<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
-----------------
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)
(702) 367-2411
---------------
(Registrant's telephone number, including area code)
N/A
----
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
- ---------------------------- -------------------------------
Common stock, $.01 par value 35,318,057
1
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STATION CASINOS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - 3
December 31, 1996 and March 31, 1996
Condensed Consolidated Statements of Operations (unaudited) - 4
Three and Nine Months Ended December 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows (unaudited) - 5
Nine Months Ended December 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATION CASINOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 35,426 $ 114,868
Accounts and notes receivable, net........................................... 11,737 5,151
Inventories.................................................................. 2,587 2,299
Prepaid expenses and other................................................... 14,255 11,121
----------- -----------
TOTAL CURRENT ASSETS..................................................... 64,005 133,439
Property and equipment, net.................................................... 951,337 616,211
Land held for development...................................................... 26,332 28,934
Other assets, net.............................................................. 82,502 48,730
----------- -----------
TOTAL ASSETS............................................................. $ 1,124,176 $ 827,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................................ $ 19,843 $ 23,256
Accounts payable............................................................. 15,098 11,091
Accrued payroll and related.................................................. 13,344 11,519
Construction contracts payable............................................... 84,761 27,879
Accrued interest payable..................................................... 9,405 6,875
Accrued expenses and other current liabilities............................... 19,995 16,706
----------- -----------
TOTAL CURRENT LIABILITIES................................................ 162,446 97,326
Long-term debt, less current portion........................................... 629,209 441,742
Deferred income taxes, net..................................................... 17,438 9,776
----------- -----------
TOTAL LIABILITIES........................................................ 809,093 548,844
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
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..................................... (1,371) (1,811)
Retained earnings............................................................ 45,204 22,305
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................... 315,083 278,470
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $ 1,124,176 $ 827,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1996 1995 1996 1995
---------- --------- --------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino......................................... $ 102,002 $ 94,621 $ 314,074 $ 258,581
Food and beverage.............................. 20,954 19,562 63,580 51,135
Room........................................... 7,053 6,432 19,711 17,223
Other.......................................... 12,440 9,627 35,192 29,069
--------- --------- --------- ---------
Gross revenues.............................. 142,449 130,242 432,557 356,008
Less promotional allowances.................... (8,682) (7,330) (25,316) (19,131)
--------- --------- --------- ---------
Net revenues................................ 133,767 122,912 407,241 336,877
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Casino......................................... 45,976 39,942 139,254 108,114
Food and beverage.............................. 15,499 16,007 47,774 41,199
Room........................................... 2,328 2,400 7,425 6,742
Other.......................................... 5,659 5,762 16,919 19,222
Selling, general and administrative............ 26,781 24,894 82,387 70,982
Corporate expenses............................. 4,735 4,075 13,377 11,509
Development expenses........................... 377 606 979 2,430
Depreciation and amortization.................. 10,876 9,347 30,968 25,221
Preopening expenses............................ - 927 - 1,825
--------- --------- --------- ---------
112,231 103,960 339,083 287,244
--------- --------- --------- ---------
OPERATING INCOME................................. 21,536 18,952 68,158 49,633
OTHER INCOME (EXPENSE):
Interest expense, net.......................... (7,631) (7,593) (23,891) (22,424)
Other.......................................... (116) 150 (50) 1,289
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES....................... 13,789 11,509 44,217 28,498
Income tax provision........................... (5,033) (4,149) (15,884) (10,369)
--------- --------- --------- ---------
NET INCOME....................................... 8,756 7,360 28,333 18,129
PREFERRED STOCK DIVIDENDS........................ (1,812) - (5,434) -
--------- --------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK............ $ 6,944 $ 7,360 $ 22,899 $ 18,129
========= ========= ========= =========
EARNINGS PER COMMON SHARE........................ $ 0.20 $ 0.21 $ 0.65 $ 0.54
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....... 35,318 35,303 35,315 33,499
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 28,333 $ 18,129
---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................. 30,968 25,221
Preopening expenses........................................... - 1,825
Increase in deferred income taxes............................. 7,772 5,731
Changes in assets and liabilities:
Increase in accounts and notes receivable, net.............. (6,586) (3,252)
Increase in inventories and prepaid expenses and other...... (3,532) (4,848)
Increase in accounts payable................................ 4,007 3,507
Increase (decrease) in accrued expenses and other current
liabilities.............................................. 7,384 (1,250)
Other, net.................................................... 5,196 4,040
---------- ----------
Total adjustments...................................... 45,209 30,974
---------- ----------
Net cash provided by operating activities................... 73,542 49,103
