanently moored ("dockside")
riverboat casinos and powered ("excursion") riverboat casinos. On
September 20, 1993, the Company filed its initial application with the
Missouri Gaming Commission for either a dockside or a cruising gaming
license in St. Charles, Missouri, which license was issued on May 27,
1994, thereby making the Company one of the first two entrants in the
Missouri riverboat gaming market.
However, due to both a January 25, 1994, ruling by the Missouri Supreme
Court which held that games of chance, including certain games
authorized under the Missouri Gaming Law such as bingo and keno,
constitute "lotteries" and were therefore prohibited under the
Missouri Constitution and the failure of a state wide election on
April 5, 1994, to adopt a constitutional amendment that would have
exempted excursion boats and floating facilities from such
constitutional prohibition on lotteries, the Company commenced
operations only with those games which involve some
15
<PAGE>
element of skill ("limited gaming"), such as poker and blackjack,
that would be constitutionally permissible. The authorization of both
games of skill and games of chance ("full-scale gaming") occurred on
November 9, 1994, with passage by Missouri voters of a constitutional
amendment virtually identical to the measure which was defeated on
April 5, 1994. Full-scale gaming became effective on December 9, 1994,
and by the end of December 1994, the Company was conducting full scale
gaming on both its excursion and dockside casinos in St. Charles, Missouri.
Opponents of gaming in Missouri have brought several legal challenges
to gaming in the past and may possibly bring similar challenges in the
future. There can be no assurances that any future challenges, if
brought, would not further interfere with full-scale gaming operations
in Missouri, including the operations of the Company and its
subsidiaries.
On January 16, 1997, the Missouri Gaming Commission granted Station
Casino Kansas City a Class A and Class B Excursion Gambling Boat
license to own and operate the River King and River Queen floating
gaming facilities.
Under the Missouri Gaming Law, the ownership and operation of
riverboat gaming facilities in Missouri are subject to extensive state
and local regulation. By virtue of its gaming license in Missouri,
the Company, any subsidiaries it has or it may form and certain of its
officers and employees are subject to the Missouri Gaming Law and the
regulations of the Missouri Gaming Commission.
As part of the application and licensing process for a gaming license,
the applicant must submit detailed financial, operating and other
reports to the Missouri Gaming Commission. Each applicant has an
ongoing duty to update the information provided to the Missouri Gaming
Commission in the application. In addition to the information
required of the applicant, directors, officers and other key persons
must submit Personal Disclosure Forms which include detailed personal
financial information and are subject to thorough investigations. All
gaming employees must obtain an occupational license issued by the
Missouri Gaming Commission. The operators' licenses are issued
through application to the Missouri Gaming Commission, which requires,
among other things, (a) investigations into an applicant's character,
financial responsibility and experience qualifications and (b) that
applicants furnish (i) an affirmative action plan for the hiring and
training of minorities and women and (ii) an economic development or
impact report. License fees are a minimum of $50,000 for the initial
application and $25,000 annually thereafter.
The Missouri Gaming Commission may revoke or suspend gaming licenses
and impose other penalties for violation of the Missouri Gaming Law
and the rules and regulations which may be promulgated thereunder,
including, without limitation, forfeiture of all gaming equipment used
for improper gaming and fines of up to three times an operator's
highest daily gross adjusted receipts during the preceding twelve
months. The gaming licenses may not be transferred nor pledged as
collateral, and the Missouri Gaming Law regulations bar a licensee
from taking any of the following actions without 15 days' prior notice
to, and approval by, the Missouri Gaming Commission: any issuance of
an ownership interest of five percent or more of the issued and
outstanding ownership interest, any private incurrence of debt by the
licensee or any holding company of $1,000,000 or more, and any public
issuance of debt by a licensee or its holding company. The Missouri
Gaming Commission may reopen the licensing hearing of the applicable
gaming licensee prior to or following the consummation date to
consider the effect of the transaction on the gaming licensee's
suitability. In addition, the licensee must notify the Missouri
Gaming Commission of other transactions, including the transfer of
five percent or more of an ownership interest in the licensee or
holding company, the pledge of five percent or more of the ownership
interest in a license or holding company, and any transaction of at
least $1,000,000. The restrictions on transfer of ownership apply to
the Company and its subsidiaries.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer that
licensees must pay to the Missouri Gaming Commission, certain minimum
payout requirements, a 20% tax on adjusted gross receipts,
prohibitions against providing credit to gaming customers (except for
the use of credit cards and cashing checks) and a requirement that
each licensee reimburse the Missouri Gaming Commission for all costs
of any Missouri Gaming Commission staff necessary to protect the
public on the licensee's riverboat. Licensees must also submit
audited quarterly financial reports to the Commission and pay the
associated auditing fees. Other areas of operation which are subject
to regulation under Missouri rules are the size, denomination and
handling of chips and tokens; the surveillance methods and computer
monitoring of electronic games; accounting and audit methods and
procedures; and approval of an extensive internal control system. The
Missouri rules also require that all of an operator's purchases of
chips, tokens, dice, playing cards and electronic gaming devices must
be acquired from suppliers licensed by the Missouri Gaming Commission.
The Missouri Gaming Law provides for a loss limit of $500 per person
per excursion and requires licensees to maintain scheduled excursions
with boarding and debarking times
16
<PAGE>
regardless of whether the riverboat cruises. Although the Missouri
Gaming Law provides no limit on the amount of riverboat space that
may be used for gaming, the Missouri Gaming Commission is empowered
to impose such space limitations through the adoption of rules and
regulations. Additionally, United States Coast Guard safety regulations
could affect the amount of riverboat space that may be devoted to gaming.
The Missouri Gaming Law also includes requirements as to the form of
riverboats, which must resemble Missouri's riverboat history to the extent
practicable and include certain non-gaming amenities. All eleven
licensees in Missouri are authorized to conduct all or a portion
of their operations on a dockside basis.
With respect to the availability of dockside gaming, which may be more
profitable than excursion gaming, the Missouri Gaming Commission is
empowered to determine on a site-by-site basis where such gaming is
appropriate and shall be permitted. All other riverboats will be
required to cruise. On December 27, 1994, Station Casino St.
Charles was granted a dockside gaming license for its floating gaming
facility by the Missouri Gaming Commission. On April 16, 1996,
Station Casino St. Charles, subsequently received approval from the
Missouri Gaming Commission to conduct its operations on its excursion
gaming riverboat on a continuously docked basis. The U.S. Coast Guard
has recommended to the Missouri Gaming Commission that all gaming
vessels on the Missouri River be required to remain dockside because
certain characteristics of the Missouri River, including turbulence,
lack of emergency response infrastructure and potential congestion,
create substantially elevated risks for the operation of large
capacity passenger vessels. Dockside gaming in Missouri may differ
from dockside gaming in other states, such as Mississippi, because the
Missouri Gaming Commission has the ability to require ''simulated
cruising.'' This requirement permits customers to board dockside
riverboats only at specific times and prohibits boarding during a
certain portion of each simulated cruise, which is presently two
hours in length. Dockside gaming in Missouri may not be as profitable
as dockside gaming in other states, that allow for continuous customer
ingress and egress.
The Company may not make a public issuance of debt or ownership
interests without first notifying the Missouri Gaming Commission at
least 15 days prior to such issuance. The Missouri Gaming Commission
may reopen the licensing hearing of the gaming licensee prior to or
following the consummation date to consider the effect of the
transaction on the gaming licensee's suitability.
LOUISIANA GAMING REGULATIONS
The Company, through SGSI and other subsidiaries, provides slot route
management services to numerous food and beverage establishments,
commercial businesses and major hotels and casinos in southern Nevada
and Louisiana. In July 1992, SGSI entered into a joint venture with a
corporation owned by certain Louisiana residents to form Southwest
Gaming Services of Louisiana ("SGLA"), in which SGSI owns a 49% equity
interest.
The manufacture and distribution of video draw poker devices in
Louisiana and the ownership of video poker terminals ("Terminals") in
Louisiana, are subject to the Louisiana Draw Poker Control Law and the
Rules and Regulations promulgated thereunder (the "Louisiana Act") and
to licensing and regulatory control by the Louisiana Gaming Control
Board and the Video Gaming Division of the Gaming Enforcement Section
of the Office of State Police within the Louisiana Department of
Public Safety and Corrections (the "Louisiana Gaming Authorities").
The laws and regulations of the Louisiana Gaming Authorities are based
upon declarations of policy which are concerned with protecting the
video gaming industry from elements of organized crime, illegal
gambling activities and other harmful elements, and protection of the
public from illegal and unscrupulous gaming to ensure the fair play of
devices.
SGLA has been granted a license as a Terminal owner by the Louisiana
Gaming Authorities. SGSI owns a 49% equity interest in SGLA, with the
remaining 51% interest owned by River Cities Gaming Corporation, a
Louisiana corporation not otherwise affiliated with the Company. The
license held by SGLA is not transferable and must be renewed annually
through payment of fees.
The Louisiana Gaming Authorities may, upon compliance with certain
regulatory procedures, limit, condition, suspend or revoke the license
of SGLA for any cause deemed reasonable by such licensing agency.
Fines for violations of gaming laws or regulations may be levied
against the licensees and the persons involved. In addition, SGLA
could be subject to fines for each violation of the gaming laws.
Suspension or revocation of any of the licenses of SGLA could have a
material adverse effect upon the business of the Company.
17
<PAGE>
Every person who has or controls more than a 5% ownership, income or
profit interest in an entity which has or applies for a license in
accordance with the provisions of the Louisiana Gaming Authorities, to
exercise a significant influence over the activities of a licensee
must meet all suitability requirements and qualifications for
licensees. Thus, any holder of more than 10% of the equity securities
of the Company will be required to meet such suitability requirements
and qualifications. Frank J. Fertitta III, Blake L. and Delise F.
Sartini, and Lorenzo J. Fertitta have already obtained such requisite
licenses. The Louisiana Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. The Louisiana
Gaming Authorities require the submission of detailed personal and
financial information followed by a thorough investigation. The
applicant for licensing must pay a filing fee which also covers the
cost of investigation. Determinations of suitability or of questions
pertaining to licensing are subject to review under the provisions of
Louisiana's Administrative Procedures Act.
In order for an entity such as a joint venture to be licensed by the
Louisiana Gaming Authorities, it must be demonstrated that a majority
of the interest in the joint venture is owned by persons who have been
domiciled in Louisiana for a period of a least two years prior to the
date of the application.
Terminals must meet strict specifications established by the Louisiana
Gaming Authorities. There are also restrictions on the number of
Terminals that can be operated at certain locations. Fees are paid to the
Louisiana Gaming Authorities based upon a percentage of net revenues
from the operation of such Terminals, together with license renewal
fees payable quarterly and annually.
GENERAL GAMING REGULATIONS IN OTHER JURISDICTIONS
If the Company becomes involved in gaming operations in any other
jurisdictions, such gaming operations will subject the Company and
certain of its officers, directors, key employees, stockholders and
other affiliates ("Regulated Persons") to strict legal and regulatory
requirements, including mandatory licensing and approval requirements,
suitability requirements, and ongoing regulatory oversight with
respect to such gaming operations. Such legal and regulatory
requirements and oversight will be administered and exercised by the
relevant regulatory agency or agencies in each jurisdiction (the
"Regulatory Authorities"). The Company and the Regulated Persons will
need to satisfy the licensing, approval and suitability requirements
of each jurisdiction in which the Company seeks to become involved in
gaming operations. These requirements vary from jurisdiction to
jurisdiction, but generally concern the responsibility, financial
stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in
gaming operations. In general, the procedures for gaming licensing,
approval and finding of suitability require the Company and each
Regulated Person to submit detailed personal history information and
financial information to demonstrate that the proposed gaming
operation has adequate financial resources generated from suitable
sources and adequate procedures to comply with the operating controls
and requirements imposed by law and regulation in each jurisdiction,
followed by a thorough investigation by such Regulatory Authorities.
In general, the Company and each Regulated Person must pay the costs
of such investigation. An application for any gaming license, approval
or finding of suitability may be denied for any cause that the
Regulatory Authorities deem reasonable. Once obtained, licenses and
approvals may be subject to periodic renewal and generally are not
transferable. The Regulatory Authorities may at any time revoke,
suspend, condition, limit or restrict a license, approval or finding
of suitability for any cause they deem reasonable. Fines for
violations may be levied against the holder of a license or approval
and in certain jurisdictions, gaming operation revenues can be
forfeited to the state under certain circumstances. There can be no
assurance that the Company will obtain all of the necessary licenses,
approvals and findings of suitability or that its officers, directors,
key employees, other affiliates and certain other stockholders will
satisfy the suitability requirements in one or more jurisdictions, or
that such licenses, approvals and findings of suitability, if
obtained, will not be revoked or renewed in the future.
Failure by the Company to obtain, or the loss or suspension of, any
necessary licenses, approval or findings of suitability would prevent
the Company from conducting gaming operations in such jurisdiction and
possibly in other jurisdictions. The Company may be required to submit
detailed financial and operating reports to Regulatory Authorities.
The laws, regulations and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be
amended. Any changes in such laws, regulations, or their
interpretations could have a material adverse effect on the Company.
18
<PAGE>
EMPLOYEES
As of May 31, 1997, the Company and its subsidiaries had approximately
10,000 employees. Management believes that it has good relationships
with its employees.
FORWARD-LOOKING STATEMENTS
When used in this report and elsewhere by management from time to
time, the words "believes," "anticipates," and "expects" and similar
expressions are intended to identify forward-looking statements with
respect to the financial condition, results of operations and
expansion projects of the Company and its subsidiaries. Certain
important factors, including but not limited to, competition from
other gaming operations, construction risks, licensing and other
regulatory risks, could cause the Company's actual results to differ
materially from those expressed in the Company's forward-looking
statements. Further information on potential factors which could
affect the financial condition, results of operations and expansion
projects of the Company and its subsidiaries are included in the
filings of the Company with the Securities and Exchange Commission,
including, but not limited to, the Company's Registration Statement on
Form S-3 (File No. 333-1102). Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as
of the date thereof. The Company undertakes no obligation to publicly
release any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof.
ITEM 2. PROPERTIES
Palace Station is situated on 39 acres located on the west side of Las
Vegas, Nevada. The Company owns 26 acres and leases the remaining 13
acres pursuant to five long-term ground leases with unaffiliated third
parties. The property is subject to a lien to secure borrowings under
the Company's reducing revolving bank credit facility.
Boulder Station is situated on 40 acres located on the east side of
Las Vegas, Nevada. The Company owns 13 acres and leases the remaining
27 acres from a trust pursuant to a long-term ground lease. The
trustee of such trust is Bank of America NT&SA and the beneficiary of
which is KB Enterprises, an affiliated company owned by Frank J.
Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the
parents of Frank J. Fertitta III, Chairman of the Board and Chief
Executive Officer of the Company. The lease has a maximum term of 65
years, ending in June 2058. Currently, the lease provides for monthly
payments of $125,000 until June 1998. In June 1998 and every ten years
thereafter the rent will be adjusted to the product of the fair market
value of the land and the greater of (i) the then prevailing annual
rate of return for comparably situated property or (ii) 8% per year.
The rent will be further adjusted in June 2003 and every ten years
thereafter by a cost of living factor. In no event will the rent for
any period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year
intervals beginning in June 1998, to purchase the land at fair market
value. The Company believes that the terms of the ground lease are as
fair to the Company as could be obtained from an independent third
party. The Company's leasehold interest in the property and the
acreage it owns directly are subject to a lien to secure borrowings
under the Company's reducing revolving bank credit facility.
Texas Station is situated on 47 acres located in North Las Vegas,
Nevada. The Company leases the property from a trust pursuant to a
long-term ground lease. The trustee of such trust is Bank of America
NT&SA and the beneficiary of which is Texas Gambling Hall & Hotel,
Inc. an affiliate company of the Related Lessor. The lease has a
maximum term of 65 years, ending in May 2060. The lease provides for
monthly rental payments of $150,000 until July 2000. In July 2000,
and every ten years thereafter, the rent will be adjusted to the
product of the fair market value of the land and the greater of (i)
the then prevailing rate of return being realized for owners of
comparable land in Clark County or (ii) 8% per year. The rent will be
further adjusted by a cost of living factor after the first ten years
and every ten years thereafter. In no event will the rent for any
period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year
intervals, to purchase the land at fair market value. The Company
believes that the terms of the ground lease are as fair to the Company
as could be obtained from an independent third party. The Company's
leasehold interest in the property is subject to a lien to secure
borrowings under the Company's reducing revolving bank credit
facility.
Station Casino St. Charles is situated on 52 acres located immediately
north of Interstate 70 on the edge of the Missouri River in St.
Charles, Missouri. The Company owns the entire 52 acres. The
Company's ownership interests in the St. Charles property is subject
to liens to secure borrowings under the Company's reducing revolving
bank credit facility.
19
<PAGE>
Station Casino Kansas City is situated on 171 acres in Kansas City,
Missouri. The Company entered into a joint venture with an
unaffiliated third party to acquire the property. Station Casino
Kansas City leases the site from the joint venture with monthly
payments of $100,000. The Company amended the lease and will make monthly
payments of $85,000 through March 31, 1997, and $90,000 through the
remainder of the lease term. The lease term was extended to March
31, 2006, with the option to extend the lease for up to eight renewal
periods of ten years each plus one additional period of seven years.
Commencing April 1, 1998, and every anniversary thereafter the rent shall
be adjusted by a cost of living factor. In connection with the joint
venture agreement, the Company received an option that provided for the
right to acquire the joint venture partners interest in this joint
venture. The Company has the option to purchase this interest at any
time after April 1, 2002 through April 1, 2011 for $11.7 million,
however, commencing April 1, 1998, the purchase price will be adjusted
by a cost of living factor of not more than 5% or less than 2% per annum.
