<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 SEPTEMBER 30, 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
incorporation or organization) Identification No.)
2411 West Sahara Avenue, Las Vegas, Nevada
------------------------------------------
(Address of principal executive offices)
89102
-----
(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 October 31, 1997
- ---------------------------- -------------------------------
Common stock, $.01 par value 35,306,657
1
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STATION CASINOS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)- 3
September 30, 1997 and March 31, 1997
Condensed Consolidated Statements of Operations (unaudited)- 4
Three and six months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows (unaudited)- 5
Six months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
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>
September 30, March 31,
1997 1997
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 43,923 $ 42,522
Accounts and notes receivable, net................ 12,487 7,852
Inventories....................................... 4,360 3,473
Prepaid gaming taxes.............................. 6,657 4,291
Prepaid expenses and other........................ 14,920 11,231
---------- ----------
TOTAL CURRENT ASSETS........................... 82,347 69,369
Property and equipment, net......................... 1,138,825 1,069,052
Land held for development........................... 26,449 26,354
Other assets, net................................... 61,054 69,343
---------- ----------
TOTAL ASSETS................................... $1,308,675 $1,234,118
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................. $ 14,302 $ 18,807
Accounts payable.................................. 16,383 21,106
Accrued payroll and related....................... 16,015 13,460
Construction contracts payable.................... 19,931 94,835
Accrued interest payable.......................... 18,932 10,625
Accrued expenses and other........................ 31,000 26,433
---------- ----------
TOTAL CURRENT LIABILITIES...................... 116,563 185,266
Long-term debt, less current portion................ 885,692 742,156
Deferred income taxes, net.......................... 16,919 7,848
---------- ---------
TOTAL LIABILITIES.............................. 1,019,174 935,270
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized
5,000,000 shares; 2,070,000 convertible
preferred shares issued and outstanding......... 103,500 103,500
Common stock, par value $.01; authorized 90,000,000
shares; 35,306,657 and 35,318,057 shares issued
and outstanding................................. 353 353
Additional paid-in capital........................ 167,154 167,397
Deferred compensation - restricted stock.......... (774) (1,225)
Retained earnings................................. 19,268 28,823
---------- ----------
TOTAL STOCKHOLDERS' EQUITY...................... 289,501 298,848
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $1,308,675 $1,234,118
========== ==========
</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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino............................................ $ 149,425 $ 107,412 $ 282,700 $ 212,072
Food and beverage................................. 34,722 21,460 63,577 42,626
Room.............................................. 9,179 6,214 17,218 12,658
Other............................................. 14,468 11,451 28,676 22,752
--------- --------- --------- ---------
Gross revenues................................. 207,794 146,537 392,171 290,108
Less promotional allowances....................... (13,697) (8,503) (24,558) (16,634)
--------- --------- --------- ---------
Net revenues................................... 194,097 138,034 367,613 273,474
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Casino............................................ 73,301 47,964 137,592 93,278
Food and beverage................................. 23,581 16,190 44,862 32,275
Room.............................................. 3,380 2,539 6,481 5,097
Other............................................. 6,319 5,465 13,481 11,260
Selling, general and administrative............... 43,240 27,084 81,896 55,606
Corporate expenses................................ 3,750 4,429 7,644 8,642
Development expenses.............................. - 285 104 602
Depreciation and amortization..................... 17,186 10,269 33,169 20,092
Preopening expenses............................... - - 10,866 -
--------- --------- --------- ---------
170,757 114,225 336,095 226,852
--------- --------- --------- ---------
OPERATING INCOME..................................... 23,340 23,809 31,518 46,622
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net............................. (19,706) (7,967) (35,713) (16,260)
Other............................................. 21 5 (4,996) 66
--------- --------- --------- ---------
(19,685) (7,962) (40,709) (16,194)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.................... 3,655 15,847 (9,191) 30,428
Income tax (provision) benefit....................... (1,298) (5,729) 3,258 (10,851)
-------- --------- --------- ---------
NET INCOME (LOSS).................................... 2,357 10,118 (5,933) 19,577
PREFERRED STOCK DIVIDENDS............................ (1,811) (1,811) (3,622) (3,622)
-------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK......... $ 546 $ 8,307 $ (9,555) $ 15,955
======== ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE..................... $ 0.02 $ 0.24 $ (0.27) $ 0.45
======== ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 35,307 35,318 35,310 35,314
======== ========= ========= =========
</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>
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (5,933) $ 19,577
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................. 33,169 20,092
Increase in deferred income taxes............................. 7,290 4,621