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (373,496) (198,588)
Increase in construction contracts payable.................... 56,882 9,897
Other, net.................................................... (22,659) (2,826)
---------- ----------
Net cash used in investing activities....................... (339,273) (191,517)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank credit facilities, net.................. 206,000 87,000
Proceeds from the issuance of notes payable................... 2,250 28,950
Principal payments on notes payable........................... (25,147) (29,827)
Proceeds from the issuance of convertible preferred stock..... 13,095 -
Proceeds from the issuance of common stock.................... - 77,360
Preferred stock dividends..................................... (5,174) -
Other, net.................................................... (4,735) (6,685)
---------- ----------
Net cash provided by financing activities................... 186,289 156,798
---------- ----------
CASH AND CASH EQUIVALENTS:
(Decrease) increase in cash and cash equivalents.............. (79,442) 14,384
Balance, beginning of period.................................. 114,868 16,961
---------- ----------
Balance, end of period........................................ $ 35,426 $ 31,345
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized............ $ 18,287 $ 24,833
Cash paid for income taxes.................................... $ 5,950 $ 7,568
Property and equipment purchases financed by debt............. $ 361 $ 24,877
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdicitional gaming enterprise that currently
owns and operates casino properties in Las Vegas, Nevada, St.
Charles, Missouri and beginning January 16, 1997, 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 casino property in Las Vegas scheduled to open
in mid-summer 1997.
The accompanying condensed consolidated financial statements
include the accounts of Station Casinos, Inc. 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") (currently under
development), St. Charles Riverfront Station, Inc. ("St. Charles
Station"), Kansas City Station Corporation ("Kansas City Station") and
the Southwest Companies. The Southwest Companies include Southwest
Services, Inc., Southwest Gaming Services, Inc. ("SGSI"), Southwest
Gaming of Louisiana and SGSI's wholly-owned subsidiaries, Tropicana
Caboose, Inc. and Nellis Caboose, Inc. Material intercompany accounts
and transactions have been eliminated.
The accompanying condensed consolidated financial statements
included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods have been made.
The results for the three and nine months ended December 31, 1996 are
not necessarily indicative of results to be expected for the full
fiscal year. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial
statements for the three and nine months ended December 31, 1995 to
conform to the financial statement presentation for the three and
nine months ended December 31, 1996. These reclassifications had no
effect on net income.
6
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 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, St. Charles Station and Kansas City Station,
$372 million limit at December 31, 1996, 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 (6.98% at December 31, 1996)...... $ 183,500 $ -
9 5/8% senior subordinated notes, payable interest only
semi-annually, principal due June 1, 2003, net of unamortized
discount of $6.9 million at December 31, 1996....................... 186,060 185,531
10 1/8% senior subordinated notes, payable interest only
semiannually, principal due March 15, 2006, net of unamortized
discount of $1.2 million at December 31, 1996....................... 196,798 196,737
Notes payable to banks and others, collateralized by slot machines
and related equipment, monthly installments including interest
ranging from 6.81% to 7.56%......................................... 17,773 24,726
Capital lease obligations, collateralized by furniture
and equipment....................................................... 9,225 12,171
Other long-term debt.................................................... 33,196 45,833
----------- -----------
Total.......................................................... 626,552 464,998
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 (9.38% at December 31, 1996), due September 2000............... 22,500 -
----------- -----------
Total long-term debt........................................... 649,052 464,998
Current portion of long-term debt....................................... (19,843) (23,256)
----------- -----------
Total long-term debt, less current portion..................... $ 629,209 $ 441,742
=========== ===========
</TABLE>
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 has received a commitment for $110 million to finance the
remaining development and construction costs of Sunset Station Hotel &
Casino. In connection with the Sunset Loan Agreement, the Company
also entered into an operating lease for certain furniture, fixtures
and equipment with a cost of $40 million. (See Note 3)
The Sunset Loan Agreement includes a first mortgage term note in
the amount of $110 million (the "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. The Note will 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 Note is
subject to prepayment subsequent to July 1998 by an amount equal to a
specified percentage of Excess Cash Flow, as defined. The Note carries
an interest rate of 375 basis points above the Eurodollar Rate (as
defined in the Sunset Loan
7
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT (CONTUNUED)
Agreement). The Note is secured by substantially all of the assets of
Sunset Station, including a leasehold deed of trust with respect to a
portion of the real property on which Sunset Station Hotel & Casino is
being constructed, which portion is subject to a sublease from the
Company to Sunset Station, a deed of trust with respect to the
remainder of such property which is owned by Sunset Station and an
assignment of 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 including a minimum fixed charge coverage ratio as
of the last day of any quarter after the opening of Sunset Station
Hotel & Casino of not less than 1.10 to 1.00, a maximum senior funded
debt to earnings before interest, taxes, depreciation and amortization
ratio after opening of 4.50 to 1.00 for the first quarter, reducing by
varying amounts 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 any 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").