The Company paid $2.6 million for this option. The Company's leasehold
interest in the property is subject to a lien to secure borrowings
under the Company's reducing revolving bank credit facility, and under
certain circumstances the Bank Facility permits the lenders to force
the exercise of such option.
The Company is developing Sunset Station on approximately 100 acres
located in the Green Valley/Henderson area of Las Vegas, Nevada. The
Company leases approximately 48 acres pursuant to a long-term ground
lease with an unaffiliated third party. The lease was entered into in
June 1994, and has a term of 65 years with monthly rental payments of
$120,000, adjusted on each subsequent five-year anniversary by a cost
of living factor. On the seventh anniversary date of the lease, the
Company has the option to purchase the land for $23.8 million. The
lessor also has an option to sell the land to the Company for $21.8
million on the seventh anniversary of the lease. The remaining
approximate 52 acres were purchased by the Company in September 1995,
for approximately $11 million.
The Company has acquired several parcels of land in various
jurisdictions as part of the Company's development activities. At
March 31, 1997, $22.6 million of land had been acquired for potential
gaming projects in jurisdictions where gaming has been approved. In
addition, $3.7 million of land had been acquired in certain
jurisdictions where gaming has not yet been approved. No assurances
can be made that these jurisdictions will approve gaming in the
future.
The Company has entered into various purchase agreements whereby the
Company has the option to acquire or lease land for developing
existing and potential new gaming projects with purchase prices
totaling $31.3 million at March 31, 1997. In consideration for these
options, the Company has paid or placed in escrow $6.0 million at
March 31, 1997, all of which would be forfeited should the Company not
exercise its options to acquire or lease the land.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various lawsuits
relating to routine matters incidental to their business. Management
does not believe that the outcome of such litigation, in the
aggregate, will have a material adverse effect on the Company.
A suit seeking status as a class action lawsuit was filed by
plaintiff, William H. Poulos, et. al, as class representative, on
April 26, 1994, in the United States District Court, Middle District
of Florida, naming 41 manufacturers, distributors and casino operators
of video poker and electronic slot machines, including the Company.
On May 10, 1994, a lawsuit alleging substantially identical claims was
filed by another plaintiff, William Ahearn, et. al, as class
representative, in the United States District Court, Middle District
of Florida, against 48 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including the
Company and most of the other major hotel-casino companies. The
lawsuits allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce persons to play
such games based on a false belief concerning how the gaming machines
operate, as well as the extent to which there is an opportunity to
win. The two lawsuits have been consolidated into a single action,
and have been transferred to the United States District Court, for the
State of Nevada. On September 26, 1995, a lawsuit alleging
substantially identical claims was filed by plaintiff, Larry Schreier,
et. al, as class representative, in the United States District Court
for the District of Nevada, naming 45 manufacturers, distributors, and
casino operators of video poker and electronic slot machines,
including the Company. Motions to dismiss the Poulos/Ahearn and
Schreier cases were filed by Defendants. On April 17, 1996, the
Poulos/Ahearn lawsuits were dismissed, but plaintiffs were given leave
to file Amended Complaints on or before May 31, 1996. On May 31,
1996, an Amended Compliant was filed, naming William H. Poulos,
et. al, as plaintiff. Defendants filed a motion to dismiss. On
August 15, 1996, the Schreier lawsuit was dismissed with leave to amend.
On September 27, 1996, Schreier filed an Amended Complaint. Defendants
filed motions to dismiss the Amended Complaint. In December 1996,
the Court consolidated the
20
<PAGE>
Poulos/Ahearn, the Schreier, and a third case not involving the Company
and ordered all pending motions be deemed withdrawn without prejudice,
including Defendants' Motions to Dismiss the Amended Complaints. The
plaintiffs filed a Consolidated Amended Complaint on February 13, 1997.
The Defendants have filed motions to dismiss, substantially identical
to those filed in the earlier separate actions. The motions to
dismiss remain pending before the Court. Management believes that
the claims are wholly without merit and does not expect that the
lawsuits will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The registrant's common stock trades on New York Stock Exchange under
the symbol "STN" . Prior to September 5, 1996, the common stock
traded on the Nasdaq Stock Market under the symbol ''STCI.'' The
following table sets forth, for the periods indicated, the high and
low closing sale price per share of the common stock as reported on
the New York Stock Exchange or the Nasdaq National Market as
applicable.
High Low
---- ---
Fiscal Year Ending March 31, 1996
---------------------------------
First Quarter 17.50 10.38
Second Quarter 20.00 14.88
Third Quarter 16.00 12.50
Fourth Quarter 15.13 9.75
Fiscal Year Ending March 31, 1997
---------------------------------
First Quarter 16.13 11.63
Second Quarter 14.38 11.00
Third Quarter 12.75 9.50
Fourth Quarter 10.63 8.13
As of May 31, 1997, there were 1,069 holders of record of the
Company's common stock.
The Company has never paid cash dividends on any shares of common
stock. The Company does not intend to pay cash dividends in the
foreseeable future so that it may reinvest its earnings in the
development of its business. The payment of dividends in the future
will be at the discretion of the Board of Directors of the Company.
Restrictions imposed by the Company's debt instruments and other
agreements limit the payment of dividends by the Company. See
''Management's Discussion and Analysis of Financial Condition and
Results of Operations-Description of Certain Indebtedness and Capital
Stock''.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of
and for the Company's fiscal years ended March 31, 1993, 1994, 1995,
1996 and 1997 have been derived from consolidated financial statements
which, except for 1993 and 1994, are contained elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial data set forth
below are qualified in their entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements, the
notes thereto and other financial and statistical information included
elsewhere in this Annual Report on Form 10-K.
<TABLE>
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Casino..................................................... $ 450,013 $ 358,495 $ 210,534 $ 109,090 $ 100,426
Food and beverage.......................................... 92,220 73,057 43,208 26,078 25,157
Room....................................................... 27,420 23,614 17,690 14,360 12,373
Other...................................................... 48,957 39,099 36,561 31,226 20,743
---------- ---------- ---------- ---------- ----------
Gross revenues.......................................... 618,610 494,265 307,993 180,754 158,699
Less promotional allowances................................ (35,095) (27,408) (17,715) (11,211) (8,804)
---------- ---------- ---------- ---------- ----------
Net revenues............................................ 583,515 466,857 290,278 169,543 149,895
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Casino..................................................... 203,857 150,805 92,812 47,492 42,185
Food and beverage.......................................... 68,994 57,659 34,045 19,528 20,184
Room....................................................... 10,318 9,147 7,014 5,439 5,398
Other...................................................... 23,927 24,902 27,270 22,432 15,822
Selling, general and administrative........................ 120,285 97,466 60,810 26,269 28,514
Corporate expenses......................................... 18,284 15,979 13,141 7,920 -
Restructuring charge....................................... 2,016 - - - -
Development expenses....................................... 1,302 3,960 7,200 1,791 -
Depreciation and amortization.............................. 44,589 35,039 22,220 12,976 10,935
Preopening expenses........................................ 31,820 2,436 19,378 - -
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses...................... 525,392 397,393 283,890 143,847 123,038
---------- ---------- ---------- ---------- ----------
Operating income............................................. 58,123 69,464 6,388 25,696 26,857
Interest expense, net........................................ (36,698) (30,563) (19,967) (9,179) (8,949)
Other income (expense)....................................... (47) 1,150 2,160 2,192 32
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............................ 21,378 40,051 (11,419) 18,709 17,940
Income tax (provision) benefit............................... (7,615) (14,579) 3,477 (4,806) -
Reinstatement of deferred taxes.............................. - - - (4,486) -
Pro forma income taxes (unaudited) (1)....................... - - - - (6,100)
---------- ---------- ---------- ---------- ----------
Net Income (loss)............................................ 13,763 25,472 (7,942) 9,417 -
Preferred stock dividends.................................... (7,245) (53) - - -
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock................. $ 6,518 $ 25,419 $ (7,942) $ 9,417 $ -
========== ========== ========== ========== ==========
Proforma net income after income taxes (unaudited)(1)........ $ - $ - $ - $ 12,309 $ 11,840
========== ========== ========== ========== ==========
Earnings per share:
Earnings (loss) per common share............................. $ 0.18 $ 0.75 $ (0.26) - -
Pro forma earnings per share (unaudited) (1)................. - - - $ 0.42 $ 0.44
Weighted average common shares outstanding................... 35,316 33,918 30,113 - -
Pro forma weighted average common
shares outstanding (unaudited)........................... - - - 29,413 26,681
22
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OTHER DATA (2):
Number of hotel rooms........................................ 1,708 1,528 1,328 1,028 1,028
Average daily occupancy rate................................. 96% 94% 95% 97% 94%
Casino square footage........................................ 432,000 278,000 206,000 84,000 84,000
Number of slot machines...................................... 13,008 9,555 7,020 3,323 3,202
Capital expenditures (3)..................................... $ 506,096 $ 307,745 $ 163,884 $ 102,687 $ 15,504
EBITDA (4)................................................... 136,548 106,939 47,986 41,743 37,792
Cash flows provided by (used in):
Operating activities....................................... $ 111,803 $ 77,953 $ 48,494 $ 23,685 $ 29,658
Investing activities....................................... (479,008) (266,935) (157,585) (111,072) (14,867)
Financing activities....................................... 294,859 286,889 109,893 92,073 (10,309)
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 42,522 $ 114,868 $ 16,961 $ 16,159 $ 11,473
Total assets................................................. 1,234,118 827,314 436,538 301,486 185,110
Long-term debt (5)........................................... 760,963 464,998 299,814 159,460 133,215
Stockholder's equity......................................... 298,848 278,470 87,886 95,791 37,153
</TABLE>
(1) Reflects provisions for federal income taxes (assuming a 34% effective
tax rate for both periods) as if the Company had not been treated as
an S corporation during these periods.
(2) Other Data relating to the number of hotel rooms, the casino square
footage and the number of slot machines represent end of period data.
(3) Capital expenditures for the fiscal year ended March 31, 1994 included
$52.8 million related to the development of Station Casino St. Charles
and $31.9 million related to the development of Boulder Station. Capital
expenditures for the fiscal year ended March 31, 1995 include $52.9 million
related to the development of Station Casino St. Charles and $90.7 million
related to the development of Boulder Station. Capital expenditures for
the fiscal year ended March 31, 1996 include $84.9 million related to the
acquisition and completion of Texas Station, $25.0 million related to the
parking garage and entertainment complex at Boulder Station, $62.8 million
related to the development and construction of Station Casino Kansas City,
$29.7 million related to the development and construction of Sunset Station
and $39.4 million related to the expansion of Station Casino St. Charles
including an elevated roadway, a parking structure and restuarant
facilities. Capital expenditures for the fiscal year ended March 31, 1997
included $211.1 million related to the development and construction of
Station Casino Kansas City, $112.8 million related to the development and
construction of Sunset Station and $99.6 million related to the
development and construction of the St. Charles Expansion.
(4) "EBITDA" consists of operating income and, in the case of Station Casino
St. Charles, lease income of $3.1 million relating to the Casino St.
Charles riverboat in fiscal year 1994, plus depreciation and amortization,
including preopening expenses and restructuring charge in 1997. EBITDA
should not be construed as an alternative to operating income as an
indicator of the Company's operating performance, or as an alternative to
cash provided by operating activities as a measure of liquidity. The
Company has presented EBITDA solely as supplemental disclosure because the
Company believes that certain investors consider this information useful
in the evaluation of the financial performance of companies with
substantial depreciation and amortization.
(5) Long-term debt at March 31, 1993 includes $7.8 million of notes payable to
affiliates, which were subsequently paid.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in
conjunction with "Selected Consolidated Financial Data" and the
financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table highlights the results of operations for
the Company and its subsidiaries:
Fiscal Year Ended March 31,
---------------------------
1997 1996 1995
---- ---- ----
NEVADA OPERATIONS:
PALACE STATION
Net revenues.................... $ 133,464 $ 131,178 $ 133,313
Operating income................ 30,802 28,615 31,390
EBITDA (1)...................... 38,890 38,225 41,285
BOULDER STATION
Net revenues.................... $ 143,039 $ 118,040 $ 64,645
Operating income (2)............ 37,728 28,103 5,450
EBITDA (1)...................... 48,553 35,650 16,842
TEXAS STATION
Net revenues.................... $ 80,690 $ 55,098 $ --
Operating income................ 4,062 3,903 --
EBITDA (1)...................... 12,462 8,904 --
TOTAL NEVADA OPERATIONS:
Net revenues.................... $ 357,193 $ 304,316 $ 197,958
Operating income................ 72,592 60,621 36,840
EBITDA (1)...................... 99,905 82,779 58,127
MISSOURI OPERATIONS:
STATION CASINO ST. CHARLES
Net revenues.................... $ 158,760 $ 129,878 $ 58,384
Operating income (loss) (3)..... 34,996 28,058 (12,039)
EBITDA (1)...................... 47,144 39,627 5,632
STATION CASINO KANSAS CITY
Net revenues.................... $ 39,071 $ -- $ --
Operating (loss) (4)............ (30,701) -- --
EBITDA (1)...................... 3,536 -- --
TOTAL MISSOURI OPERATIONS:
Net revenues.................... $ 197,831 $ 129,878 $ 58,384
Operating income (loss) (3)(4).. 4,295 28,058 (12,039)
EBITDA (1)...................... 50,680 39,627 5,632
STATION CASINOS, INC. AND OTHER:
Net revenues.................... $ 28,491 $ 32,663 $ 33,936
Operating loss.................. (18,764) (19,215) (18,413)
EBITDA (1)...................... (14,037) (15,467) (15,773)
(1) "EBITDA" consists of operating income and, in the case
of Station Casino St. Charles, lease income relating
to the Casino St. Charles riverboat, plus depreciation
and amortization, including preopening expenses
and a restructuring charge in 1997. EBITDA should not
be construed as an alternative to operating income
as an indicator of the Company's operating performance,
or as an alternative to cash provided by operating
activities as a measure of liquidity. The Company
has presented EBITDA solely as supplemental disclosure
because the Company believes that certain investors
consider this information useful in the evaluation of the
financial performance of companies with substantial depreciation
and amortization.
(2) Operating income for Boulder Station for the fiscal
year ended March 31, 1995, includes preopening expenses
of $7.5 million.
(3) Operating loss for Station Casino St. Charles for the
fiscal year ended March 31, 1995, includes preopening
expenses of $11.9 million.
(4) Operating loss for Station Casino Kansas City for the
fiscal year ended March 31, 1997, includes preopening
expenses of $31.1 million.
24
<PAGE>
Fiscal Year 1997 Compared to Fiscal Year 1996
Consolidated net revenues increased 25.0% to $583.5 million for
the fiscal year ended March 31, 1997, from $466.9 million in the prior
year. The Company's Nevada Operations contributed $357.2 million of
net revenues for the fiscal year ended March 31, 1997, an increase
of 17.4% over the prior year. This increase is primarily due to
improved operations at Boulder Station and the operations of Texas
Station which opened in July 1995. The Company's Missouri Operations
contributed $197.8 million of net revenues for the fiscal year ended
March 31, 1997, an increase of 52.3% over the prior year. This
increase is due to the opening at Station Casino Kansas City in
January 1997, as well as an increase in revenues at Station Casino
St. Charles. For the fiscal year ended March 31, 1996, net revenues
and operating income at Station Casino St. Charles were adversely
impacted by flooding on the Missouri River, which closed operations
for 16 days and disrupted operations through the balance of the first
quarter of fiscal year 1996. During the fiscal year ended March 31,
1997, the improved results at Station Casino St. Charles were achieved
despite disruption created from the construction of a new parking garage
and elevated roadway, which opened in May 1996, and construction related
to the further development of the property's master plan. Flooding
on the Missouri River did occur again in May 1996. The newly
completed parking garage and elevated roadway served one of its
intended purposes in minimizing business disruption caused by the
flood. Additionally, results at Station Casino St. Charles were
adversely impacted with the opening of a new hotel/casino in March
1997.
Operating income decreased 16.3% to $58.1 million for the fiscal
year ended March 31, 1997, from $69.5 million in the prior year.
Operating income at the Company's Nevada Operations increased 19.8%
to $72.6 million from $60.6 million in the prior year. Operating
income at the Company's Missouri Operations were negatively impacted
by the write-off of preopening expenses for Station Casino Kansas
City and a one-time restructuring charge from the implementation of
a plan to reduce costs and improve efficiency which resulted
primarily in employee severance payments. Operating income at
Station Casino St. Charles increased 24.7% to $35.0 million. For
the fiscal year ended March 31, 1997, these results, including an
increase in net interest expense of $6.1 million, a decrease in the
income tax provision of $7.0 million and dividends of $7.2 million
on the convertible preferred stock issued in March 1996, resulted in
net income applicable to common stock of $6.5 million, or earnings
per common share of $0.18, compared to net income applicable to
common stock of $25.4 million or earnings per common share of $0.75
in the prior year.
CASINO. Casino revenues increased 25.5% to $450.0 million for the
fiscal year ended March 31, 1997, from $358.5 million in the prior
year. This increase is due to the opening of Station Casino Kansas
City, a full year of operations at Texas Station, as well as
improved results at both Boulder Station and Station Casino St.
Charles. Casino revenues increased $42.8 million and $51.6 million
for the Nevada Operations and Missouri Operations, respectively.
Station Casino Kansas City generated casino revenue of $29.9 million
since opening in January 1997.
Casino expenses increased 35.2% to $203.9 million for the fiscal
year ended March 31, 1997, from $150.8 million in the prior year.
These increases in casino expenses are consistent with the increases
in casino revenues discussed above.