Preopening expenses........................................... 10,866 -
Changes in assets and liabilities:
Increase in accounts and notes receivable, net.............. (4,635) (1,392)
Increase in inventories and prepaid expenses and other...... (5,161) (3,377)
(Decrease) increase in accounts payable..................... (4,723) 6,481
Increase in accrued expenses and other...................... 13,896 3,006
Other, net.................................................... 9,875 3,169
---------- ----------
Total adjustments...................................... 60,577 32,600
---------- ----------
Net cash provided by operating activities................... 54,644 52,177
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (100,029) (218,436)
(Decrease) increase in construction contracts payable......... (74,904) 27,193
Preopening expenses........................................... (8,550) -
Other, net.................................................... 525 (4,610)
---------- ----------
Net cash used in investing activities....................... (182,958) (195,853)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under bank facility, net................ (63,000) 73,000
Borrowings under Sunset loan agreement, net................... 57,000 -
Proceeds from the issuance of notes payable................... 15,730 -
Principal payments on notes payable........................... (19,631) (19,482)
Proceeds from the issuance of senior subordinated notes, net.. 144,287 -
Proceeds from the issuance of preferred stock, net............ - 13,095
Dividends paid................................................ (3,622) (3,362)
Other, net.................................................... (1,049) (3,819)
---------- ----------
Net cash provided by financing activities................... 129,715 59,432
---------- ----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents.............. 1,401 (84,244)
Balance, beginning of period.................................. 42,522 114,868
---------- ----------
Balance, end of period........................................ $ 43,923 $ 30,624
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized............ $ 24,510 $ 13,832
Cash paid for income taxes.................................... $ - $ 4,450
Property and equipment purchases financed by debt............. $ 3,532 $ 361
</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 four 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.
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"), St. Charles Riverfront
Station, Inc. ("Station Casino St. Charles"), Texas Station, Inc.
("Texas Station"), Kansas City Station Corporation ("Station Casino
Kansas City"), Sunset Station, Inc. ("Sunset Station") and Southwest
Gaming Services, 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 six months ended September 30, 1997 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, 1997.
6
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STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
September 30, March 31,
1997 1997
---------- -----------
<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, $330 million
limit at September 30, 1997, due September 2000, interest at a margin
above the bank's prime rate or the Eurodollar Rate (7.87% at
September 30, 1997)................................................. $ 214,000 $ 277,000
9 5/8% senior subordinated notes, payable interest only semi-annually,
principal due June 1, 2003, net of unamortized discount of $6.4
million at September 30, 1997....................................... 186,638 186,248
9 3/4% senior subordinated notes, payable interest only semi-annually,
principal due April 15, 2007, net of unamortized discount of $5.5
million at September 30, 1997....................................... 144,452 -
10 1/8% senior subordinated notes, payable interest only semi-annually,
principal due March 15, 2006, net of unamortized discount of $1.1
million at September 30, 1997....................................... 196,862 196,818
Notes payable to banks and others, collateralized by slot machines,
furniture and equipment, monthly installments including interest
ranging from 7.66% to 9.00% at September 30, 1997................... 32,717 27,564
Capital lease obligations, collateralized by furniture and equipment.... 5,096 7,703
Other long-term debt.................................................... 17,229 19,630
---------- ----------
Sub-total................................................ 796,994 714,963
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
(9.52% at September 30, 1997), due September 2000................... 103,000 46,000
---------- ----------
Total long-term debt..................................... 899,994 760,963
Current portion of long-term debt....................................... (14,302) (18,807)
---------- ----------
Total long-term debt, less current portion............... $ 885,692 $ 742,156
========== ==========
</TABLE>
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 is 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.
In June 1997, the Company obtained an amendment to the reducing
revolving credit facility (the "Bank Facility"). This amendment
modified the covenant restricting the maximum consolidated funded debt
to EBITDA ratio as follows: 5.75 to 1.00 for the fiscal quarter ended
June 30, 1997, 5.85 to 1.00 for the fiscal quarter ended September 30,
1997, 5.75 to 1.00 for the fiscal quarters ending December 31,
7
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT (CONTINUED)
1997 and March 31, 1998, 5.00 to 1.00 for the fiscal quarter ending 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 September 30, 1997, the Company's funded debt to
EBITDA ratio was 5.74 to 1.00. In addition, in July 1997, the Company
reduced the total amount available under the Bank Facility by $30
million. As a result, no additional reductions are required until
June 30, 1998, at which time the Bank Facility will reduce by $22.4
million each fiscal quarter through March 31, 2000.