Sunset Station will be required to draw amounts under the Supplemental
Loan Agreement in the event of the failure of certain financial
covenants under the Sunset Loan Agreement. The Supplemental Loan
Agreement expires in September 2001. 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. 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 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 Company's
reducing revolving bank credit facility.
In order to manage the interest rate risk associated with the
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 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 to be paid or
received pursuant to the swap agreement is accrued as interest rates
change and recognized as an adjustment to interest expense for the
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.
3. COMMITMENTS AND CONTINGENCIES
EQUIPMENT LEASE
In connection with the Sunset Loan Agreement, the Company has
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 "Operating Lease") between the Company and First
Security Trust Company of Nevada. The 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
8
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
financial terms substantially similar to the 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.
In connection with the 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
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.
LAND OPTIONS
The Company has entered into various option agreements whereby
the Company has the option to acquire or lease land for the
development of existing and potential new gaming projects with
purchase prices totaling $31.3 million. In consideration for these
options, the Company has paid or placed in escrow $5.9 million
at December 31, 1996, all of which would be forfeited should the
Company not exercise its options to acquire or lease the land.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. OVERVIEW
The following table highlights the results of operations for the Company
and its subsidiaries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NEVADA OPERATIONS:
- ------------------
PALACE STATION
Net revenues.................. $ 32,059 $ 32,777 $ 100,559 $ 98,234
Operating income.............. $ 7,222 $ 7,112 $ 23,407 $ 21,653
EBITDA (1).................... $ 9,214 $ 9,639 $ 29,444 $ 29,124
BOULDER STATION
Net revenues.................. $ 35,904 $ 29,764 $ 105,948 $ 85,649
Operating income.............. $ 9,054 $ 7,105 $ 27,267 $ 19,510
EBITDA (1).................... $ 11,818 $ 9,019 $ 35,285 $ 24,417
TEXAS STATION
Net revenues.................. $ 19,435 $ 18,353 $ 59,239 $ 36,580
Operating income.............. $ 476 $ 524 $ 2,324 $ 2,674
EBITDA (1).................... $ 2,814 $ 2,307 $ 8,153 $ 6,143
TOTAL NEVADA OPERATIONS:
Net revenues.................. $ 87,398 $ 80,894 $ 265,746 $ 220,463
Operating income.............. $ 16,752 $ 14,741 $ 52,998 $ 43,837
EBITDA (1).................... $ 23,846 $ 20,965 $ 72,882 $ 59,684
MISSOURI OPERATIONS:
- -------------------
ST. CHARLES STATION
Net revenues................... $ 39,209 $ 35,401 $ 120,026 $ 93,288
Operating income............... $ 9,221 $ 8,791 $ 27,451 $ 19,336
EBITDA (1)..................... $ 12,235 $ 12,182 $ 36,317 $ 28,245
STATION CASINOS, INC. AND OTHER
- -------------------------------
Net revenues................... $ 7,160 $ 6,617 $ 21,469 $ 23,126
Operating loss................. $ (4,437) $ (4,580) $ (12,291) $ (13,540)
EBITDA (1)..................... $ (3,669) $ (3,921) $ (10,073) $ (11,250)
</TABLE>
(1) "EBITDA" consists of operating income plus depreciation and
amortization, including preopening expenses. 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 activites 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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS
Three and Nine Months Ended December 31, 1996 Compared to Three
and Nine Months Ended December 31, 1995.
Consolidated net revenues increased 8.8% to $133.8 million for
the three months ended December 31, 1996, from $122.9 million in the
prior year. This increase in net revenues is primarily due to strong
results at Boulder Station and St. Charles Station, as well as
improved results at Texas Station. Nevada Operations contributed
$87.4 million of net revenues for the three months ended December 31,
1996, an increase of $6.5 million over the prior year. St. Charles
Station contributed $39.2 million of net revenues, an increase of $3.8
million over the prior year. For the nine months ended December 31,
1996, consolidated net revenues increased 20.9% to $407.2 million, as
compared to $336.9 million in the prior year. Nevada Operations
contributed $265.7 million of net revenues for the nine months ended
December 31, 1996, an increase of $45.3 million over the prior year.