Casino net profit margin decreased to 54.7% from 57.9% in the
prior year. The decrease is due to a slight decrease at the Nevada
Operations and a lower margin at Station Casino Kansas City due to
the start-up nature of the new operations. In addition, the Missouri
Operations have a lower margin than the Company's combined margin due
primarily to higher gaming tax rates in Missouri as compared to Nevada.
FOOD AND BEVERAGE. Food and beverage revenues increased 26.2% to
$92.2 million for the fiscal year ended March 31, 1997, from $73.1
million in the prior year. This improvement is primarily due to an
increase in food and beverage revenues at Station Casino St. Charles
of $5.0 million resulting from two new full-service restaurant
facilities which opened in October 1995, an increase of $5.0 million
at Texas Station and $7.5 million from Station Casino Kansas City.
Food and beverage net profit margins improved to 25.2% for the
fiscal year ended March 31, 1997, from 21.1% in the prior year.
This increase in net margins is primarily due to improvements at
the Nevada Operations, especially Texas Station, as a result of
continued focus on cost control and strong margins at Station Casino
St. Charles with the addition of the two full-service restaurants.
25
<PAGE>
ROOM. Room revenues increased 16.1% to $27.4 million for the fiscal
year ended March 31, 1997, from $23.6 million in the prior year.
This increase is due primarily to the addition of Texas Station with
a total of 200 rooms which contributed an increase of $1.6 million
of room revenues and Station Casino Kansas City with a total of 180
rooms which contributed $1.2 million of room revenues for the fiscal
year ended March 31, 1997. The Company-wide room occupancy
increased to 96% from 94%, while the average daily room rate
increased to $48 from $46.
OTHER. Other revenues increased 25.2% to $49.0 million for the
fiscal year ended March 31, 1997, from $39.1 million in the prior
year. This increase is due to $2.3 million for the Company's
interest in the operating income of Barley's Casino & Brewing
Company which opened in January 1996, $3.1 million of lease income
from the lease of a riverboat gaming facility, combined increases in
other revenues at the Company's other operating properties of $7.5
million, offset by lost revenues of $3.0 million from the sale of
vending assets of Southwest Services which were sold in September
1995. The riverboat gaming facility lease will terminate in August
1997. Revenues from the Company's slot route business remained
constant at $21.0 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") increased 23.4% to $120.3 million
for the fiscal year ended March 31, 1997, from $97.5 million in the
prior year. This increase is primarily due to the addition of Texas
Station in July 1995 and Station Casino Kansas City in January 1997.
SG&A as a percentage of net revenues decreased slightly to 20.6%
from 20.9% in the prior year.
CORPORATE EXPENSES. Corporate expenses increased 14.4% to $18.3
million for the fiscal year ended March 31, 1997, from $16.0 million
in the prior year. These increases are attributable to increases in
personnel infrastructure to manage the Company's new properties and
projects under development. Corporate expenses decreased to 3.1% of
net revenues for the fiscal year ended March 31, 1997, from 3.4% in
the prior year.
DEVELOPMENT EXPENSES. Development expenses decreased significantly
for the fiscal year ended March 31, 1997 compared to the prior year.
This decrease is the result of reduced efforts to identify potential
gaming opportunities. Such costs are incurred by the Company in its
efforts to identify and pursue potential gaming opportunities in
selected jurisdictions, including those in which gaming has not been
approved. The Company expenses development costs including
lobbying, legal and consulting until such time as the jurisdiction
has approved gaming and the Company has identified a specific site.
Costs incurred subsequent to these criteria being met are
capitalized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased 27.3% to $44.6 million for the fiscal year ended March
31, 1997, from $35.0 million in the prior year. Station Casino
Kansas City contributed $2.8 million of this increase, while Texas
Station contributed $3.8 million. Depreciation expense increased at
Boulder Station primarily as a result of the parking garage and
entertainment facilities added during mid-fiscal year 1996 as well
as at Station Casino St. Charles primarily as a result of the
parking garage which opened in May 1996. These increases were
offset by a decrease in depreciation expense at Palace Station.
PREOPENING EXPENSES. The Company capitalizes significant preopening
expenses associated with its construction projects, including
Station Casino Kansas City which opened January 16, 1997, and Sunset
Station. These amounts are expensed upon the opening of the related
project and could have a material adverse impact on the Company's
earnings. During the fiscal year ended March 31, 1997 the Company
expensed preopening expenses of $31.8 million substantially related
to Station Casino Kansas City. Preopening expenses for the fiscal
year ended March 31, 1996 relate to the opening of the new
restaurant facilities at Station Casino St. Charles, the theater and
parking garage at Boulder Station, the opening of Texas Station in
July 1995 and the opening at Barley's Casino & Brewing Company in
January 1996.
INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) increased 59.2% to $58.8 million for the fiscal year
ended March 31, 1997. This increase is primarily attributable to
added interest costs associated with the 10 1/8 % Senior
Subordinated Notes issued by the Company in March 1996 and
borrowings under the reducing revolving credit facility. During the
first quarter of fiscal year 1997, the Company recorded interest
income of $0.7 million from investments in tax free municipal
securities purchased with the excess proceeds of the public
offerings completed in March 1996. Capitalized interest is expected
to continue, but at a reduced rate with the opening of Station Casino
Kansas City in January 1997, due to the construction of a new casino
facility in Las Vegas and expansion projects at the Company's
Missouri facilities, as well as ongoing improvements at the
Company's existing Las Vegas facilities (see "Liquidity and Capital
Resources").
26
<PAGE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Company's results of operations include the operations of Texas
Station located in northwest Las Vegas which opened on July 12, 1995,
operations for the full fiscal year ended March 31, 1996 at Boulder
Station, which opened on August 23,1994, and full-scale gaming at
Station Casino St. Charles which opened on a limited basis on May 27,
1994. Operations at Station Casino St. Charles were limited for a
significant portion of fiscal year 1995 due to the unexpected decision
of the Missouri Supreme Court in January 1994 that certain games of
chance were prohibited under the Missouri Constitution. On November
8, 1994, by referendum, the Missouri voters amended the Missouri
Constitution to permit full-scale gaming. Full-scale operations began
at Station Casino St. Charles on December 9, 1994.
Consolidated net revenues increased 60.8% to $466.9 million for the
fiscal year ended March 31, 1996, as compared to $290.3 million for
the prior year. This increase is due to the factors noted in the
preceding paragraph. Station Casino St. Charles contributed $129.9
million of net revenues, an increase of $71.5 million as compared to
the prior year, while Boulder Station contributed $118.0 million of
net revenues, an increase of $53.4 million as compared to the prior
year. Texas Station contributed $55.1 million of net revenues during
the current fiscal year. For the fiscal year ended March 31, 1996,
net revenues and operating income of Station Casino St. Charles were
negatively impacted by the flooding of the Missouri River which led to
the closing of the property from May 17 through June 1, 1995, and
disruption of operations throughout the balance of the first quarter.
The operations of Station Casino St. Charles have been further
disrupted by ongoing construction, including a new parking garage and
elevated roadway which opened in May 1996. The new parking garage
and elevated roadway should provide improved access to the gaming
facility and reduce the likelihood of further business disruption from
flooding. In addition this project is the foundation for future phases
of the land based elements of the Station Casino St. Charles master
plan.
Operating income increased $63.1 million to $69.5 million for the
fiscal year ended March 31, 1996, as compared to $6.4 million for the
prior year. This improvement is due to the new and expanded
operations discussed above. In addition, contributing to the lower
operating income for the fiscal year ended March 31, 1995 were
preopening expenses of $19.4 million related to the opening of Boulder
Station and Station Casino St. Charles. The Company did not incur a
large amount of preopening expenses in connection with the Texas
Station acquisition due to the fact that Texas Station was
substantially ready to open upon acquisition. This improvement in
operating income, partially offset by an increase in net interest
expense of $10.6 million and an increase of $18.1 million in the
income tax provision, resulted in net income applicable to common
stock of $25.4 million, or earnings per common share of $0.75 for
fiscal year 1996.
CASINO. Casino revenues increased 70.3% to $358.5 million for the
fiscal year ended March 31, 1996, as compared to $210.5 million for
the prior year. This increase is directly related to $40.1 million
in casino revenues generated by the new Texas Station property and
combined casino revenue increases generated by Station Casino St.
Charles and Boulder Station of $110.2 million. For the fiscal year
ended March 31, 1996, casino revenues at Palace Station decreased
$2.2 million or 2.3% as compared to the prior year, primarily as a
result of a decline in sports book revenue. Management believes that
Palace Station's revenues were negatively impacted by road
construction at Interstate 15 and Sahara Avenue. This construction
was substantially completed in October 1995. In addition, two of the
restaurants at Palace Station were closed for remodeling during
different parts of the fiscal year which management believes also had
a negative impact on casino revenues. Both restaurants have been
reopened. Revenues at the Southwest Company's Louisiana Downs Race
Track video poker operation declined by $2.2 million for the fiscal
year ended March 31, 1996 as compared to the prior year. This
decrease is a result of increased competition in northwest Louisiana
from riverboats opened in the first two quarters of fiscal year 1995.
The Company is considering various alternatives for improving cash
flows or possibly selling its interest in the Louisiana Downs joint
venture. In any event, the operations of the joint venture are not
material to the Company's financial position or results of operations
taken as a whole.
Casino expenses increased 62.5% to $150.8 million for the fiscal year
ended March 31, 1996, as compared to $92.8 million for the prior year.
This increase in casino expenses is consistent with the increase in
casino revenues discussed above. Casino net profit margin improved to
57.9% from 55.9% during the prior year. This improvement comes
primarily from the operations at Station Casino St. Charles where the
casino profit margin was 53.1% for the fiscal year ended March 31,
1996, compared to 45.0% for the prior year. The improvement at
Station Casino St. Charles was primarily due to increased revenues
generated as a result of the Missouri vote which allowed full-scale
gaming beginning in December 1994. The increased revenues allowed for
substantial operational efficiencies. The casino net profit
27
<PAGE>
margins at Station Casino St. Charles are lower than the Company's
combined margin primarily due to higher gaming tax rates in Missouri as
compared to Nevada.
FOOD AND BEVERAGE. Food and beverage revenues increased $29.8 million
or 69.1% for the fiscal year ended March 31, 1996, as compared to the
prior year. This increase is due to food and beverage revenues of
$15.1 million at the newly opened Texas Station property and combined
food and beverage revenue increases at Station Casino St. Charles and
Boulder Station of $14.2 million. Food and beverage revenues at
Station Casino St. Charles have increased with the opening of two full
service restaurants in October 1995. The addition of these
restaurants should have a positive impact on food and beverage
revenues during the upcoming fiscal year.
Food and beverage net profit margins have remained relatively flat,
with a margin of 21.1% in fiscal year 1996. Net profit margins for
Boulder Station have improved significantly over the prior year from
5.4% to 17.8% for the fiscal year ended March 31, 1996. Management
believes that the low margin experienced in the prior year was due to
typical initial operating inefficiencies of a new property. In fiscal
year 1996 the increase in margin at Boulder Station was due to
efficiencies resulting from effective cost control measures
implemented. The net profit margin at Texas Station was 9.7% which
management attributes primarily to initial operating inefficiencies
typical for a new property.
ROOM. Room revenues increased 33.5% to $23.6 million for the fiscal
year ended March 31, 1996, as compared to $17.7 million for the prior
year. This increase is due primarily to the addition of Texas Station
and a full year of operations at Boulder Station. Texas Station, with
a total of 200 rooms, contributed $2.1 million of the increase.
Boulder Station, with a total of 300 rooms, contributed $2.7 million
of the increase. Palace Station contributed an increase of $1.1
million over the prior year. The Company-wide room occupancy rate
declined from 95% in the prior year to 94% for the fiscal year ended
March 31, 1996, while the average daily room rate increased from $41
to $46.
OTHER. Other revenues increased $2.5 million or 6.9% to $39.1 million
for the fiscal year ended March 31, 1996, as compared to the prior
year. This increase is due primarily to increased slot route revenues
of $4.0 million and an increase in other revenues at Boulder Station
of $1.8 million. In addition, Texas Station added $1.8 million of
other revenues during the fiscal year ended March 31, 1996. These
increases were offset by decreases in operating revenues resulting
after the sale of certain assets of the pay phone division at the end
of fiscal year 1995 and the vending division in the middle of fiscal
year 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") increased $36.7 million or 60.3% for
the fiscal year ended March 31, 1996, as compared to the prior year.
This increase is primarily due to the operations at Station Casino St.
Charles and Boulder Station, which combined, contributed an increase
of $20.5 million over the prior year. In addition, Texas Station
added $14.8 million of SG&A for the fiscal year ended March 31, 1996.
SG&A as a percentage of net revenues remained consistent at 20.9%.
CORPORATE EXPENSES. Corporate expenses increased $2.8 million or
21.6% to $16.0 million for the fiscal year ended March 31, 1996, as
compared to the prior year. This increase is attributable to
increases in personnel and other infrastructure costs required to
manage the Company's new properties and expansion plans for fiscal
years 1997 and beyond. Corporate expenses declined to 3.4% of net
revenues for the fiscal year ended March 31, 1996, as compared to 4.5%
in the prior year.
DEVELOPMENT EXPENSES. Development expenses decreased significantly
for the fiscal year ended March 31, 1996, compared to the prior year.
This decrease was the result of reduced efforts to identify potential
gaming opportunities. Such costs are incurred by the Company in its
efforts to identify and pursue potential gaming opportunities in
selected jurisdictions, including those in which gaming has not been
approved. The Company expenses development costs including lobbying,
legal and consulting until such time as the jurisdiction has approved
gaming and the Company has identified a specific site. Costs incurred
subsequent to these criteria being met are capitalized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $12.8 million or 57.7% to $35.0 million for the fiscal year
ended March 31, 1996. This increase is attributed to increases of
$3.5 million at Boulder Station and $5.2 million at Station Casino
St. Charles due to expansions at these facilities. In addition,
Texas Station generated $4.1 million of depreciation and amortization
for the fiscal year ended March 31, 1996.
INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) for the fiscal year ended March 31, 1996 were $36.7
million, a 41.5% increase over the prior year. This increase is
primarily attributable to increases in
28
<PAGE>
term note and revolving line of credit balances as a result of the capital
required for the Company's expansion strategy. Capitalized interest is
expected to continue to grow at an increased pace due to ongoing
improvements at the Company's casinos as well as construction of new
facilities (see "Liquidity and Capital Resources").
Other income includes a $1.2 million gain recorded as a result of
the sale of certain assets of the vending division of Southwest
Services, Inc.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 1997, the Company's sources
of capital included cash flows from operating activities of $111.8
million, borrowings under the Company's reducing revolving bank credit
facility of $277.0 million, borrowings under the Sunset Loan Agreement
(as defined herein) of $46.0 million, net proceeds from the exercise
of the underwriters' over-allotment option to purchase an additional
270,000 shares of convertible preferred stock related to 1,800,000
shares of convertible preferred stock issued by the Company on March
29, 1996, of $13.1 million and excess cash invested from the March 29,
1996, issuance of convertible preferred stock and senior subordinated
notes. At March 31, 1997, the Company had available borrowings of
$91.0 million under its reducing revolving bank credit facility, $64.0
million under the Sunset Loan Agreement, available advances of $40.0
million under the Sunset Operating Lease (as defined herein) and $42.5
million in cash and cash equivalents. In addition, in April 1997, the
Company completed a offering of $150 million of senior subordinated
notes, the proceeds of which were used to reduce amounts outstanding
under the bank credit facility.
During the fiscal year ended March 31, 1997, total capital
expenditures were approximately $506.1 million, of which approximately
(i) $211.1 million was associated with the development and
construction of Station Casino Kansas City, (ii) $112.8 million was
associated with the development and construction of Sunset Station,
(iii) $99.6 million was associated with the construction of the
St. Charles Expansion Project, (iv) $14.7 million was associated with
the construction of a 4,000-space parking structure and elevated
roadway at Station Casino St. Charles, which opened in May 1996 and
(v) $67.9 million was associated with various other projects,
maintenance capital expenditures and net construction period interest.
The Company's primary requirements during fiscal year 1998 are
expected to include the following:
. Sunset Station - The Company anticipates that the total cost
of the Sunset Station project will be approximately $198 million
(excluding net construction period interest and preopening
expenses), of which approximately $143.9 million had been
incurred as of March 31, 1997. The cost of the project has
increased $38 million from the previous estimate of $160 million.
The increased cost is primarily attributable to the Company's
decision to expand the project to include an increase in the
number of slot and video poker machines from 2,300 to 2,700
machines, a tenant buildout for a microbrewery, enhancements to
the streetscape facades, sky ceilings, stained glass, landscaping
and other general interior upgrades, an increased number of hotel
suites, an enhanced outdoor pool and an amphitheater. In
addition, the Company experienced increased construction costs
due in part to the high level of overall construction activity in
Las Vegas. Management believes that the enhanced project will
position the Company as the premier entrant in the
Henderson/Green Valley area, and allow the Company to market the
property more effectively and offer guests a more complete
entertainment experience. Sunset Station is being constructed on
approximately 100 acres in the Henderson/Green Valley area of Las
Vegas and will feature a casino, hotel, and dining and
entertainment facilities. The construction of Sunset Station is
being financed through $110 million of non-recourse debt under
the Sunset Loan Agreement and a $40 million operating lease
provided by the Company. See "Description of Certain
Indebtedness and Capital Stock." As of March 31, 1997, the
Company has made equity contributions of $54.0 million to the
project and plans to fund all of the remaining construction and
preopening expenses in excess of the $110 million note and $40
million operating lease through additional equity contributions
of approximately $33.0 million. Sunset Station is expected to open
in June 1997.