3. OTHER MATTERS
PREOPENING EXPENSES
Prior to the opening of a facility, all operating expenses,
including incremental salaries and wages, related thereto are
capitalized as preopening expenses. The Company expenses preopening
expenses upon the opening of the related facility. In June 1997,
Sunset Station Hotel & Casino opened. During the six months ended
September 30, 1997, $10.9 million of preopening expenses primarily
related to Sunset Station were expensed.
EXPIRED OPTION PAYMENTS
In June 1997, $5 million of certain expired option payments to
lease or acquire land for future development, which had previously
been capitalized, were expensed. Such amounts are included in other
income/expense in the accompanying condensed consolidated statements
of operations for the six months ended September 30, 1997.
EARNINGS PER SHARE
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 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 its fiscal year 1998
annual financial statements. Management believes the adoption of SFAS
No. 128 will have no impact on the Company's previously reported
earnings per share.
8
<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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
1997 1996 1997 1996
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NEVADA OPERATIONS:
- ------------------
PALACE STATION
Net revenues........................................ $ 30,500 $ 34,180 $ 63,390 $ 68,500
Operating income.................................... $ 6,218 $ 8,292 $ 13,988 $ 16,185
EBITDA (1).......................................... $ 8,311 $ 10,299 $ 18,214 $ 20,230
BOULDER STATION
Net revenues........................................ $ 33,187 $ 35,645 $ 69,083 $ 70,044
Operating income.................................... $ 8,463 $ 9,390 $ 18,846 $ 18,213
EBITDA (1).......................................... $ 11,453 $ 12,053 $ 24,742 $ 23,467
TEXAS STATION
Net revenues........................................ $ 21,516 $ 20,016 $ 42,657 $ 39,804
Operating income.................................... $ 2,302 $ 536 $ 4,656 $ 1,848
EBITDA (1).......................................... $ 4,556 $ 2,332 $ 9,068 $ 5,339
SUNSET STATION
Net revenues........................................ $ 32,607 $ - $ 42,150 $ -
Operating income (loss)............................. $ 5,450 $ - $ (3,386) $ -
EBITDAR (1)......................................... $ 9,041 $ - $ 11,827 $ -
EBITDA (1).......................................... $ 7,011 $ - $ 9,276 $ -
TOTAL NEVADA OPERATIONS:
Net revenues........................................ $ 117,810 $ 89,841 $ 217,280 $ 178,348
Operating income.................................... $ 22,433 $ 18,218 $ 34,104 $ 36,246
EBITDA (1).......................................... $ 31,331 $ 24,684 $ 61,300 $ 49,036
MISSOURI OPERATIONS:
- --------------------
STATION CASINO ST. CHARLES
Net revenues........................................ $ 29,796 $ 41,292 $ 61,150 $ 80,817
Operating income.................................... $ 3,212 $ 9,690 $ 6,590 $ 18,230
EBITDA (1).......................................... $ 6,483 $ 12,762 $ 13,147 $ 24,082
STATION CASINO KANSAS CITY
Net revenues........................................ $ 39,715 $ - $ 74,994 $ -
Operating income (loss)............................. $ 956 $ - $ (2,314) $ -
EBITDA (1).......................................... $ 5,358 $ - $ 6,518 $ -
TOTAL MISSOURI OPERATIONS:
Net revenues........................................ $ 69,511 $ 41,292 $ 136,144 $ 80,817
Operating income.................................... $ 4,168 $ 9,690 $ 4,276 $ 18,230
EBITDA (1).......................................... $ 11,841 $ 12,762 $ 19,665 $ 24,082
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands)
(unaudited)
1. OVERVIEW (CONTINUED)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
1997 1996 1997 1996
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
STATION CASINOS, INC. AND OTHER:
- --------------------------------
Net revenues........................................ $ 6,776 $ 6,901 $ 14,189 $ 14,309
Operating loss...................................... $ (3,261) $ (4,099) $ (6,862) $ (7,854)
EBITDA (1).......................................... $ (2,646) $ (3,368) $ (5,412) $ (6,404)
</TABLE>
(1) "EBITDA" consists of operating income plus depreciation and
amortization, including preopening expenses. "EBITDAR" consists of operating
income plus depreciation, amortization, preopening expenses and rent expense.