This improvement is primarily due to the increased operations from the
expansion project at Boulder Station which opened in late November
1995, and the operations of Texas Station which opened in July 1995.
St. Charles Station contributed $120.0 million of net revenues for the
nine months ended December 31, 1996, an increase of $26.7 million over
the prior year. For the nine months ended December 31, 1995, net
revenues and operating income at St. Charles Station 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 nine months ended December
31, 1996, the improved results at St. Charles Station 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, however the newly completed parking garage and elevated roadway
served one of its intended purposes in minimizing business disruption
caused by the flood. In addition to minimizing disruptions caused by
flooding, the parking garage and elevated roadway provide improved
access to the gaming facility and are the foundation for future phases
of the St. Charles Station master plan.
Operating income increased 13.6% to $21.5 million for the three
months ended December 31, 1996, from $19.0 million in the prior year.
For the nine months ended December 31, 1996 operating income increased
37.3% to $68.2 million, from $49.6 million in the prior year. These
improvements are due to the factors discussed above. The improvement
in operating income, offset by dividends of $1.8 million on the
convertible preferred stock issued in March 1996, resulted in net
income applicable to common stock of $6.9 million, or earnings per
common share of $0.20 for the three months ended December 31, 1996,
compared to net income applicable to common stock of $7.4 million, or
earnings per common share of $0.21 in the prior year. For the nine
months ended December 31, 1996, the improved results, partially offset
by an increase in net interest expense of $1.5 million, an increase in
the income tax provision of $5.5 million and dividends of $5.4 million
on the convertible preferred stock, resulted in net income applicable
to common stock of $22.9 million, or earnings per common share of
$0.65, compared to net income applicable to common stock of $18.1
million or earnings per share of $0.54 in the prior year.
CASINO. Casino revenues increased 7.8% to $102.0 million for the
three months ended December 31, 1996, from $94.6 million in the prior
year. This increase is directly related to the improved results at
Boulder Station, Texas Station and St. Charles Station. Casino
revenues increased $5.3 million and $2.1 million for the Nevada
Operations and St. Charles Station, respectively, for the three months
ended December 31, 1996. For the nine months ended December 31, 1996,
casino revenues increased 21.5% to $314.1 million, from $258.6 million
in the prior year. This increase is due to a full nine months of
operations at Texas Station, as well as improved results at both
Boulder Station and St. Charles Station. Casino revenues increased
$35.4 million and $20.8 million for the Nevada Operations and St.
Charles Station, respectively. Casino revenues for the Nevada
Operations were negatively impacted as a result of a decline in
sports book revenue for both the three and nine months ended December
31, 1996.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
Casino expenses increased 15.1% to $46.0 million for the three
months ended December 31, 1996, from $39.9 million in the prior year.
For the nine months ended December 31, 1996, casino expenses increased
28.8% to $139.3 million, from $108.1 million in the prior year. These
increases in casino expenses are consistent with the increases in
casino revenues discussed above.
FOOD AND BEVERAGE. Food and beverage revenues increased 7.1% to
$21.0 million for the three months ended December 31, 1996, from $19.6
million in the prior year. Food and beverage revenues for the Nevada
Operations increased $0.7 million, while the results at St. Charles
Station improved by $0.7 million. For the nine months ended December
31, 1996, food and beverage revenues increased 24.3% to $63.6 million,
from $51.1 million in the prior year. This improvement is primarily
due to an increase in food and beverage revenues at St. Charles
Station of $4.5 million, resulting from two new full-service
restaurant facilities which opened in October 1995, and an increase of
$5.1 million related to Texas Station which opened in July 1995.
Food and beverage net profit margins improved to 26.0% for the
three months ended December 31, 1996, from 18.2% in the prior year.
For the nine months ended December 31, 1996, food and beverage net
profit margins improved to 24.9%, from 19.4% in the prior year.
These increases in net margins are primarily due to improvements
at the Nevada Operations, especially Texas Station, as a result of
continued focus on cost control and strong margins at St. Charles
Station with the addition of the two full-service restaurants.
ROOM. Room revenues increased 9.7% to $7.1 million for the three
months ended December 31, 1996, from $6.4 million in the prior year.