. Station Casino St. Charles - The Company has commenced
construction of the St. Charles Expansion Project. In connection
with this expansion project, the Company is constructing a man-
made backwater basin that would contain two new gaming vessels,
which will be similar to the gaming vessels at Station Casino
Kansas City. The project also includes a transition deck to
provide direct access from the 4,000-space parking garage into
the new casino facilities. This project is expected to cost
approximately $190 million (excluding construction period
interest and preopening expenses), of which $99.6 million had
been incurred at March 31, 1997. Management
29
<PAGE>
estimates that the St. Charles Expansion Project will be completed
by mid-summer 1998. The scope and timing of this expansion project
depend on several factors, including, but not limited to, the
Company's ability to draw under its Bank Facility as restricted by
the maximum funded debt to EBITDA (as adjusted for preopening
expenses) ratio described herein. In addition, the Company has
entered into a non-binding letter of intent with the Gordon Group
to develop a substantial portion of the new retail and entertainment
complex portion of the St. Charles Expansion Project. The Company
anticipates that between $50 million and $70 million of financing
will be required by the Gordon Group for the development of a
uniquely styled shopping and entertainment area, including a
variety of specialty retail stores, restaurants and entertainment
attractions. If the Gordon Group fails to proceed with
development of the retail and entertainment complex, the Company
plans to complete a smaller-scale build-out of the retail and
entertainment complex for an estimated cost of $16 million (net
of construction period interest and preopening expenses). No
assurances can be given that the Company and the Gordon Group
will enter into a definitive development agreement with respect
to the project, that the Gordon Group will be able to obtain the
necessary financing, that the Gordon Group will complete the
build-out of the complex within the Company's estimated
completion time of mid-summer 1998 or that the Gordon Group will
be able to develop and operate the project successfully.
. Construction Contracts Payable - The payment of
approximately $95 million of construction contracts payable and
retention outstanding as of March 31, 1997. This includes
approximately $35.3 million related to the construction and
development of Sunset Station which is expected to open in June
1997.
Other planned uses of capital include (i) maintenance capital
expenditures at Palace Station, Boulder Station, Texas Station,
Sunset Station, Station Casino Kansas City, Station Casino St. Charles
and SGSI, (ii) principal and interest payments on indebtedness,
(iii) dividend payments on convertible preferred stock and (iv)
general corporate purposes. The Company has delayed commencement of
construction on a 507-room hotel project at Boulder Station. Management
is currently evaluating the timing of this Boulder Station project which
depends significantly on the operating results of the Company, including
its new facility Station Casino Kansas City, as well as the Las Vegas
market's ability to absorb significantly increased hotel capacity.
The Company capitalizes significant preopening expenses associated
with its construction projects, including Sunset Station, which
amounts will be expensed upon the opening of the related project and
could have a material adverse impact on the Company's earnings.
The Company believes cash flows from operations, borrowings under the
reducing revolving bank credit facility borrowings under the Sunset
Loan Agreement, net proceeds from the issuance of $150 million 9 3/4%
senior subordinated notes in April 1997, vendor and lease financing
of equipment and existing cash balances will be adequate to satisfy
the Company's anticipated uses of capital during fiscal year 1998.
The Company, however, is continually evaluating the financing needs of
its current and planned projects. If more attractive financing
alternatives become available to the Company, the Company may amend
its financing plans with respect to such projects, assuming such
financing would be permitted under its debt agreements (see
"Description of Certain Indebtedness and Capital Stock") and other
applicable agreements.
The Company's plans for the development of additional new gaming
opportunities, as well as further expansion of the existing
operations, may require substantial amounts of additional capital.
The Company has entered into various option agreements to acquire or
lease land for the development of existing and potential new gaming
projects with purchase prices totaling $31.3 million as of March 31,
1997. In consideration for these options, the Company had paid or
placed in escrow $6.0 million as of March 31, 1997, all of which would
be forfeited should the Company not exercise its option to acquire or
lease the land. To develop all of these projects, together with any
new commitments the Company may enter into, the Company will be
required to obtain additional capital through debt or equity
financings. There can be no assurance that any such financing would be
available to the Company or, if available, that any such financing
would be available on favorable terms. The Company's reducing
revolving bank credit facility and the senior subordinated note
indentures limit the incurrence of additional indebtedness by the
Company and its subsidiaries and contain various financial and other
covenants. In addition, the Sunset Loan Agreement contains similar
restrictions related to the Sunset Station project. See "Description
of Certain Indebtedness and Capital Stock."
30
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK
BANK FACILITY
The Company's secured, reducing revolving loan agreement, as amended
on March 21, 1997 (the "Bank Facility"), is a reducing revolving
credit facility which provides for borrowings up to an aggregate
principal amount of
$368 million as of March 31, 1997. The Bank Facility is secured
by substantially all of the assets of Palace Station, Boulder Station,
Texas Station, Station Casino Kansas City and Station Casino St. Charles
(collectively, the "Borrowers"). The Company and SGSI guarantee the
borrowings under the Bank Facility (collectively the "Guarantors").
The Bank Facility matures on September 30, 2000 and available
borrowings reduce quarterly by varying amounts (including $8.0 million
for the fiscal quarter ending June 30, 1997 and $10.0 million for each
quarter ending September 30, 1997, December 31, 1997, and March 31, 1998,
and by substantially higher amounts thereafter). Borrowings under the
Bank Facility bear interest at a margin above the bank's prime rate or
the Eurodollar Rate, as selected by the Company. The margin above such
rates, and the fee on the unfunded portions of the Bank Facility, will
vary quarterly based on the combined Borrower's and the Company's
consolidated (exclusive of Sunset Station) ratio of funded debt to
earnings before interest, taxes, depreciation and amortization
("EBITDA") adjusted for preopening expenses. As of March 31, 1997,
the Company's margin above the Eurodollar Rate on borrowings under the
Bank Facility is 2.0%. Such margin will increase to 2.75% if the
maximum funded debt to EBITDA (adjusted for preopening expenses) ratio
is reached.
The Bank Facility contains certain financial and other covenants.
These include a maximum funded debt to EBITDA (adjusted for preopening
expenses) ratio for the Borrowers combined of 3.00 to 1.00 for each
fiscal quarter through June 30, 1997, 2.75 to 1.00 for each fiscal
quarter through June 30, 1998, and 2.50 to 1.00 for each fiscal
quarter thereafter, a minimum fixed charge coverage ratio for the
preceding four quarters for the Borrowers combined of 1.35 to 1.00 for
the periods March 31, 1996 through June 30, 1998, and 1.50 to 1.00
for periods thereafter, a limitation on indebtedness, and limitations
on capital expenditures. As of March 31, 1997, the Borrowers funded
debt to EBITDA ratio was 1.97 to 1.00 and the fixed charge coverage
ratio for the fiscal year ended March 31, 1997 was 2.54 to 1.00. A
tranche of the Bank Facility contains a minimum tangible net worth
requirement for Palace Station ($10 million plus 95% of net income
determined as of the end of each fiscal quarter with no reduction for
net losses) and certain restrictions on distributions of cash from
Palace Station to the Company. As of March 31, 1997, Palace Station's
tangible net worth exceeded the requirement by approximately $7
million. These covenants limit Palace Station's ability to make
payments to the Company, a significant source of anticipated cash for
the Company.
In addition, the Bank Facility has financial covenants relating to the
Company. These include prohibitions on dividends on or redemptions of
the Company's Common Stock, restrictions on repayment of any
subordinated debt, limitations on the incurrence of additional
indebtedness, the Company's senior subordinated notes and other
specified indebtedness, minimum consolidated tangible net worth
requirements (adjusted upwards for post October 1, 1995 preopening
expenses, not to exceed $18 million and for potential losses on
disposed or discontinued assets, not to exceed $30 million), for the
Company of $165 million plus 95% of post October 1, 1995 net income
(not reduced by net losses) and 100% of net equity offering proceeds,
and limitations on capital expenditures and investments. As of March
31, 1997, the Company's consolidated net worth exceeded the
requirement by approximately $20 million. In March 1997, the Company
obtained certain amendments to the Bank Facility in order to enhance
its borrowing capacity under its Bank Facility to fund the expansion
strategy described herein. As amended, the Bank Facility includes a
maximum funded debt to EBITDA (adjusted for preopening expenses)
ratio, including annualized EBITDA (adjusted for preopening expenses)
for any new venture, as defined, open less than a year, for the
Company on a consolidated basis of 5.00 to 1.00 for the fiscal quarter
ending March 31, 1997, 5.25 to 1.00 for each fiscal quarter through
December 31, 1997, 5.00 to 1.00 for each fiscal quarter through June
30, 1998, 4.75 to 1.00 for the fiscal quarter ending September 30,
1998, 4.50 to 1.00 for the fiscal quarter ending December 31, 1998,
4.25 to 1.00 for each fiscal quarter through June 30, 1999, 4.00 to
1.00 for the fiscal quarter ending September 30, 1999 and 3.75 to 1.00
thereafter. As of March 31, 1997, the Company's funded debt to EBITDA
ratio was 4.54 to 1.00. Such consolidated calculations for the
Company do not include Sunset Station. In addition, the Bank Facility
prohibits the Company from holding cash and cash equivalents in excess
of the sum of the amounts necessary to make the next scheduled
interest or dividend payments on the Company's senior subordinated
notes and preferred stock, the amounts necessary to fund casino
bankroll in the ordinary course of business and $2.0 million. The
Guarantors waive certain defenses and rights including rights of
subrogation and reimbursement. The Bank Facility contains customary
events of default and remedies and is cross-defaulted to the Company's
senior subordinated notes and the Change of Control Triggering Event
as defined in the indentures governing the senior subordinated notes.
32
<PAGE>
The Company has obtained an amendment to the Bank Facility that will
permit the Company to form a wholly-owned limited partnership to enter
into a financing transaction to lease the two new gaming vessels under
construction at Station Casinos St. Charles pursuant to an operating
lease.
SENIOR SUBORDINATED NOTES
The Company has $383.1 million, net of unamortized discount of
$8.0 million, of senior subordinated notes outstanding as of March 31,
1997. $186.2 million of these notes bear interest, payable semi-
annually, at a rate of 9 5/8% per year and $196.8 million of these
notes bear interest, payable semi-annually, at a rate of 10 1/8 % per
year . In April 1997, the Company issued $150 million of 9 3/4%
senior subordinated notes that rank PARI PASSU with the existing
senior subordinated notes (collectively the "Notes"). The indentures
governing the Notes ("Indentures") contain certain customary financial
and other covenants which prohibit the Company and its subsidiaries
from incurring indebtedness (including capital leases) other than (a)
non-recourse debt for certain specified subsidiaries, (b) certain
equipment financings, (c) the Notes, (d) up to $15 million of
additional indebtedness, (e) additional indebtedness if, after giving
effect thereto, a 2.00 to 1.00 pro forma Consolidated Coverage Ratio
(as defined) has been met, (f) Permitted Refinancing Indebtedness (as
defined), (g) borrowings of up to $72 million under the Bank Facility,
and (h) certain other indebtedness. At March 31, 1997, the Company's
Consolidated Coverage Ratio was 2.66 to 1.00. In addition, the
Indentures prohibit the Company from paying dividends on any of its
capital stock unless at the time of and after giving effect to such
dividends, among other things, the aggregate amount of all Restricted
Payments and Restricted Investments (as defined in the Indentures, and
which include any dividends on any capital stock of the Company) do
not exceed the sum of (i) 50% of Cumulative Consolidated Net Income
(as defined) of the Company (less 100% of any consolidated net
losses), (ii) certain net proceeds from the sale of equity securities
of the Company and (iii) $15 million. The limitation on the
incurrence of additional indebtedness and dividend restrictions in the
Indentures may significantly affect the Company's ability to pay
dividends on its capital stock. The Indentures also give the holders
of the Notes the right to require the Company to purchase the Notes at
101% of the principal amount of the Notes plus accrued interest
thereon upon a Change of Control and Rating Decline (each as defined
in the Indentures) of the Company.
SUNSET LOAN AGREEMENT, SUPPLEMENTAL LOAN AGREEMENT AND SUNSET OPERATING LEASE
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of
the Company, entered into a Construction/Term Loan Agreement (the
"Sunset Loan Agreement") with Bank of America National Trust and
Savings Association ("Bank of America NT&SA"), Bank of Scotland,
Societe Generale and each of the other lenders party to such
agreement, pursuant to which Sunset Station received a commitment for
$110 million to finance the remaining development and construction
costs of Sunset Station. The Company also entered into an operating
lease for certain furniture, fixtures and equipment with a cost of $40
million to be subleased to Sunset Station.
The Sunset Loan Agreement includes a first mortgage term note in the
amount of $110 million (the "Sunset Note") which is non-recourse to
the Company, except as to certain construction matters pursuant to a
completion guarantee dated as of September 25, 1996, executed by the
Company on behalf of Sunset Station, and except that the Company has
pledged all of the stock of Sunset Station as security for the Sunset
Loan Agreement. As of March 31, 1997, Sunset Station had borrowed
$46.0 million under the Sunset Note. The Sunset Note is to reduce
$1.8 million for each fiscal quarter ending March 1998 through
December 1998, $2.3 million for each fiscal quarter ending March 1999
through December 1999, and $2.0 million for the fiscal quarters ending
March 2000 and June 2000 and matures in September 2000. In addition,
the Sunset Note is subject to prepayment subsequent to July 1998 by an
amount equal to a specified percentage of Excess Cash Flow (as
defined). The Sunset Note carries an interest rate of 375 basis
points over the Eurodollar Rate (as defined in the Sunset Loan
Agreement). The Sunset Note is secured by substantially all of the
assets of Sunset Station, including a deed of trust with respect to
the real property on which Sunset Station is being constructed, a
portion of which is subject to a lease from the Company to Sunset
Station, and the remainder of which property is owned by Sunset
Station, and a security agreement as to all tangible and intangible
personal property including Sunset Station's rights under an operating
lease for certain furniture, fixtures and equipment.
The Sunset Loan Agreement contains certain customary financial and
other covenants (related exclusively to Sunset Station) including a
minimum fixed charge coverage ratio as of the last day of any full
quarter after the opening of Sunset Station of not less than 1.10 to
1.00, a maximum senior funded debt to EBITDA (adjusted for certain cash
contributions or advances by the Company) ratio after opening of 4.50
to 1.00 for the first full quarter reducing by 0.25 on certain quarters
thereafter to 3.25 to 1.00 for the tenth quarter and each quarter
thereafter, and a minimum net worth as
32
<PAGE>
of any quarter end after opening of not less then $52 million plus 80% of
net income (not reduced by net losses) for each quarter after opening,
plus 100% of certain additional equity contributions by the Company and
Supplemental Loans (as defined). In addition, the agreement places
restrictions on indebtedness and guarantees, dividends, stock
redemptions, mergers, acquisitions, sale of assets or sale of stock in
subsidiaries and limitations on capital expenditures.
In addition, the Company has provided a funding commitment to Sunset
Station of up to an additional $25 million pursuant to a supplemental
loan agreement (the "Supplemental Loan Agreement"). The Sunset Loan
Agreement requires Sunset Station to draw amounts under the
Supplemental Loan Agreement in the event of the failure of certain
financial covenants under the Sunset Loan Agreement. Loans under this
funding commitment may be drawn down beginning on the last day of the
first full calendar quarter ending after Sunset Station opens for
business in the amount of up to $10 million during the first year
after such date, up to $10 million during the second year after such
date and up to $5 million during the third year after such date. The
Supplemental Loan Agreement also provides for an additional, separate
funding commitment up to $40 million in connection with a purchase
option for certain furniture, fixtures and equipment currently
financed under the Sunset Operating Lease (as defined herein). Sunset
Station will pay interest at a rate per annum equal to the three
month Eurodollar Rate, the interest being payable solely in the form
of commensurate additions to the principal of the Supplemental Loans.
The Supplemental Loan Agreement expires in September 2001. The
funding commitments under the Supplemental Loan Agreement are subject
to limitations imposed by the Existing Indentures, the Indenture and
the Bank Facility.
In order to manage the interest rate risk associated with the Sunset
Note, Sunset Station entered into an interest rate swap agreement with
Bank of America NT&SA. This agreement swaps the variable rate
interest pursuant to the Sunset Note to a fixed rate of 9.58% on $35
million notional amount as of January 1997 increasing to $60 million
at March 1997, $90 million at June 1997, $100 million at September
1997 and then decreasing to $95 million at June 1998. The agreement
expires in December 1998. The difference paid or received pursuant to
the swap agreement is accrued as interest rates change and recognized
as an adjustment to interest expense for the Sunset Note. Sunset
Station is exposed to credit risk in the event of non-performance by
the counterparty to the agreement. The Company believes the risk of
non-performance by the counterparty is minimal.
The Company has also entered into an operating lease for furniture,
fixtures and equipment (the "Equipment") with a cost of $40 million,
dated as of September 25, 1996 (the "Sunset Operating Lease") between
the Company and First Security Trust Company of Nevada. The Sunset
Operating Lease expires in October 2000 and carries a lease rate of
225 basis points above the Eurodollar Rate. The Company has entered
into a sublease with Sunset Station for the Equipment pursuant to an
operating lease with financial terms substantially similar to the
Sunset Operating Lease. In the event that Sunset Station elects to
purchase the Equipment, the Company has provided a funding commitment
up to the amount necessary for such purchase pursuant to the
Supplemental Loan Agreement (subject to the limitations on funding
contained in the Supplemental Loan Agreement).