For the nine months ended December 31, 1996, room revenues increased
14.4% to $19.7 million, from $17.2 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 $1.4 million of
room revenues for the nine months ended December 31, 1996. The
Company-wide room occupancy increased to 93% from 88%, while the
average daily room rate increased to $53 from $51 for the three months
ended December 31, 1996. For the nine months ended December 31, 1996,
the Company-wide room occupancy increased to 96% from 93%, while
the average daily room rate increased to $48 from $46.
OTHER. Other revenues increased 29.2% to $12.4 million for the
three months ended December 31, 1996, from $9.6 million in the prior
year. This increase is due primarily to $0.7 million for the Company's
interest in the operating income of Barley's Casino & Brewing Company
which opened in January 1996, $0.9 million of lease income from the
lease of a riverboat gaming facility and combined increases in other
revenues at the Company's other operating properties of $1.2 million.
For the nine months ended December 31, 1996, other revenue increased
21.1% to $35.2 million, from $29.1 million in the prior year. This
increase is due to $1.7 million for the Company's interest in the
operating income of Barley's Casino & Brewing Company, $2.2 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 $5.2 million, offset by lost revenues of $3.0 million
from the vending division of Southwest Services which was sold in
September 1995.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") increased 7.6% to $26.8 million for
the three months ended December 31, 1996, from $24.9 million in the
prior year. For the nine months ended December 31, 1996, SG&A
increased 16.1% to $82.4 million from $71.0 million in the prior year.
This increase is primarily due to the addition of Texas Station in
July 1995. SG&A as a percentage of net revenues decreased to 20.0%
for the three months ended December 31, 1996, from 20.3% in the
prior year. For the nine months ended December 31, 1996, SG&A as a
percentage of net revenues decreased to 20.2%, from 21.1% in the prior
year.
CORPORATE EXPENSES. Corporate expenses increased 16.2% to $4.7
million for the three months ended December 31, 1996, from $4.1
million in the prior year. For the nine months ended December 31,
1996, corporate expenses increased 16.2% to $13.4 million, from $11.5
million in the prior year. These increases are
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
attributable to increases in personnel infrastructure to manage the
Company's new properties and development plans for the remainder of
fiscal year 1997 and 1998. Corporate expenses increased to 3.5% of
net revenues for the three months ended December 31, 1996, from 3.3%
in the prior year. For the nine months ended December 31, 1996,
corporate expenses decreased to 3.3% of net revenues, from 3.4% in the
prior year.
DEVELOPMENT EXPENSES. Development expenses decreased
significantly for the three months ended December 31, 1996 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 16.4% to $10.9 million for the three months ended December
31, 1996, from $9.3 million in the prior year. For the nine months
ended December 31, 1996, depreciation and amortization increased 22.8%
to $31.0 million, from $25.2 million in the prior year. Texas Station
contributed $3.3 million of this increase. Depreciation expense at
Boulder Station increased primarily as a result of the parking garage
and entertainment facilities added during mid-fiscal year 1996. These
increases were offset by decreases in depreciation expense at Palace
Station.
PREOPENING EXPENSE. The Company capitalizes significant
preopening expenses associated with its construction projects,
including Kansas City Station which opened January 16, 1997, and
Sunset Station. These 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 estimates total preopening costs for
Kansas City Station will be between $28 million and $31 million.
Preopening expenses for the three months ended December 31, 1995
relate to the opening of the new restaurant facilities at St. Charles
Station and the theater and parking garage at Boulder Station. For
the nine months ended December 31, 1995 preopening expenses include
expenses related to the opening of Texas Station in July 1995, as well
as the items noted above.
INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) increased 56.2% to $15.0 million for the three months
ended December 31, 1996. For the nine months ended December 31, 1996,
interest costs were $41.2 million, a 55.7% increase over the prior
year. 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. The Company recorded interest income of $0.7 million
for the three months ended June 30, 1996, 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 Kansas City
Station 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").
3. LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1996, the Company's
sources of capital included cash flows from operating activities of
$73.5 million, borrowings under the Company's reducing revolving bank
credit facility of $183.5 million, borrowings under the Sunset Station
Note of $22.5 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 December 31, 1996, the Company had available borrowings of $188.5
million
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
under its reducing revolving credit facility, $87.5 million under the
Sunset Station Note, $40 million under the Operating Lease and $35.4
million in cash and cash equivalents.