In connection with the Sunset Operating Lease, the Company also
entered into a participation agreement, dated as of September 25, 1996
(the "Participation Agreement") with the trustee, as lessor under the
Sunset Operating Lease, and holders of beneficial interests in the
Lessor Trust (the "Holders"). Pursuant to the Participation
Agreement, the Holders will advance funds to the trustee for the
purchase by the trustee of, or to reimburse the Company for the
purchase, of the Equipment, which will then be leased to the Company
under the Sunset Operating Lease, and in turn subleased to Sunset
Station. Pursuant to the Participation Agreement, the Company also
agreed to indemnify the Lessor and the Holders against certain
liabilities.
COMMON STOCK
The Company is authorized to issue up to 90,000,000 shares of its
common stock, $.01 par value per share (the "Common Stock"),
35,318,057 shares of which were issued and outstanding as of March 31,
1997. Each holder of the Common Stock is entitled to one vote for
each share held of record on each matter submitted to a vote of
stockholders. Holders of the Common Stock have no cumulative voting,
conversion, redemption or preemptive rights or other rights to
subscribe for additional shares. Subject to any preferences that may
be granted to the holders of the Company's preferred stock, each
holder of Common Stock is entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally
available therefor as well as any distributions to the stockholders
and, in the event of liquidation, dissolution or winding up of the
Company, is entitled to share ratably in all assets of the Company
remaining after payment of liabilities.
33
<PAGE>
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of its
preferred stock, $.01 par value per share (the "Preferred Stock"). In
March 1996, the Company completed an offering of 1,800,000 shares of
$3.50 Convertible Preferred Stock (the "Convertible Preferred Stock").
In April 1996, the underwriters exercised the over allotment option of
an additional 270,000 shares of the Convertible Preferred Stock. The
Board of Directors, without further action by the holders of Common Stock
or the Convertible Preferred Stock, may issue shares of Preferred
Stock in one or more series and may fix or alter the rights, preferences,
privileges and restrictions, including the voting rights, redemption
provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation rates, liquidation preferences, conversion
rights and the description and number of shares constituting
any wholly unissued series of Preferred Stock. Except as described
above, the Board of Directors, without further stockholder approval,
may issue shares of Preferred Stock with rights that could adversely
affect the rights of the holders of Common Stock or the Convertible
Preferred Stock. The issuance of shares of Preferred Stock under
certain circumstances could have the effect of delaying or preventing
a change of control of the Company or other corporate action.
CONVERTIBLE PREFERRED STOCK
As of March 31, 1997, the Company has 2,070,000 shares of Convertible
Preferred Stock outstanding, each with a liquidation preference of
$50.00 per share plus an amount equal to any accumulated and unpaid
dividends at the annual rate of $3.50 per share, or 7.0% of such
liquidation preference. Such dividends accrue and are cumulative from
the date of issuance and are payable quarterly. The Convertible
Preferred Stock is convertible at the option of the holder thereof at
any time, unless previously redeemed, into shares of Common Stock at
an initial conversion rate of 3.2573 shares of Common Stock for each
share of Convertible Preferred Stock, subject to adjustment in certain
circumstances. The Company may reduce the conversion price of the
Convertible Preferred Stock by any amount for any period of at least
20 days, so long as the decrease is irrevocable during such period.
The Convertible Preferred Stock is redeemable, at the option of the
Company, in whole or in part, for shares of Common Stock, at any time
after March 15, 1999, initially at a price of $52.45 per share of
Convertible Preferred Stock, and thereafter at prices decreasing
annually to $50.00 per share of Convertible Preferred Stock on and
after March 15, 2006, plus accrued and unpaid dividends. The Common
Stock to be issued is determined by dividing the redemption price by
the lower of the average daily closing price for the Company's Common
Stock for the preceding 20 trading days or the closing price of the
Company's Common Stock on the first business day preceding the date of
the redemption notice. Any fractional shares would be paid in cash.
There is no mandatory sinking fund obligation with respect to the
Convertible Preferred Stock. The holders of the Convertible Preferred
Stock do not have any voting rights, except as required by applicable
law and except that, among other things, whenever accrued and unpaid
dividends on the Convertible Preferred Stock are equal to or exceed
the equivalent of six quarterly dividends payable on the Convertible
Preferred Stock, the holders of the Convertible Preferred Stock,
voting separately as a class with the holders of any other series of
parity stock upon which like voting rights have been conferred and are
exercisable, will be entitled to elect two directors to the Board of
Directors until dividend arrearage has been paid or amounts have been
set apart for such payment. The Convertible Preferred Stock is senior
to the Common Stock with respect to dividends and upon liquidation,
dissolution or winding-up.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants............................... 36
Consolidated Balance Sheets............................................ 37
Consolidated Statements of Operations.................................. 38
Consolidated Statements of Stockholders' Equity........................ 39
Consolidated Statements of Cash Flows.................................. 40
Notes to Consolidated Financial Statements............................. 41
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Station Casinos, Inc.:
We have audited the accompanying consolidated balance sheets of Station
Casinos, Inc. (a Nevada corporation) and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in
the period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Station Casinos,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years
in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Las Vegas, Nevada
April 23, 1997
36
<PAGE>
STATION CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31,
---------
1997 1996
---- ----
(amounts in thousands,
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 42,522 $ 114,868
Accounts and notes receivable, net................................ 7,852 5,151
Inventories....................................................... 3,473 2,299
Prepaid gaming taxes.............................................. 4,291 3,726
Prepaid expenses and other........................................ 11,231 7,395
---------- ----------
Total current assets.......................................... 69,369 133,439
Property and equipment, net......................................... 1,069,052 616,211
Land held for development........................................... 26,354 28,934
Other assets, net................................................... 69,343 48,730
---------- ----------
Total assets.................................................. $1,234,118 $ 827,314
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 18,807 $ 23,256
Accounts payable.................................................. 21,106 11,091
Accrued payroll and related....................................... 13,460 11,519
Construction contracts payable.................................... 94,835 27,879
Accrued interest payable.......................................... 10,625 6,875
Accrued expenses and other current liabilities.................... 26,433 16,706
---------- ----------
Total current liabilities..................................... 185,266 97,326
Long-term debt, less current portion................................ 742,156 441,742
Deferred income taxes, net.......................................... 7,848 9,776
---------- ----------
Total liabilities............................................. 935,270 548,844
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.01; authorized 5,000,000
shares; 2,070,000 and 1,800,000 convertible preferred
shares issued and outstanding.................................. 103,500 90,000
Common stock, par value $.01; authorized 90,000,000 shares;
35,318,057 and 35,303,346 shares issued and outstanding......... 353 353
Additional paid-in capital........................................ 167,397 167,623
Deferred compensation - restricted stock.......................... (1,225) (1,811)
Retained earnings................................................. 28,823 22,305
---------- ----------
Total stockholders' equity.................................... 298,848 278,470
---------- ----------
Total liabilities and stockholders' equity.................... $1,234,118 $ 827,314
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE>
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended March 31,
1997 1996 1995
---------- --------- ---------
(amounts in thousands, except share data)
<S> <C> <C> <C>
Operating Revenues:
Casino......................................... $ 450,013 $ 358,495 $ 210,534
Food and beverage.............................. 92,220 73,057 43,208
Room........................................... 27,420 23,614 17,690
Other.......................................... 48,957 39,099 36,561
---------- ---------- ----------
Gross revenues.............................. 618,610 494,265 307,993
Promotional allowances......................... (35,095) (27,408) (17,715)
---------- ---------- ----------
Net revenues................................ 583,515 466,857 290,278
---------- ---------- ----------
Operating Costs and Expenses:
Casino......................................... 203,857 150,805 92,812
Food and beverage.............................. 68,994 57,659 34,045
Room........................................... 10,318 9,147 7,014
Other.......................................... 23,927 24,902 27,270
Selling, general and administrative............ 120,285 97,466 60,810
Corporate expenses............................. 18,284 15,979 13,141
Restructuring charge........................... 2,016 - -
Development expenses........................... 1,302 3,960 7,200
Depreciation and amortization.................. 44,589 35,039 22,220
Preopening expenses............................ 31,820 2,436 19,378
---------- ---------- ----------
525,392 397,393 283,890
---------- ---------- ----------
Operating income................................. 58,123 69,464 6,388
Other income (expense):
Interest expense, net.......................... (36,698) (30,563) (19,967)
Other.......................................... (47) 1,150 2,160
---------- ---------- ----------
(36,745) (29,413) (17,807)
---------- ---------- ----------
Income (loss) before income taxes................ 21,378 40,051 (11,419)
Income tax (provision) benfit.................... (7,615) (14,579) 3,477
---------- ---------- ----------
Net income (loss)................................ 13,763 25,472 (7,942)
Preferred stock dividends........................ (7,245) (53) -
---------- ---------- ----------
Net income (loss) applicable to common stock..... $ 6,518 $ 25,419 $ (7,942)
========== ========== ==========
Earnings (loss) per common share................. $ 0.18 $ 0.75 $ (0.26)
========== ========== ==========
Weighted Average Common Shares Outstanding....... 35,316,077 33,917,646 30,112,851
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE>
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Deferred Retained
Additional compensation - earnings Total
Preferred Common paid - in restricted (accumulated stockholders'
stock stock capital stock deficit) equity
----- ----- ------- ----- -------- -----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1994......... $ - $ 300 $ 90,663 $ - $ 4,828 $ 95,791
Restricted stock grant (Note 9).. - 1 2,929 (2,930) - -
Amortization of deferred
compensation.................... - - - 37 - 37
Net loss......................... - - - - (7,942) (7,942)
-------- -------- -------- -------- -------- --------
Balances, March 31,1995.......... - 301 93,592 (2,893) (3,114) 87,886
Issuance of common
stock (Note 7).................. - 52 77,309 - - 77,361
Issuance of preferred
stock (Note 7).................. 90,000 - (3,278) - - 86,722
Amortization of deferred
compensation.................... - - - 1,082 - 1,082
Preferred stock dividends........ - - - - (53) (53)
Net income....................... - - - - 25,472 25,472
-------- -------- -------- -------- -------- --------
Balances March 31,1996........... 90,000 353 167,623 (1,811) 22,305 278,470
Issuance of preferred
stock (Note 7).................. 13,500 - (405) - - 13,095
Exercise of stock options........ - - 179 - - 179
Amortization of deferred
compensation.................... - - - 586 - 586
Preferred stock dividends........ - - - - (7,245) (7,245)
Net income....................... - - - - 13,763 13,763
-------- -------- -------- -------- -------- --------
Balances March 31,1997........... $103,500 $ 353 $167,397 $ (1,225) $ 28,823 $298,848
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
39
<PAGE>
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 13,763 $ 25,472 $ (7,942)
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................................. 44,589 35,039 22,220
Amortization of debt discount and issuance costs.............. 5,279 3,141 1,211
Preopening expenses........................................... 31,820 2,436 19,378
(Decrease) increase in deferred income taxes.................. (3,752) 8,995 (5,449)
Changes in assets and liabilities:
Increase in accounts and notes receivable, net.............. (1,151) (522) (955)
Increase in inventories and prepaid expenses and other...... (3,751) (2,428) (3,152)
(Decrease) increase in accounts payable..................... 10,015 (2,710) 10,547
Increase in accrued expenses and other current liabilities.. 13,723 4,822 12,041
Other, net.................................................... 1,268 3,708 595
---------- ---------- ----------
Total adjustments...................................... 98,040 52,481 56,436
---------- ---------- ----------
Net cash provided by operating activities.............. 111,803 77,953 48,494
---------- ---------- ----------
Cash flows from investing activites
Capital expenditures.......................................... (505,735) (279,340) (141,165)
Proceeds from sale of land, property and equipment............ 8,900 6,578 12,483
Land held for development..................................... (36) (5,018) (5,507)
Other long-term assets........................................ (15,772) (1,638) (2,489)
Refund on land held for development........................... - - 9,500
Increase (decrease) in construction contracts payable......... 66,956 21,460 (10,337)
Preopening expenses........................................... (31,820) (2,436) (19,378)
Other, net.................................................... (1,501) (6,541) (692)
---------- ---------- ----------
Net cash used in investing activities.................. (479,008) (266,935) (157,585)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings (payments) under bank facility, net................ 277,000 (65,000) 37,000
Borrowings under Sunset loan agreement........................ 46,000 - -
Proceeds from notes payables.................................. 2,250 42,438 13,757
Principal payments on notes payable........................... (30,444) (34,958) (8,195)
Proceeds from the issuance of common stock.................... - 78,246 -
Proceeds from the issuance of senior subordinated notes....... - 191,292 72,091
Proceeds from the issuance of preferred stock................. 13,095 87,300 -
Distributions paid to stockholders............................ - - (4,014)
Dividends paid on preferred stock............................. (6,985) - -
Debt issuance costs and other, net............................ (6,057) (12,429) (746)
---------- ----------- ----------
Net cash provided by financing activities.............. 294,859 286,889 109,893
---------- ---------- ----------
Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents.............. (72,346) 97,907 802
Balance, beginning of year.................................... 114,868 16,961 16,159
---------- ---------- ----------
Balance, end of year.......................................... $ 42,522 $ 114,868 $ 16,961
========== ========== ==========
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts capitalized............ $ 28,577 $ 27,817 $ 17,021
Cash paid for income taxes, net............................... $ 9,250 $ 8,668 $ 1,303
Property and equipment purchases financed by debt............. $ 361 $ 28,405 $ 22,719
Assets sold for note receivable............................... S 1,550 S - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
40
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
BASIS OF PRESENTATION AND ORGANIZATION
Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdictional gaming enterprise that currently owns
and operates three hotel/casino properties in Las Vegas, Nevada, a
gaming and entertainment complex in St. Charles, Missouri and a gaming
and entertainment complex in Kansas City, Missouri. The Company also
owns and provides slot route management services in Southern Nevada
and Louisiana. Additionally, the Company is constructing a new
hotel/casino property in Las Vegas.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Palace Station Hotel &
Casino, Inc. (''Palace Station''), Boulder Station, Inc. (''Boulder
Station''), Texas Station, Inc. ("Texas Station") , Sunset Station,
Inc. ("Sunset Station"), St. Charles Riverfront Station, Inc.
(''Station Casino St. Charles''), Kansas City Station Corporation
("Station Casino Kansas City"), and Southwest Gaming Services, Inc.
(''SGSI''). The Company owns a 50% interest in Town Center
Amusements, Inc. d.b.a. Barley's Casino & Brewing Company. The
Company accounts for this investment using the equity method of
accounting. All significant intercompany balances and transactions
have been eliminated.
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 reporting period. Actual results may differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments purchased with an
original maturity of 90 days or less.
INVENTORIES
Inventories are stated at the lower of cost or market; cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives of the assets or the terms of the capitalized
lease, whichever is less. Costs of major improvements are capitalized,
while costs of normal repairs and maintenance are charged to expense
as incurred.
CAPITALIZATION OF INTEREST
The Company capitalizes interest costs associated with debt incurred
in connection with major construction projects. Interest
capitalization ceases once the project is complete. When no debt is
specifically identified as being incurred in connection with such
construction projects, the Company capitalizes interest on amounts
expended on the project at the Company's average cost of borrowed
money. Interest capitalized for the fiscal years ended March 31, 1997,
1996 and 1995 was approximately $21.1 million, $6.1 million and $6.0
million, respectively.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the issuance of
long-term debt are capitalized and amortized to interest expense over
the terms of the related debt agreements.
41
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
DEVELOPMENT ACTIVITIES
The Company expenses all internal salaries and related expenses with
respect to development activities. Other development costs, including
legal, lobbying, and consulting are expensed, until such time as the
jurisdiction has approved gaming and the Company has a specific site
identified. Costs incurred subsequent to these criteria being met are
capitalized. At March 31, 1997 and 1996, the Company had capitalized
costs of $0.7 million and $1.3 million, respectively, related to
various development projects. These costs are included in other
assets, net in the accompanying consolidated balance sheets.
PREOPENING EXPENSES
Prior to the opening of a facility, all operating expenses, including
incremental salaries and wages, related thereto are capitalized as
preopening expenses. At March 31, 1997, $2.4 million of preopening
expenses related to a new hotel/casino under construction known as
Sunset Station had been capitalized and are included in other assets,
net in the accompanying consolidated balance sheets. The Company
expenses preopening expenses upon the opening of the related facility.
During the fiscal year ended March 31, 1995, the Company incurred
preopening expenses of $7.5 million and $11.9 million related to
Boulder Station and Station Casino St. Charles, respectively. During
the fiscal year ended March 31, 1996, the Company incurred preopening
expenses of $2.4 million related to new projects for Texas Station and
Barley's Casino & Brewing Company and expansion projects at Boulder
Station and Station Casino St. Charles. During the fiscal year ended
March 31, 1997, the Company incurred preopening expenses of $31.8
million substantially related to the opening of Station Casino Kansas City.
REVENUES AND PROMOTIONAL ALLOWNACES
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference
between gaming wins and losses. All other revenues are recognized as
the service is provided. Revenues include the retail value of
accommodations and food and beverage provided on a complimentary basis
to customers. The estimated departmental costs of providing such
promotional allowances are included in casino costs and expenses and
consist of the following (amounts in thousands):
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995
---- ---- ----
Food and beverage . . . . . .. $ 27,418 $ 23,483 $ 14,276
Room . . . . . . . . . . . . . 1,439 1,203 874
Other. . . . . . . . . . . . . 1,263 653 313
-------- -------- --------
Total . . . . . . . .. . . . . $ 30,120 $ 25,339 $ 15,463
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed by dividing net income
(loss) applicable to common stock by the weighted average common
shares outstanding during the period. Earnings per share assuming
full dilution is not presented because the exercise of stock options
and the conversion of the convertible preferred stock does not have a
dilutive effect on the per share amounts.
The Financial Accounting Standards Board has issued Statement on
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
which is effective for fiscal years ending after December 15, 1997.
This statement replaces primary earnings per share ("EPS") with basic EPS.
No dilution for potentially dilutive securities is included in
basic EPS. This statement also requires when applying the treasury
stock method for diluted EPS to compute dilution for
42
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
options and warrants, to use average share price for the period, rather
than the more dilutive greater of the average share price or end-of-period
share price. The Company will adopt SFAS No. 128 in the fiscal year ending
March 31, 1998. Management believes the adoption of SFAS No. 128 will have
no impact on the Company's previously reported earnings per share.
2. ACCOUNTS AND NOTES RECEIVABLE
Components of accounts and notes receivable are as follows (amounts in
thousands):
MARCH 31,
1997 1996
--------------------
Casino......................................... $ 3,698 $ 2,569
Hotel.......................................... 1,331 1,144
Other.......................................... 3,876 2,082
--------- ---------
8,905 5,795
Allowance for doubtful accounts................ (1,053) (644)
--------- ---------
Accounts and notes receivable, net......... $ 7,852 $ 5,151
========= =========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31, 1997
and 1996 (amounts in thousands):
<TABLE>
Estimated Life March 31,
(years) 1997 1996
-------------- ----------- ----------
<S> <C> <C> <C>
Land ............................................. --- $ 17,114 $ 16,962
Land leases acquired ............................. 48-52 4,395 4,395
Buildings and leasehold improvements ............. 31-45 554,294 285,558
Boats and barges ................................. 20-45 123,774 81,463
Furniture, fixtures and equipment ................ 3-7 192,546 163,580
Construction in progress ......................... --- 283,792 165,513
---------- ----------
1,175,915 717,471
Accumulated depreciation and amortization ........ (106,863) (101,260)
---------- ----------
Property and equipment, net ...................... $1,069,052 $ 616,211
========== ==========
</TABLE>
At March 31, 1997 and 1996, substantially all property and equipment
of the Company is pledged as collateral for long-term debt.
4. LAND HELD FOR DEVELOPMENT
The Company has acquired several parcels of land in various
jurisdictions as part of the Company's development activities. The
Company's decision whether to proceed with any new gaming opportunity
is dependent upon future economic and regulatory factors, the
availability of financing and competitive and strategic
considerations. As many of these considerations are beyond the
Company's control, no assurances can be made that the Company will be
able to obtain appropriate licensing or be able to secure additional,
acceptable financing in order to proceed with any particular project.
At March 31, 1997 and 1996, $22.6 million and $22.7 million,
respectively, of land had been acquired for potential gaming projects
in jurisdictions where gaming has been approved. In addition, at March
31, 1997 and 1996, $3.7 million and $6.2 million, respectively, of
land had been acquired in certain jurisdictions where gaming has not
yet been approved. No assurances can be made that these jurisdictions
will approve gaming in the future.
43
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LAND HELD FOR DEVELOPMENT (CONTINUED)
The Company has entered into various purchase agreements whereby the
Company has the option to acquire or lease land for development of
potential new gaming projects totaling $31.3 million and $34.2 million
at March 31, 1997 and 1996, respectively. In consideration for these
options, the Company has paid or placed in escrow $6.0 million and
$2.4 million at March 31, 1997 and 1996, respectively. Should the Company
not exercise its option to acquire or lease the land, it would forfeit
all amounts paid or placed in escrow as of March 31, 1997. These
option payments are included in other assets, net in the accompanying
consolidated balance sheets.
5. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
STATION CASINOS, INC. (EXCLUDING SUNSET STATION):
Reducing revolving credit facility, secured by substantially all of the
assets of Palace Station, Boulder Station, Texas Station, Station
Casino St. Charles and Station Casino Kansas City, $368
million limit at March 31, 1997, reducing quarterly by varying
amounts until September 2000 when the remaining principal balance
is due, interest at a margin above the bank's prime rate or the
Eurodollar Rate (7.89% at March 31, 1997)............................. $ 277,000 $ -
9 5/8% senior subordinated notes, payable interest only semi-annually,
principal due June 1, 2003, net of unamortized discount of $6.8
million at March 31,1997.............................................. 186,248 185,531
10 1/8% senior subordinated notes, payable interest only semi-annually,
principal due March 15, 2006, net of unamortized discount of $1.2
million at March 31, 1997............................................. 196,818 196,737
Notes payable to banks and others, collateralized by slot machines and
related equipment, monthly installments including interest ranging
from 7.47% to 7.94%................................................... 15,952 24,726
Capital lease obligations, collateralized by furniture and equipment.... 7,703 12,171
Other long-term debt.................................................... 31,242 45,833
---------- ----------
Sub-total...................................................... 714,963 464,998
SUNSET STATION, INC.:
$110 million Sunset Station first mortgage construction/term loan
agreement, secured by substantially all of the assets of Sunset Station,
interest at a margin of 375 basis points above the Eurodollar Rate
(9.37% at March 31, 1997), due September 2000......................... 46,000 -
---------- ----------
Total long-term debt..................................... 760,963 464,998
Current portion of long-term debt....................................... (18,807) (23,256)
---------- ----------
Total long-term debt, less current portion............... $ 742,156 $ 441,742
========== ==========
</TABLE>
In June 1993, the Company completed an offering at par of $110
million in 9 5/8% senior subordinated notes due in June 2003. In May
1994, the Company completed an offering of $83 million in senior
subordinated notes that rank PARI PASSU with the existing $110 million
senior subordinated notes, and have identical maturities and covenants
as the original issue. The $83 million senior subordinated notes have
a coupon rate of 9 5/8% and were priced to yield 11.5% to maturity.
The discount on the $83 million senior subordinated notes has been
recorded as a reduction to long-term debt in the accompanying
consolidated balance sheets.
44
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
In March 1996, the Company completed an offering of $198 million of
senior subordinated notes due in March 2006, that rank PARI PASSU with
the existing $193 million of senior subordinated notes. The $198
million senior subordinated notes have a coupon rate of 10 1/8% and
were priced to yield 10.24% to maturity. The discount on the $198
million senior subordinated notes has been recorded as a reduction to
long-term debt in the accompanying consolidated balance sheets.
In April 1997, the Company completed an offering of $150 million of
senior subordinated notes due in April 2007, that rank PARI PASSU with
the Company's existing senior subordinated notes. The $150 million
senior subordinated notes have a coupon rate of 9 3/4% and were priced
to yield 10.37% to maturity. The discount on the $150 million senior
subordinated notes will be recorded as a reduction to long-term debt.
Proceeds from the offering were used to pay down amounts outstanding
under the reducing revolving credit facility.
The indentures governing the Company's senior subordinated notes ("the
Indentures") contain certain customary financial and other covenants,
which among other things, govern the Company and certain of its
subsidiaries ability to incur indebtedness (except, as specifically
allowed) unless after giving effect thereto, a 2.0 to 1.0 pro forma
Consolidated Coverage Ratio (as defined in the Indentures) has been
met. As of March 31, 1997, the Company's Consolidated Coverage Ratio
was 2.66 to 1.00.
On July 5, 1995, the Company obtained a $275 million reducing
revolving credit facility. On March 25, 1996, the Company amended and
restated this bank facility, providing for borrowings up to an
aggregate principal amount of $400 million. On March 21, 1997, the
Company obtained certain amendments to the reducing revolving bank
credit facility in order to enhance its borrowing capacity (the "Bank
Facility"). The Bank Facility is secured by substantially all the
assets of Palace Station, Boulder Station, Texas Station, Station
Casino St. Charles and Station Casino Kansas City (collectively, the
"Borrowers"). The Company and SGSI guarantee the borrowings under the
Bank Facility (collectively the "Guarantors"). The Bank Facility
matures on September 30, 2000 and reduces quarterly by varying amounts
(including $8 million for the fiscal quarter ending on June 30,
1997 and $10 million for each quarter ending September 30, 1997,
December 31, 1997 and March 31, 1998). Borrowings under the
Bank Facility bear interest at a margin above the bank's prime rate
or LIBOR, as selected by the Company. The margin above such rates,
and the fee on the unfunded portions of the Bank Facility, will vary
quarterly based on the combined Borrower's and the Company's
consolidated ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA").
The Bank Facility contains certain financial and other covenants.
These include a maximum funded debt to EBITDA ratio for the Borrowers
combined of 3.00 to 1.00 for each fiscal quarter through June 30,
1997, 2.75 to 1.00 for each fiscal quarter through June 30, 1998, and
2.50 to 1.00 for each fiscal quarter thereafter, a minimum fixed
charge coverage ratio for the preceding four quarters for the
Borrowers combined of 1.35 to 1.00 for periods March 31, 1996 through
June 30, 1998, and 1.50 to 1.00 for periods thereafter, a limitation
on indebtedness, and limitations on capital expenditures. As of March
31, 1997, the Borrowers funded debt to EBITDA ratio was 1.97 to 1.00
and the fixed charge coverage ratio for the fiscal year ended March
31, 1997 was 2.54 to 1.00. A tranche of the Bank Facility contains a
minimum tangible net worth requirement for Palace Station (as defined)
and certain restrictions on distributions of cash from Palace Station
to the Company. As of March 31, 1997, Palace Station's tangible net
worth exceeded the requirement by approximately $7 million. These
covenants limit Palace Station's ability to make payments to the
Company, a significant source of anticipated cash for the Company.
In addition, the Bank Facility has financial covenants relating to
the Company. These include prohibitions on dividends on or redemptions
of the Company's common stock, restrictions on repayment of any
subordinated debt, limitations on indebtedness beyond existing
indebtedness, the Company's senior subordinated notes and up to $25
million of purchase money indebtedness, minimum consolidated net
worth requirements for the Company of $165 million plus post October
1, 1995 preopening expenses, 95% of post October 1, 1995 net income
(not reduced by net losses) and 100% of net equity offering proceeds,
and limitations on capital expenditures. As of March 31, 1997, the
Company's consolidated net worth exceeded the requirement by
approximately $20 million. The Bank Facility also includes a
45
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
maximum funded debt to EBITDA (adjusted for preopening expenses)
ratio including annualized EBITDA (adjusted for preopening expenses) for
any new venture, as defined, open less than a year for the Company on a
consolidated basis of 5.00 to 1.00 for the fiscal quarter ended March
31, 1997, 5.25 to 1.00 for each fiscal quarter through December 31,
1997, 5.00 to 1.00 for each fiscal quarter through June 30, 1998, 4.75
to 1.00 for the fiscal quarter ending September 30, 1998, 4.50 to 1.00 for the
fiscal quarter ending December 31, 1998, 4.25 to 1.00 for each fiscal
quarter through June 30, 1999, 4.00 to 1.00 for the fiscal quarter ending
September 30, 1999 and 3.75 to 1.00 thereafter. As of March 31, 1997,
the Company's funded debt to EBITDA ratio was 4.54 to 1.00. Such
consolidated calculations for the Company do not include Sunset Station
(see below). In addition, the Bank Facility prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts
necessary to make the next scheduled interest or dividend payments on
the Company's senior subordinated notes and the Convertible
Preferred Stock (see Note 7), the amounts necessary to fund casino
bankroll in the ordinary course of business, and $2,000,000.
The Guarantors waive certain defenses and rights including rights
of subrogation and reimbursement. The Bank Facility contains customary
events of default and remedies and is cross-defaulted to the Company's
senior subordinated notes and the Change of Control Triggering Event as
defined in the Indentures.
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of
the Company, entered into a Construction/Term Loan Agreement (the
"Sunset Loan Agreement") with Bank of America National Trust and
Savings Association, Bank of Scotland, Societe Generale and each of
the other lenders party to such agreement, pursuant to which Sunset
Station received a commitment for $110 million to finance the
remaining development and construction costs of Sunset Station. The
Company also entered into an operating lease for certain furniture,
fixtures and equipment with a cost of $40 million to be subleased to
Sunset Station as part of the Sunset Station Project (See Note 6).
The Sunset Loan Agreement includes a first mortgage term note in
the amount of $110 million (the "Sunset Note") which is non-recourse
to the Company, except as to certain construction matters pursuant to a
completion guarantee dated as of September 25, 1996, executed by the
Company on behalf of Sunset Station and except that the Company has
pledged all of the stock of Sunset Station as security for the Sunset
Loan Agreement. The Sunset Note is to reduce $1.8 million for each
fiscal quarter ending March 1998 through December 1998, $2.3 million
for each fiscal quarter ending March 1999 through December 1999, and
$2.0 million for the fiscal quarters ending March 2000 and June 2000
and matures in September 2000. In addition, the Sunset Note is
subject to prepayment subsequent to July 1998 by an amount equal to a
specified percentage of Excess Cash Flow, as defined. The Sunset Note
carries an interest rate of 375 basis points above the Eurodollar Rate
(as defined in the Sunset Loan Agreement). The Sunset Note is secured
by substantially all of the assets of Sunset Station, including a deed
of trust with respect to the real property on which Sunset Station is
being constructed, a portion of which is subject to a lease from the
Company to Sunset Station, and the remainder of which property is
owned by Sunset Station and a security agreement as to all tangible
and intangible personal property including Sunset Station's rights
under an operating lease for certain furniture, fixtures and equipment
to be used by Sunset Station.
The Sunset Loan Agreement contains certain customary financial and
other covenants (related exclusively to Sunset Station) including a
minimum fixed charge coverage ratio as of the last day of any quarter
after the opening of Sunset Station of not less than 1.10 to 1.00,
a maximum senior funded debt to EBITDA (adjusted for certain cash
contributions or advances by the Company) ratio after opening of
4.50 to 1.00 for the first full quarter, reducing by 0.25 on certain
quarters thereafter to 3.25 to 1.00 for the tenth quarter and each
quarter thereafter, and a minimum net worth as of any quarter end after
opening of not less than $52 million plus 80% of net income (not reduced
by net losses) for each quarter after opening, plus 100% of certain
additional equity contributions by the Company and Supplemental Loans,
as defined. In addition, the agreement places restrictions on
indebtedness and guarantees, dividends, stock redemptions, mergers,
acquisitions, sale of assets or sale of stock in subsidiaries and
limitations on capital expenditures.
In addition, the Company has provided a funding commitment to Sunset
Station of up to an additional $25 million pursuant to a supplemental
loan agreement (the "Supplemental Loan Agreement"). The Sunset Loan
Agreement requires
46
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Sunset Station to draw amounts under the Supplemental Loan
Agreement in the event of the failure of certain financial covenants
under the Sunset Loan Agreement. Loans under this funding commitment
may be drawn down beginning on the last day of the first full calendar
quarter ending after Sunset Station opens for business in the amount
of up to $10 million during the first year after such date, up to $10
million during the second year after such date and up to $5 million
during the third year after such date. The Supplemental Loan Agreement
also provides for an additional, separate funding commitment up to $40
million in connection with a purchase option for certain furniture,
fixtures and equipment under the Sunset Operating Lease. Sunset
Station will pay interest at a rate per annum equal to the three-month
Eurodollar Rate, the interest being payable solely in the form of
commensurate additions to the principal of the Supplemental Loans.
The Supplemental Loan Agreement expires in September 2001. The
funding commitments under the Supplemental Loan Agreement are subject
to limitations imposed by the indentures governing the Company's
existing senior subordinated notes and the Bank Facility.
In order to manage the interest rate risk associated with the Sunset
Note, Sunset Station entered into an interest rate swap agreement with
Bank of America National Trust and Savings Association. This
agreement swaps the variable rate interest pursuant to the Sunset Note
to a fixed rate of 9.58% on $35 million notional amount as of January
1997 increasing to $60 million at March 1997, $90 million at June
1997, $100 million at September 1997 and then decreasing to $95
million at June 1998. The agreement expires in December 1998. The
difference paid or received pursuant to the swap agreement is accrued
as interest rates change and recognized as an adjustment to interest
expense on the Sunset Note. Sunset Station is exposed to credit risk
in the event of non-performance by the counterparty to the agreement.
The Company believes the risk of non-performance by the counterparty
is minimal. As of March 31, 1997, the market value of this interest
rate swap was $1.0 million.
The estimated fair value of the Company's long-term debt at March 31,
1997 was approximately $755.6 million, compared to its book value of
approximately $761.0 million. The estimated fair value amounts were
based on quoted market prices on or about March 31, 1997 for the
Company's debt securities that are publicly traded. For debt securities
that are not publicly traded, fair value was estimated based on the quoted
market prices for similar issues or the current rates offered to the Company
for debt having the same remaining maturities.
Scheduled maturities of long-term debt are as follows (amounts in
thousands):
FISCAL YEAR ENDING MARCH 31,
1998 ...................................... $ 18,807
1999 ...................................... 12,948
2000 ...................................... 11,141
2001 ...................................... 333,373
2002 ...................................... 1,288
Thereafter................................. 383,406
-----------
Total................................. $ 760,963
===========
6. COMMITMENTS AND CONTINGENCIES
STATION CASINO ST. CHARLES
In September 1994, Station Casino St. Charles entered into an
agreement for property acquisitions with the City of St. Charles,
Missouri which allows for the acquisition by the Company of property
within a designated 107-acre Redevelopment Project Area, a portion of
which is adjacent to Station Casino St. Charles. This land is being
acquired for the construction of a mixed use development which may
include retail space, a hotel, office space, convention space or
restaurants. The Company has a right to terminate the agreement if all
related acquisition costs exceed $13.7 million. As
47
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of March 31, 1997, the Company has incurred $3.4 million of acquisition
costs included in property and equipment, net in the accompanying
consolidated balance sheets.
BOULDER STATION LEASE
The Company entered into a ground lease for 27 acres of land on which
Boulder Station is located. The Company leases this land from a trust
pursuant to a long-term ground lease. The trustee of this trust is
Bank of America NT&SA, the beneficiary of which is KB Enterprises, an
affiliated company owned by Frank J. Fertitta, Jr. and Victoria K.