During the nine months ended December 31, 1996, total capital
expenditures were approximately $373.9 million, of which approximately
(i) $198.5 million was associated with the development and
construction of Kansas City Station, (ii) $53.8 million was associated
with the development and construction of Sunset Station, (iii) $57.5
million was associated with the construction of the next phase of the
St. Charles Station master plan, (iv) $14.7 million was associated
with the construction of a 4,000 space parking structure and elevated
roadway at St. Charles Station, which opened in May 1996 and (v) $49.4
million was associated with various other projects and maintenance
capital expenditures, including net construction period interest.
The Company's primary requirements during the remainder of fiscal
year 1997 and fiscal 1998 are expected to include the following:
- - Sunset Station - The Company anticipates that the project
will cost approximately $160.0 million (excluding net
construction period interest and preopening expenses), of which
approximately $84.9 million had been incurred as of December 31,
1996. 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 project is expected to be completed in mid-calendar year
1997.
- - St. Charles Station - The Company has commenced construction
construction on certain elements of the St. Charles Station
master plan. The Company currently intends to construct a
man-made back water basin that would contain the gaming
facilities, as well as to complete construction and equipping of
one new casino barge facility, similar to those operating at
Kansas City Station. The project also includes a transition
deck to provide direct access from the parking garage into the
casino. This project is expected to cost at least $100 million
(excluding construction period interest and preopening expenses),
of which, $57.5 million had been incurred at December 31, 1996.
The timing of the completion of this project, as well as any
increase in scope, is dependent on the Company's ability
to borrow under its Bank Facility as restricted by the maximum
funded debt to EBITDA ratio described below.
- - Construction Contracts Payable - The payment of approximately
$84.8 million of construction contracts payable and retention
outstanding as of December 31, 1996. This includes the primary
requirements for capital for Kansas City Station, which commenced
operations on January 16, 1997.
Other planned uses of capital include (i) maintenance capital
expenditures at Palace Station, Boulder Station, Texas Station, St.
Charles Station, Kansas City Station and the Southwest Companies, (ii)
principal and interest payments on indebtedness, (iii) dividend
payments on convertible preferred stock, and (iv) general corporate
purposes, including certain elements of other planned improvements and
expansion at the Company's existing facilities. The Sunset Loan
Agreement requires the Company to contribute $52.0 million of equity
to the Sunset Station project, which was met as of December 31, 1996.
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 its new facility
Kansas City Station, 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, 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 estimates total
preopening costs for Kansas City Station, which opened January 16,
1997, will be between $28 million and $31 million. The Company
believes that cash flows from operations, borrowings under the
reducing revolving bank credit facility, borrowings under the
Sunset Note, vendor and lease financing of equipment and existing
cash balances will be adequate to satisfy the Company's anticipated
uses of capital during the remainder of fiscal year 1997. The Company,
however, is continually
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 December
31, 1996. In consideration for these options, the Company had paid or
placed in escrow $5.9 million as of December 31, 1996, 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. As discussed below, the
reducing revolving bank credit facility and the indentures governing
the Company's 9 5/8% and 10 1/8% senior subordinated notes 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 Sunset Station.
DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK
BANK FACILITY
On March 25, 1996, the Company amended and restated its bank
facility, providing for borrowings up to an aggregate principal
amount of $400 million, reduced to $372 million as of December 31,
1996 (the "Bank Facility"). As of December 31, 1996, the Company had
borrowed $183.5 million under the Bank Facility. The Bank Facility is
secured by substantially all of the assets of Palace Station, Boulder
Station, Texas Station, St. Charles Station and Kansas City Station
(collectively, the "Borrowers"). The Company and the Southwest
Companies 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 approximately $4.0 million for the quarter ending March 31,
1997). 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
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, 1997, and 1.50 to 1.00 for periods thereafter, a limitation
on indebtedness, and limitations on capital expenditures. As of
December 31, 1996, the Borrowers funded debt to EBITDA ratio was 1.58
to 1.00 and the fixed charge coverage ratio for the preceding four
quarters ended December 31, 1996, was 2.68 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 December 31, 1996, 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 not to exceed $18 million, 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
December 31, 1996, the Company's consolidated net worth exceeded the
requirement by approximately $17 million. The Bank Facility also
includes a maximum funded debt to EBITDA ratio, including annualized
EBITDA for any new venture, as defined, open less than a year, for the
Company on a consolidated basis of 4.75 to 1.00 for each fiscal
quarter through September 30, 1997, 4.50 to 1.00 for the quarter
ending December 31, 1997, 4.25 to 1.00 for the quarter ending March
31, 1998, 4.00 to 1.00 for each fiscal quarter through September 30,
1998 and 3.75 to 1.00 thereafter. As of December 31, 1996, the
Company's funded debt to EBITDA ratio was 4.56 to 1.00. 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.
SENIOR SUBORDINATED NOTES
The Company has $382.9 million, net of unamortized discount of
$8.1 million, of senior subordinated notes outstanding as of December
31, 1996. $186.1 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 (collectively, the "Notes"). The indentures governing the Notes
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. As of December 31, 1996, the Company's Consolidated
Coverage Ratio was 2.88 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 Notes 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 STATION CONSTRUCTION/TERM LOAN AGREEMENT
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 has received a commitment for $110 million to finance the
remaining development and construction costs of Sunset Station Hotel &
Casino. In connection with the Sunset
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Loan Agreement, the Company also entered into an operating lease for
certain furniture, fixtures and equipment with a cost of $40 million.
The Sunset Loan Agreement includes a first mortgage term note in
the amount of $110 million (the "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. As of December 31, 1996, Sunset
Station had borrowed $22.5 million under the Note. The Note will
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 Note is subject to prepayment subsequent to
July 1998 by an amount equal to a specified percentage of Excess Cash
Flow, as defined. The Note carries an interest rate of 375 basis
points over the Eurodollar Rate (as defined in the Sunset Loan
Agreement). The Note is secured by substantially all of the assets
of Sunset Station, including a leasehold deed of trust with respect
to a portion of the real property on which Sunset Station Hotel &
Casino is being constructed, which portion is subject to a sublease
from the Company to Sunset Station, a deed of trust with respect to
the remainder of such property which is owned by Sunset Station and
an assignment of 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 including a minimum fixed charge coverage ratio as
of the last day of any quarter after the opening of Sunset Station
Hotel & Casino of not less than 1.10 to 1.00, a maximum senior funded
debt to EBITDA ratio after opening of 4.50 to 1.00 for the first
quarter reducing by varying amounts 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 then
$52 million plus 80% of net income (not reduced by net losses) for
each quarter after opening, plus 100% of any 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").
Sunset Station will be required to draw amounts under the Supplemental
Loan Agreement in the event of the failure of certain financial
covenants under the Sunset Loan Agreement. The Supplemental Loan
Agreement expires in September 2001. 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. 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 funding commitments under the Supplemental Loan Agreement are
subject to limitations imposed by the indentures governing the Notes
and the Bank Facility.
In order to manage the interest rate risk associated with the
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 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 to
be paid or received pursuant to the swap agreement is accrued as
interest rates change and recognized as an adjustment to interest
expense for the 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 "Operating Lease")
between the Company and First Security Trust Company of Nevada.
The 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
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.
In connection with the 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
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.
COMMON STOCK
The Company is authorized to issue up to 90,000,000 shares of its
common stock, $.01 par value per share, 35,318,057 shares of which
were issued and outstanding as of December 31, 1996. Each holder of
the Company's common stock (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.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of its
preferred stock, $.01 par value per share ("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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
CONVERTIBLE PREFERRED STOCK
As of December 31, 1996, 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.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements in this document are intended
to be subject to the safe harbor protection provided by Section 21E.
All forward-looking statements involve risks and uncertainties.
Although the Company believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results
will not materially differ from its expectations. Factors that could
cause actual results to differ materially from expectations include,
among other things, the Company's competition, the limitations on
capital resources imposed by the Company's Bank Facility, the Sunset
Note and the terms of the indentures governing the Company's
senior subordinated debt, the Company's ability to meet its interest
expense and principal repayment obligations, the Company's ability to
obtain licenses for its new projects, loss of the Company's riverboat
and dockside facilities from service, construction risks, the
Company's dependence on key gaming markets, the Company's ability
to take advantage of new gaming development opportunities and gaming
regulations. For other factors that may cause actual results to
materially differ from expectations and underlying assumptions, refer
to the Registration Statement on Form S-3 (File No. 333-1102) (and
particularly the section labeled "Risk Factors" therein) and
periodic reports, including the Annual Report on Form 10-K for the
year ended March 31, 1996, filed by the Company with the Securities
and Exchange Commission (and particularly the section labeled
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" therein). 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.
19
<PAGE>
Part II -OTHER INFORMATION
ITEM 1. 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 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 court also ordered the plaintiffs to file
one consolidated Amended Complaint on or before February 14, 1997. As
such, the case(s) remain pending. 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.