Fertitta (the "Related Lessor"), the parents of Frank J. Fertitta III,
Chairman of the Board and Chief Executive Officer of the Company. The
lease has a term of 65 years with monthly payments of $125,000 through
June 1998. In June 1998, and every ten years thereafter, the rent will
be adjusted to the product of the fair market value of the land and
the greater of (i) the then prevailing annual rate of return for
comparably situated property or (ii) 8% per year. The rent will be
further adjusted in June 2003, and every ten years thereafter by a
cost of living factor. In no event will the rent for any period be
less than the immediately prior period. Pursuant to the ground lease,
the Company has an option, exercisable at five-year intervals
beginning in June 1998, to purchase the land at fair market value.
The Company's leasehold interest in the property is subject to a lien
to secure borrowings under the Bank Facility.
TEXAS STATION LEASE
The Company entered into a ground lease for 47 acres of land on which
Texas Station is located. The Company leases this land from a trust
pursuant to a long-term ground lease. The trustee of this trust is
Bank of America NT&SA, the beneficiary of which is Texas Gambling
Hall & Hotel, Inc. an affiliate company of the Related Lessor. The
lease has a term of 65 years with monthly rental payments of $150,000
through July 2000. In July 2000, and every ten years thereafter, the
rent will be adjusted to the product of the fair market value of the
land and the greater of (i) the then prevailing annual rate of return
being realized for owners of comparable land in Clark County or (ii)
8% per year. The rent will be further adjusted by a cost of living
factor after the first ten years and every ten years thereafter. In
no event will the rent for any period be less than the immediately
prior period. Pursuant to the ground lease, the Company will have an
option, exercisable at five-year intervals beginning in May 2000, to
purchase the land at fair market value. The Company's leasehold
interest in the property is subject to a lien to secure borrowings
under the Bank Facility.
SUNSET STATION LEASE
In June 1994, the Company entered into a lease agreement for
approximately 47.5 acres of land in the Southeast area of Las Vegas on
which Sunset Station is being developed. The lease has a term of 65
years with monthly rental payments of $120,000, adjusted on each
subsequent five-year anniversary by a cost of living factor. On the
seventh anniversary of the lease, the Company has an option to
purchase this land for $23.8 million. Additionally, on the seventh
anniversary of the lease, the lessor has an option to sell this land
to the Company for $21.8 million.
STATION CASINO KANSAS CITY LEASE
The Company has entered into a joint venture which owns the land on
which Station Casino Kansas City is located. At March 31, 1997, $3.5
million related to this investment is included in other assets, net
in the accompanying consolidated balance sheets.
In April 1994, Station Casino Kansas City entered into an agreement
with the joint venture to lease this land. The agreement requires
monthly payments of $85,000 through March 31, 1997 and $90,000 through
the remainder of the lease term. The lease expires March 31, 2006,
with an option to extend the lease for up to eight renewal periods of
ten years each, plus one additional seven year period. Commencing
April 1, 1998 and every anniversary thereafter, the rent shall be
adjusted by a cost of living factor. In connection with the joint
venture agreement, the Company received an
48
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
option providing for the right to acquire the joint venture partner's
interest in this joint venture. The Company has the option to acquire
this interest at any time after April 1, 2002 through April 1, 2011 for
$11.7 million, however, commencing April 1, 1998 the purchase price will
be adjusted by a cost of living factor of not more than 5% or less than
2% per annum. At March 31, 1997, $2.6 million paid by the Company in
consideration for this option is included in other assets, net in the
accompanying consolidated balance sheets.
SOUTHERN FLORIDA
In October 1994, the Company entered into an agreement to form a
limited partnership with the existing operator of a pari-mutuel
facility in Southern Florida. In the event casino gaming is approved
by the voters of Florida by October 2000 and in the event the site is
licensed by the state, the Company will be obligated to make capital
contributions to the partnership totaling $35 million, reduced by
credits for amounts previously contributed to any Florida gaming
referendum campaign.
OPEARTING LEASES
The Company leases several parcels of land and equipment used in
operations at Palace Station, Boulder Station, Texas Station,
Station Casino St. Charles and Station Casino Kansas City and for land
on which Sunset Station is being developed. Leases on various parcels
ranging from 13 acres to 171 acres have terms expiring between March
2006 and July 2060. Future minimum lease payments required under these
operating leases and other noncancelable operating leases are as
follows for the fiscal years ending March 31, (amounts in
thousands):
FUTURE MINIMUM LEASE PAYMENTS
1998.......................................... $ 6,423
1999.......................................... 6,296
2000.......................................... 5,932
2001.......................................... 5,932
2002.......................................... 5,932
Thereafter.................................... 280,479
----------
Total.................................... $ 310,994
==========
Rent expense totaled approximately $5.4 million, $6.5 million and
$4.9 million for the years ended March 31, 1997, 1996 and 1995,
respectively. Rents of $2.2 million and $2.1 million were
capitalized in connection with the construction of Station Casino
Kansas City and Sunset Station for the fiscal years ended March 31,
1997 and 1996, respectively.
During fiscal 1995, the Company sold approximately $13.0 million of
equipment and leased it back under lease agreements ranging from three
to seven years. The transactions produced gains of approximately
$665,000 which have been deferred and are being amortized against
lease expense over the remaining lease terms.
EQUIPMENT LEASE
In connection with the Sunset Loan Agreement, the Company entered into
an operating lease for furniture, fixtures and equipment (the
"Equipment") with a cost of $40 million, dated as of September 25,
1996 (the "Sunset Operating Lease") with First Security Trust Company
of Nevada. The Sunset Operating Lease expires in October 2000 and carries
a lease rate of 225 basis points above the Eurodollar Rate. The Company has
entered into a sublease with Sunset Station for the Equipment pursuant
to an operating lease with financial terms substantially similar to
the Sunset Operating Lease. In the event that Sunset Station elects to
purchase the Equipment, the Company has provided a funding commitment up
to the amount necessary for such purchase pursuant to the Supplemental Loan
Agreement (subject to the limitations on funding contained in the Supplemental
Loan Agreement) (See Note 5).
49
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Sunset Operating Lease, the Company also entered
into a participation agreement, dated as of September 25, 1996 (the
"Participation Agreement") with the trustee, as lessor under the
Sunset Operating Lease, and holders of beneficial interests in the
Lessor Trust (the "Holders"). Pursuant to the Participation Agreement,
the Holders will advance funds to the trustee for the purchase by the
trustee of, or to reimburse the Company for, the purchase of the
Equipment, which will then be leased to the Company, and in turn
subleased to Sunset Station. Pursuant to the Participation Agreement,
the Company also agreed to indemnify the Lessor and the Holders
against certain liabilities.
LEGAL MATTERS
The Company is a litigant in legal matters arising in the normal
course of business. In the opinion of management, all pending legal
matters are either adequately covered by insurance or, if not insured,
will not have a material adverse effect on the financial position or
the results of operations of the Company.
7. STOCKHOLDER'S EQUITY
In July 1995, the Company completed a public offering of 5,175,000
shares of common stock at $16 per share generating net proceeds of
approximately $78.2 million, before deducting $0.8 million of offering
costs paid by the Company. The proceeds from this offering were
primarily used to acquire the assets of Texas Station located in North
Las Vegas, which commenced operations July 12, 1995. The seller of
the assets is a wholly-owned subsidiary of a trust of which the
Related Lessor is the sole trustee (the "Seller"). The purchase price
of such assets was an amount equal to the Seller's out-of-pocket costs
incurred in connection with the financing, development and
construction of the hotel/casino through the closing date. At
closing, the Company paid $62.8 million to the Seller and assumed
various liabilities and contracts to complete construction of the
facility. The total cost of the property was approximately $84.9
million. The land on which the Texas Station facility is situated is
being leased to the Company by the Seller pursuant to a long-term
ground lease (See Note 6).
In March 1996, the Company completed a public offering of 1,800,000
shares of convertible preferred stock (the "Convertible Preferred
Stock") at $50.00 per share generating net proceeds of approximately
$87.3 million, before deducting $0.6 million of offering costs paid
by the Company. In April 1996, the underwriters exercised their option
to purchase an additional 270,000 shares of the Convertible Preferred
Stock generating net proceeds to the Company of approximately $13.1
million. The Convertible Preferred Stock is convertible at an initial
conversion rate of 3.2573 shares of common stock for each share of
Convertible Preferred Stock. The Convertible Preferred Stock is
redeemable, at the option of the Company in whole or in part, for
shares of the Company's common stock at any time after March 15, 1999,
initially at a redemption price of $52.45 per share and thereafter at
prices decreasing annually to $50.00 per share of Convertible
Preferred Stock on and after March 15, 2006, plus accrued and unpaid
dividends. The common shares to be issued is determined by dividing
the redemption price by the lower of the average daily closing price
for the Company's common stock for the preceding 20 trading days or
the closing price of the Company's common stock on the first business
day preceding the date of the redemption notice. Any fractional
shares would be paid in cash. Dividends on the Convertible Preferred
Stock of $3.50 per share annually, accrue and are cumulative from the
date of issuance. The Convertible Preferred Stock has a liquidation
preference of $50.00 per share, plus accrued and unpaid dividends.
8. RELATED PARTIES
The Company has employed McNabb/McNabb/DeSoto/Salter & Co. (''MMDS")
to provide advertising and marketing research services. Certain
stockholders of the Company own a 50% interest in MMDS. During the
fiscal years ended March 31, 1997, 1996 and 1995 the Company paid MMDS
$27.2 million, $17.4 million and $12.7 million respectively, for
advertising, market research and other costs related to these
activities. In management's opinion, these transactions were
conducted with terms as fair to the Company as could have been
obtained from unaffiliated companies. In April 1997, the Company
purchased the assets of MMDS for approximately $0.8 million.
50
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BENEFIT PLANS
STOCK COMPENSATION PROGRAM
The Company has adopted a Stock Compensation Program (the ''Program'')
which includes (i) an Incentive Stock Option Plan for the grant of
incentive stock options, (ii) a Compensatory Stock Option Plan
providing for the grant of non-qualified stock options, and (iii) a
Restricted Shares Plan providing for the grant of restricted shares of
common stock. Officers, key employees, directors (whether employee
directors or non-employee directors) and independent contractors or
agents of the Company and its subsidiaries are eligible to
participate in the program. However, only employees of the Company
and its subsidiaries are eligible to receive incentive stock options.
A maximum of 6,307,000 shares of common stock have been reserved for
issuance under the Program. Options are granted at the current market
price at the date of grant. The plan provides for a variety of vesting
schedules, ranging from immediate to twenty percent a year for five
years, to be determined at the time of grant. All options have an
exercise period of ten years from the date of grant.
The Program will terminate ten years from the date of adoption, unless
terminated earlier by the Board of Directors, and no options or
restricted shares may be granted under the Program after such date.
Summarized information for the Program is as follows:
<TABLE>
1997 1996 1995
----------------------- ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Beginning of the Year 2,697,012 $ 16.24 2,372,100 $ 19.05 1,943,725 $ 20.09
Granted 2,160,822 $ 14.01 1,593,305 $ 13.42 541,750 $ 15.50
Exercised (14,711) $ 12.16 (46) $ 12.00 - -
Canceled (410,941) $ 15.70 (1,268,347) $ 17.95 (113,375) $ 19.89
---------- ---------- ----------
Outstanding End of the Year 4,432,182 $ 15.22 2,697,012 $ 16.24 2,372,100 $ 19.05
========== ========== ==========
Restricted Stock Grants - - 170,500
========== ========== ==========
Exercisable at End of Year 1,408,893 $ 16.50 993,032 $ 16.67 721,200 $ 20.06
========== ========== ==========
Options Available for Grant 1,689,561 649,942 479,910
========== ========== ==========
</TABLE>
The following table summarizes information about the options
outstanding at March 31, 1997:
Options Outstanding Options Exerciseable
--------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices March 31, 1997 Life Price March 31,1997 Price
- ----------------- -------------- ---------- --------- -------------- -------
$ 9.38 - $ 9.88 228,000 9.9 $ 9.50 - $ -
$ 11.63 - $ 13.75 890,081 7.3 $ 12.07 549,284 $ 12.04
$ 14.38 - $ 15.00 2,149,101 8.9 $ 14.59 100,709 $ 14.44
$ 18.00 - $ 20.00 1,075,000 6.3 $ 19.72 695,900 $ 19.83
$ 22.00 - $ 22.00 90,000 2.8 $ 22.00 63,000 $ 22.00
--------- --- -------- --------- --------
4,432,182 7.9 $ 15.22 1,408,893 $ 16.50
========= === ======== ========= ========
51
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BENEFIT PLANS (CONTINUED)
Restricted stock grants in the amount of 170,500 shares were issued
during the fiscal year ended March 31, 1995. The effect of these
grants is to increase the issued and outstanding shares of the
Company's common stock and decrease the number of shares available for
grant in the plan. Deferred compensation is recorded for the
restricted stock grants equal to the market value of the Company's
common stock on the date of grant. The deferred compensation is
amortized over the period the restricted stock vests and recorded as
compensation expense in selling, general, and administrative expense
in the accompanying consolidated statements of operations.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for the Program. Accordingly, compensation expense
recognized was different than what would have been otherwise
recognized under the fair value based method defined in SFAS No. 123,
"Accounting for Stock-Based Compensation". Had compensation expense
for the plans been determined in accordance with SFAS No. 123,
the effect on the Company's net income applicable to common stock
and earnings per common share would have been as follows (amounts in
thousands, except per share data):
Year Ended March 31,
1997 1996
-------- --------
Net income applicable to common stock:
As reported......................... $ 6,518 $25,419
Proforma............................ $ 3,640 $23,562
Earnings per common share:
As reported......................... $ 0.18 $ 0.75
Proforma............................ $ 0.10 $ 0.69
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing method with the following
assumptions: (i) no dividends, (ii) expected volatility for both
years of 45.5%, (iii) risk free interest rate of 6.46% for 1997 and
6.04% for 1996, and (iv) the expected average life of 3.92 years for
1997 and 3.05 years for 1996. The weighted average fair value of
options granted in 1997 and 1996 were $5.64 and $4.91, respectively.
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to April 1, 1995, the resulting pro forma net
income may not be representative of that to be expected in future
years.
In May 1995, the Board of Directors of the Company authorized the
repricing of 1,156,900 options with option prices ranging from of
$13.00 to $20.00. Options held by certain members of the Company's
Board of Directors, including the Chairman and Chief Executive Officer
of the Company were not repriced. The effect of the repricing of all
the subject options was the cancellation of 1,116,500 options and the
reissuance of 872,680 options (''replacement options'') with a price
of $12.00 (market value at date of the repricing) which are included
in granted and canceled options in the table above. The number of
replacement options was determined, based upon a valuation model, so
that the value of the replacement options was equivalent to the value
of the options originally granted.
401(K) PLANS
The Company has a defined contribution 401(k) plan, which covers all
employees who meet certain age and length of service requirements and
allows an employer contribution up to 25 percent of the first four
percent of each participating employee's compensation. Plan
participants can elect to defer before tax compensation through
payroll deductions. These deferrals are regulated under Section 401(k)
of the Internal Revenue Code. The Company's matching contribution was
$442,000, $293,000, and $203,000 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively.
52
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EXECUTIVE COMPENSATION PLANS
The Company has employment agreements with certain of its executive
officers. These contracts provide for, among other things, an annual
base salary with annual adjustments and an annual cash bonus equal to
at least 5 percent of the executive's base salary, and supplemental
long-term disability and supplemental life insurance benefits in
excess of the Company's normal coverage for employees. The Company
elected to self-insure with respect to the long-term disability
benefits. In addition, the Company has adopted a Supplemental
Executive Retirement Plan for its Chief Executive Officer and a
Supplemental Management Retirement Plan for certain key executives as
selected by the Human Resources Committee of the Company's Board of
Directors. Other executive plans include a Deferred Compensation Plan
and a Long-Term Stay-On Performance Incentive Plan. The expenses
related to these plans are included in corporate expenses in the
accompanying consolidated statements of operations.
11. RESTRUCTURING CHARGE
In March 1997, the Company introduced a plan designed to reduce costs
and improve efficiency of operations. This plan resulted in a one-
time charge to earnings in the fourth quarter of fiscal 1997 totaling
$2,016,000, primarily related to employee severance payments.
12. INCOME TAXES
The Company files a consolidated federal income tax return. The
provision (benefit) for income taxes consists of the following
(amounts in thousands):
MARCH 31,
-------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal ................................... $ 7,708 $ 4,784 $ 721
State ..................................... (1,834) 374 (1,053)
--------- --------- ---------
5,874 5,158 (332)
Deferred .................................. 1,741 9,421 (3,145)
--------- --------- ---------
Total income taxes......................... $ 7,615 $ 14,579 $ (3,477)
========= ========= =========
The income tax provision (benefit) differs from that computed at the
federal statutory corporate tax rate as follows:
MARCH 31,
------------------------
1997 1996 1995
---- ---- ----
Federal statutory rate........................... 35.0% 35.0% (35.0%)
State income taxes, net of federal benefit....... (5.5) 0.6 (6.0)
Meals and entertainment.......................... 0.2 0.6 4.1
Other, net....................................... 5.9 0.2 6.5
------ ------ ------
Effective tax rate............................... 35.6% 36.4% (30.4%)
====== ===== ======
53
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences representing net
deferred tax assets and liabilities are as follows (amounts in
thousands):
<TABLE>
MARCH 31,
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued vacation, bonuses and group insurance.............. $ 2,981 $ 2,119
Prepaid gaming taxes....................................... (1,341) (1,177)
Other...................................................... 2,261 1,135
-------- ---------
Total current................................................. 3,901 2,077
-------- ---------
Long-term:
Preopening and other costs, net of amortization............ 15,077 4,485
State deferred taxes....................................... 1,907 462
Alternative minimum tax credits............................ 9,000 4,600
-------- ---------
Total long-term............................................... 25,984 9,547
-------- ---------
Total deferred tax assets .................................... 29,885 11,624
-------- ---------
Deferred tax liabilities:
Long-term:
Temporary differences related to property and equipment.... (32,583) (18,201)
Other...................................................... (1,249) (1,122)
-------- ---------
Total deferred tax liabilities................................ (33,832) (19,323)
-------- ---------
Net........................................................... $ (3,947) $ (7,699)
======== =========
</TABLE>
The excess of the alternative minimum tax over the regular Federal
income tax is a tax credit which can be carried forward indefinitely
to reduce future regular Federal income tax liabilities. The Company
did not record a valuation allowance at March 31, 1997 relating to
recorded tax benefits because all benefits are likely to be realized.