A suit seeking status as a class action lawsuit was filed by
plaintiffs, Thomas Hyland and Zelijko Ranogajel, et. al, as class
representative, on May 25, 1995, in the United States District Court,
District of New Jersey, Camden Division, naming 80 credit reporting
agencies and casino operators, including the Company. The lawsuit
alleges that the exclusion of blackjack players who "count cards" from
casinos and the sharing of information about them violates certain
state and federal antitrust, consumer protection, and credit reporting
statutes. On May 30, 1996, the Court dismissed this case.
A suit seeking status as a class action was filed by Paul
Winkleman et. al, as class representative, on February 26, 1996, in
the Circuit Court of the City of St. Louis, Missouri, naming St.
Charles Station and one other casino operator in Missouri as
defendants. The lawsuit seeks to recover losses that occurred within
three months of the filing of the suit under a 1939 Missouri statute
that purports to permit recovery of gaming losses. Based on the
advice of counsel, management believes the statute has been
superseded by an amendment to the constitution of the State of
Missouri that was passed on November 9, 1994, and by the Missouri
Gaming Law promulgated subsequent to a statewide referendum in
November 1992 and further clarified subsequent to the constitutional
amendment, each of which permit riverboat gaming. On May 13, 1996,
St. Charles Station filed a motion to dismiss on this basis. On
August 5, 1996, the Court dismissed this case.
20
<PAGE>
ITEM 2. CHANGES IN SECURITIES - None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit
Number
-------
27 Financial Data Schedule
(b) Reports on Form 8-K - The registrant filed one report on Form
8-K during the three month period ended December 31, 1996.
On October 29, 1996 the Registrant filed a Report on Form 8-K, dated
September 25, 1996. The Registrant reported under Item 5 (i) the
Registrant's subsidiary, Sunset Station, Inc., a Nevada Corporation,
entered into a Construction/Term 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 has received a commitment for $110
million to finance the remaining development and construction costs of
Sunset Station, (ii) the Registrant entered into a $40 million
operating lease for furniture, fixtures and equipment to be re-leased
to, and ultimately, utilized at Sunset Station under the Participation
Agreement, dated as of September 25, 1996 between the Registrant and
First Security Trust Company of Nevada, (iii) in connection with the
operating lease, the Registrant also entered into a Participation
Agreement dated as of September 25, 1996 with the trustee, as lessor
under the operating lease and holders of beneficial interests in the
Lessor Trust, (iv) pursuant to the Supplemental Loan Agreement, the
Registrant provided a funding commitment to Sunset Station of up to an
additional $25 million upon which Sunset Station is required to draw
in the event of failure of certain financial covenants under the
Sunset Loan Agreement, (v) the Registrant entered into a Trust
Agreement for the purpose of establishing First Security Trust Company
of Nevada as Trustee of the Lessor Trust under which the Holders'
beneficial interest in the operating lease exists, and (vi) Sunset
Station, Inc. entered into a form of Agreement between owner and
contractor with J.A. Tiberti Construction Company dated as of November
1, 1995 with a guaranteed maximum price of $121 million with respect
to all phases of construction of Sunset Station Hotel & Casino.
21
<PAGE>
SIGNATURE
Pursuant to the requirements 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.,
Registrant
DATE: February 12, 1997 /s/ Glenn C. Christenson
-----------------------------
Glenn C. Christenson,
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets and Condensed Consolidated Statements
of Operations found on pages 3 and 4 of the Company's Form 10-Q for the Nine
months ended December 31, 1996, 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,426
<SECURITIES> 0
<RECEIVABLES> 11,737
<ALLOWANCES> 0
<INVENTORY> 2,587
<CURRENT-ASSETS> 64,005
<PP&E> 1,047,814
<DEPRECIATION> 96,477
<TOTAL-ASSETS> 1,124,176
<CURRENT-LIABILITIES> 162,446
<BONDS> 382,858
0
103,500
<COMMON> 353
<OTHER-SE> 211,230
<TOTAL-LIABILITY-AND-EQUITY> 1,124,176
<SALES> 0
<TOTAL-REVENUES> 407,241
<CGS> 0
<TOTAL-COSTS> 211,372
<OTHER-EXPENSES> 30,968
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,891
<INCOME-PRETAX> 44,217
<INCOME-TAX> 15,884
<INCOME-CONTINUING> 28,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,899
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