54
<PAGE>
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
NET
INCOME INCOME EARNINGS
(LOSS) (LOSS) (LOSS)
OPERATING BEFORE APPLICABLE PER
NET INCOME INCOME TO COMMON COMMON
REVENUES (LOSS) TAXES STOCK SHARE
--------- --------- --------- ----------- ---------
(amounts in thousands, except per common share amounts)
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
First quarter...................... $ 135,440 $ 22,813 $ 14,581 $ 7,648 $ 0.22
Second quarter..................... $ 138,034 $ 23,809 $ 15,847 $ 8,307 $ 0.24
Third quarter...................... $ 133,767 $ 21,536 $ 13,789 $ 6,944 $ 0.20
Fourth quarter..................... $ 176,274 $ (10,035) $ (22,839) $ (16,381) $ (0.46)
YEAR ENDED MARCH 31, 1996
First quarter...................... $ 94,145 $ 13,043 $ 5,530 $ 3,511 $ 0.12
Second quarter..................... $ 119,850 $ 17,666 $ 11,459 $ 7,257 $ 0.21
Third quarter...................... $ 122,929 $ 18,969 $ 11,509 $ 7,360 $ 0.21
Fourth quarter..................... $ 129,933 $ 19,786 $ 11,553 $ 7,291 $ 0.21
YEAR ENDED MARCH 31, 1995
First quarter...................... $ 47,672 $ (8,361) $ (11,055) $ (7,399) $ (0.25)
Second quarter..................... $ 62,384 $ (6,962) $ (11,428) $ (7,379) $ (0.25)
Third quarter...................... $ 83,641 $ 6,295 $ 807 $ 483 $ 0.02
Fourth quarter..................... $ 96,581 $ 15,416 $ 10,257 $ 6,353 $ 0.22
</TABLE>
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated by reference the information appearing in
the section entitled "Directors and Executive Officers" in the
Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated by reference the information appearing in
the section entitled "Executive Compensation" in the
Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated by reference the information appearing in
the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Registrant's definitive Proxy
Statement to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated by reference the information appearing in
the sections entitled "Certain Relationships and Related
Transactions" in the Registrant's definitive Proxy Statement to
be filed with the Securities and Exchange Commission.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements (including related notes to Consolidated
Financial Statements) filed in part II of this report are listed
below:
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1997 and 1996
Years Ended March 31, 1997, 1996 and 1995:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) 2. None
(a) 3. Exhibits
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Reorganization dated as of February 1,
1993 among Frank J. Fertitta, Jr., as Trustee of the Frank J.
Fertitta and Victoria K. Fertitta Revocable Family Trust
dated June 17, 1989, Frank J. Fertitta III, Blake L. Sartini,
Delise F. Sartini and Lorenzo J. Fertitta. (Incorporated
herein by reference to Registration Statement No. 33-59302)
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (Incorporated herein by reference to
Registration Statement No. 33-76156)
3.2 Restated Bylaws of the Registrant. (Incorporated herein by
reference to Registration Statement No. 33-76156)
4.1 Form of Subordinated Note of the Registrant (1996 Issue).
(Incorporated herein by reference to the Company's Form 8-K
dated March 25, 1996)
4.2 Form of Subordinated Note of the Registrant (1994 Issue)
(Incorporated herein by reference to Registration Statement
No. 33-76156)
4.3 Form of Subordinated Note of the Registrant (1993 Issue)
(Incorporated herein by reference to Registration Statement
No. 33-59302)
4.4 Indenture dated as of March 29, 1996 between the Registrant
and First Union National Bank, as Trustee. (Incorporated
herein by reference to the Company's Form 8-K dated March 25,
1996)
4.5 Indenture dated as of May 11, 1994 between the Registrant and
First Union National Bank (f.k.a. First Fidelity Bank,
National Association) as Trustee. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the
period ended March 31, 1994)
4.6 First Supplemental Indenture dated as of March 25, 1996
between Registrant and First Union National Bank, (f.k.a.
First Fidelity Bank, National Association), as Trustee with
respect to the Indenture dated as
57
<PAGE>
of May 11, 1994. (Incorporated herein by reference to the
Company's Form 8-K dated March 25, 1996)
4.7 Indenture dated as of June 2, 1993 between the Registrant and
First Union National Bank (f.k.a. First Fidelity Bank,
National Association) as Trustee. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1993)
4.8 First Supplemental Indenture dated as of March 25, 1996
between Registrant and First Union National Bank, (f.k.a.
First Fidelity Bank, National Association), as Trustee with
respect to the Indenture dated as of June 2, 1993.
(Incorporated herein by reference to the Company's Form 8-K
dated March 25, 1996)
4.9 Amended and Restated Reducing Revolving Loan Agreement dated
as of March 19, 1996 among Palace Station, Inc., Boulder
Station, Inc., Texas Station, Inc., St. Charles Riverfront
Station, Inc. and Kansas City Station Corporation and Bank of
America National Trust and Savings Association, Bank of
Scotland and Societe Generale and each of the banks that are
party to the Bank Facility. (Incorporated herein by
reference to the Company's Form 8-K dated March 25, 1996)
4.10 Parent Guaranty dated as of March 19, 1996 executed by
Station Casinos, Inc. (Incorporated herein by reference to
the Company's Form 8-K dated March 25, 1996)
4.11 Certificate of Resolutions of Convertible Preferred Stock of
the Registrant. (Incorporated herein by reference to the
Company's Form 8-K dated March 25, 1996)
4.12 Form of Convertible Preferred Stock of the Registrant.
(Incorporated herein by reference to the Company's Form 8-K
dated March 25, 1996)
4.13 General Continuing Guaranty dated as of June 1, 1993 executed
by Station Casinos, Inc. (Incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1993)
10.1 Lease dated as of December 17, 1974 between Teddy Rich
Enterprises and Townefood, Inc. (Incorporated herein by
reference to Registration Statement No. 33-59302)
10.2 Lease dated as of May 8, 1973 between Teddy Rich Enterprises
and Mini-Price Motor Inn., including Addendum dated May 8,
1973; Lease Addendum dated June 10, 1974 amending lease dated
May 8, 1973 between Teddy Rich Enterprises and Mini-Price
Motor Inn, Inc. (Incorporated herein by reference to
Registration Statement No. 33-59302).
10.3 Lease dated as of February 16, 1976 between Richfield
Development Co. and Mini-Price Motor Inn. (Incorporated
herein by reference to Registration Statement No. 33-59302)
10.4 Lease dated as of September 6, 1977 between Richard Tam and
Mini-Price Motor Inn Joint Venture (Parcel B1).
(Incorporated herein by reference to Registration Statement
No. 33-59302)
10.5 Lease dated as of September 6, 1977 between Richard Tam and
Mini-Price Motor Inn Joint Venture (Parcel B2).
(Incorporated herein by reference to Registration Statement
No. 33-59302)
10.6 Employment Agreement between Frank J. Fertitta III and the
Registrant dated as of May 1, 1993. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1993)
10.7 Amendment to the Employment Agreement between Frank J.
Fertitta III and the Registrant dated as of November 30,
1994. (Incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the period ended December
31, 1994)
10.8 Employment Agreement between Glenn C. Christenson and the
Registrant dated as of May 1, 1993. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended
58
<PAGE>
June 30, 1993)
10.9 Amendment to the Employment Agreement between Glenn C.
Christenson and the Registrant dated as of November 30,
1994. (Incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the period ended December
31, 1994)
10.10 Employment Agreement between Scott M. Nielson and the
Registrant dated as of May 1, 1995. (Incorporated herein by
reference to the Company's Report on Form 8-K dated July 5,
1995)
10.11 Employment Agreement between Blake L. Sartini and the
Registrant dated as of November 30, 1994. (Incorporated
herein by reference to the Company's Report on Form 8-K dated
July 5, 1995)
10.12 Stock Compensation Program of the Registrant. (Incorporated
herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1993)
10.13 Amendment dated as of August 22, 1995 to the Stock
Compensation Program. (Incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995)
10.14 Supplemental Executive Retirement Plan of the Registrant
dated as of November 30, 1994. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1994)
10.15 Supplemental Management Retirement Plan of the Registrant
dated as of November 30, 1994. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1994)
10.16 Long-Term Stay-On Performance Incentive Plan between the
Registrant and Joseph J. Canfora, Glenn C. Christenson, Scott
M. Nielson and Blake L. Sartini. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1994)
10.17 Amended and Restated Deferred Compensation Plan of the
Registrant effective as of November 30, 1994.
10.18 Special Long-Term Disability Plan of the Registrant dated as
of November 30, 1994. (Incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 1994)
10.19 Ground Lease between Boulder Station, Inc. and KB Enterprises
dated as of June 1, 1993. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1993)
10.20 Option to Lease or Purchase dated as of June 1, 1993 between
Boulder Station, Inc. and KB Enterprises. (Incorporated
herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1993)
10.21 Option to Acquire Interest Under Purchase Contract dated as
of June 1, 1993 between Boulder Station, Inc. and KB
Enterprises. (Incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1993)
10.22 First Amendment to Ground Lease and Sublease, dated as of
June 30, 1995, by and between KB Enterprises, as landlord and
Boulder Station, Inc. (Incorporated herein by reference to
the Company's Form 8-K dated July 5, 1995)
10.23 Ground Lease between Registrant and Texas Gambling Hall &
Hotel, Inc. dated as of June 1, 1995. (Incorporated herein
by reference to the Company's Form 8-K dated July 5, 1995)
59
<PAGE>
10.24 First Amendment to Ground Lease dated as of June 30, 1995
between Registrant and Texas Gambling Hall & Hotel, Inc.
(Incorporated herein by reference to the Company's Form 8-K
dated July 5, 1995)
10.25 Assignment, Assumption and Consent Agreement (Ground Lease)
dated as of July 6, 1995 between Registrant and Texas
Station, Inc. (Incorporated herein by reference to the
Company's Form 8-K dated July 5, 1995)
10.26 Sublease Agreement dated as of November 30, 1992 between the
City of St. Charles and St. Charles Riverfront Station, Inc.
(Incorporated herein by reference to Registrant Statement No.
33-59302)
10.27 Lease between Navillus Investment Co.; Jerome D. Mack as
trustee of the Center Trust; Peter Trust Limited Partnership;
and Third Generation Limited Partnership and Registrant.
(Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the period ended March 31, 1994)
10.28 Joint Venture Agreement dated as of September 25, 1993,
between First Holdings Company and the Registrant.
(Incorporated herein by reference to the Company's Form 8-K
dated July 5, 1995)
10.29 Assignment and Assumption Agreement (Joint Venture Agreement)
dated as of March 25, 1996 between the Registrant and Kansas
City Station Corporation (Incorporated herein by reference to
the Company's Annual Report on Form 10-K for the period ended
March 31, 1996).
10.30 Amendment to Joint Venture Agreement dated as of November 15,
1993, between First Holdings Company and the Registrant
(Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the period ended March 31, 1996).
10.31 Second Amendment to Joint Venture Agreement, dated as of
April 22, 1996, between First Holdings Company and Kansas
City Station Corporation. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996)
10.32 Development Agreement dated as of April 24, 1995, between
Kansas City Station Corporation and the Port Authority of
Kansas City. (Incorporated herein by reference to the
Company's Form 8-K dated July 5, 1995)
10.33 Lease Agreement, dated as of April 1, 1994 between
Station/First Joint Venture and Kansas City Station
Corporation. (Incorporated herein by reference to the
Company's Form 8-K dated July 5, 1995)
10.34 First Amendment to Lease Agreement dated as of March 19, 1996
between Station/First Joint Venture and Kansas City Station
Corporation (Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the period ended March 31, 1996).
10.35 Second Amendment to Lease Agreement, dated as of April 22,
1996, between Station/First Joint Venture and Kansas City
Station Corporation. (Incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996)
10.36 Form of Indemnification Agreement for Directors and Executive
Officers. (Incorporated herein by reference to Registration
Statement No. 33-59302)
10.37 Form of Indemnification Agreement between the Registrant and
Frank Fertitta, Jr. (Incorporated herein by reference to
Registration Statement No. 33-59302)
10.38 Construction/Term Loan Agreement dated as of September 25,
1996 among Sunset Station and Bank of America National Trust
and Savings Association, Bank of Scotland, Societe Generale
and each of the other Lenders that are party to such
agreement. (Incorporated herein by reference to the
Company's Form 8-K dated October 29, 1996)
60
<PAGE>
10.39 Completion Guarantee dated as of September 25, 1996, executed
by the Registrant. (Incorporated herein by reference to the
Company's Form 8-K dated October 29, 1996)
10.40 Supplemental Loan Agreement dated as of September 25, 1996
between the Registrant and Sunset Station. (Incorporated
herein by reference to the Company's Form 8-K dated October 29,
1996)
10.41 Participation Agreement dated as of September 25, 1996 among
the Registrant, as Lessee, and First Security Trust Company
of Nevada, as Lessor and Trustee, and the other Persons that
are parties to such agreement. (Incorporated herein by
reference to the Company's Form 8-K dated October 29, 1996)
10.42 Lease Agreement dated as of September 25, 1996 between First
Security Trust Company of Nevada as Trustee and Lessor and
the Registrant, as Lessee. (Incorporated herein by reference
to the Company's Form 8-K dated October 29, 1996)
10.43 Sublease Agreement dated as of September 25, 1996 between the
Registrant, as Sublessor and Sunset Station as Sublessee.
(Incorporated herein by reference to the Company's Form 8-K
dated October 29, 1996)
10.44 Sunset Station 1996 Trust Agreement dated as of September 25,
1996 between the Registrant, as Grantor, and First Security
Trust Company of Nevada, as Trustee. (Incorporated herein by
reference to the Company's Form 8-K dated October 29, 1996)
10.45 Standard Form of Agreement Between Owner and Contractor,
dated as of November 1, 1995 between Sunset Station and J.A.
Tiberti Construction Company, Inc. (Incorporated herein by
reference to the Company's Form 8-K dated October 29, 1996)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 27, 1997, the Registrant filed a Report on Form 8-K, dated
March 27, 1997. The Registrant reported under Item 5 the issuance of
a press release which announced the sale of $150 million of senior
subordinated notes due 2007.
(c) None.
(d) None.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
STATION CASINOS, INC.
Dated: June 3, 1997 By: /s/Frank J. Fertitta III
-----------------------------
Frank J. Fertitta III
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Frank J. Fertitta III Chairman of the Board, President June 3, 1997
- ------------------------- and Chief Executive Officer
Frank J. Fertitta III (Principal Executive Officer)
/s/ Glenn C. Christenson Executive Vice President, Chief June 3, 1997
- ------------------------- Financial Officer, Chief
Glenn C. Christenson Administrative Officer, Treasurer
and Director (Principal Financial
and Accounting Officer)
/s/ Blake L. Sartini Executive Vice President, June 3, 1997
- -------------------------- Chief Operating Officer and Director
Blake L. Sartini
/s/ R. Hal Dean Director June 3, 1997
- --------------------------
R. Hal Dean
/s/ Lorenzo J. Fertitta Director June 3, 1997
- --------------------------
Lorenzo J. Fertitta
/s/ Lowell H. Lebermann, Jr. Director June 3, 1997
- ----------------------------
Lowell H. Lebermann, Jr.
/s/ Delise F. Sartini Director June 3, 1997
- -----------------------
Delise F. Sartini
62
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF STATION CASINOS, INC.
Nevada Corporations
Palace Station Hotel & Casino, Inc.
Texas Station, Inc.
Boulder Station, Inc.
Sunset Station, Inc.
Southwest Gaming Services, Inc.
Missouri Corporations
Kansas City Station Corporation
St. Charles Riverfront Station, Inc.
63
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed registration statements on Form S-8 (File
No. 33-70342), Form S-8 (File No. 33-63752) and Form S-8 (File No.
333-11975).
Arthur Andersen LLP
Las Vegas, Nevada
June 3, 1997
64
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
ON PAGE 37 AND 38 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000898660
<NAME> STATION CASINOS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 42,522
<SECURITIES> 0
<RECEIVABLES> 7,852
<ALLOWANCES> 0
<INVENTORY> 3,473
<CURRENT-ASSETS> 69,369
<PP&E> 1,175,915
<DEPRECIATION> 106,863
<TOTAL-ASSETS> 1,234,118
<CURRENT-LIABILITIES> 185,266
<BONDS> 383,066
0
103,500
<COMMON> 353
<OTHER-SE> 194,995
<TOTAL-LIABILITY-AND-EQUITY> 1,234,118
<SALES> 0
<TOTAL-REVENUES> 583,515
<CGS> 0
<TOTAL-COSTS> 307,096
<OTHER-EXPENSES> 44,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,698
<INCOME-PRETAX> 21,378
<INCOME-TAX> 7,615
<INCOME-CONTINUING> 13,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,518
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