EBITDA and EBITDAR should not be construed as alternatives to operating income
as an indicator of the Company's operating performance, or as alternatives to
cash provided by operating activities as a measure of liquidity. The Company
has presented EBITDA and EBITDAR 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, preopening expenses and rent expense.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 1996.
Consolidated net revenues increased 40.6% to $194.1 million for
the three months ended September 30, 1997, from $138.0 million in the
prior year. The Company's Nevada Operations contributed $117.8
million of net revenues for the three months ended September 30, 1997,
an increase of 31.1% over the prior year. This increase in net
revenues is due primarily to the opening of Sunset Station in June
1997, as well as the continued improvement at Texas Station. These
increases were offset by a decline of 10.8% in net revenues at Palace
Station due to a lower table games hold percentage as compared to the
prior year and competitive market conditions in the tour and travel
segment of Palace Station's business which had a negative impact on
casino revenues, as well as hotel room rates and occupancy. In
addition, net revenues at Boulder Station declined 6.9% due primarily
to the opening of Sunset Station. The Company's Missouri Operations
contributed $69.5 million of net revenues for the three months ended
September 30, 1997, an increase of 68.3% over the prior year. This
increase in net revenues is due to Station Casino Kansas City which
opened in January 1997, offset by a decline of 27.8% in net revenues
at Station Casino St. Charles due to increased competition in the St.
Louis market with the opening of a new hotel/casino in Maryland
Heights in March 1997. For the six months ended September 30, 1997,
consolidated net revenues increased 34.4% to $367.6 million, as
compared to $273.5 million in the prior year. The Nevada Operations
contributed $217.3 million of net revenues for the six months ended
September 30, 1997, an increase of $38.9 million over the prior year.
The Missouri Operations contributed $136.1 million of net revenues for
the six months ended September 30, 1997, an increase of $55.3 million
over the prior year. These net improvements are due to the factors
noted above.
Consolidated operating income decreased 2.0% to $23.3 million for
the three months ended September 30, 1997, from $23.8 million in the
prior year. Operating income at the Company's Nevada Operations
increased 23.1% to $22.4 million for the three months ended
September 30, 1997, from $18.2 million in the prior year. Operating
income at the Company's Missouri Operations declined 57.0% to $4.2
million for the three months ended September 30, 1997, from $9.7
million in the prior year. The decline in consolidated operating
income, together with an increase in net interest expense of $11.7
million and a decrease in the income tax provision resulted in net
income applicable to common stock of $0.5 million, or earnings per
common share of $0.02 for the three months ended September 30, 1997.
For the six months ended September 30, 1997, consolidated operating
income decreased 32.4% to $31.5 million, from $46.6 million in the
prior year. The Nevada Operations generated operating income of $34.1
million, a decrease of 5.9% compared to the prior year. Excluding a
$10.9 million write-off of preopening expenses primarily related to
the opening of Sunset Station, the Nevada Operations generated
operating income of $45.0 million, an increase of 24.1% over the prior
year. The Missouri Operations generated operating income of $4.3
million, a decrease of 76.5% due primarily to a decrease of $11.6
million at Station Casino St. Charles related to increased competition
and an operating loss of $2.3 million at Station Casino Kansas City.
The decline in consolidated operating income, an increase in net
interest expense of $19.5 million, and the expiration of certain
option payments to lease or acquire land for future development
resulting in an expense of $5.0 million, resulted in a net loss
applicable to common stock of $9.6 million, or a loss per common share
of $0.27 for the six months ended September 30, 1997, compared to net
income applicable to common stock of $16.0 million, or earnings per
common share of $0.45 in the prior year.
CASINO. Casino revenues increased 39.1% to $149.4 million for
the three months ended September 30, 1997, from $107.4 million in the
prior year. For the six months ended September 30, 1997, casino
revenues increased 33.3% to $282.7 million, from $212.1 million in the
prior year. These increases are due to the opening of Sunset Station
in June 1997, the opening of Station Casino Kansas City in January
1997 and improvements at Texas Station, offset by decreases at Palace
Station and Station Casino St. Charles due to the factors noted above.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
Casino expenses increased 52.8% to $73.3 million for the three
months ended September 30, 1997, from $48.0 million in the prior year.
For the six months ended September 30, 1997, casino expenses increased
47.5% to $137.6 million, from $93.3 million in the prior year. These
increases in casino expenses are consistent with the increase in
casino revenues noted above. The casino net profit margin decreased
to 50.9% for the three months ended September 30, 1997, from 55.3% in
the prior year. The Company's Nevada Operations experienced a slight
increase in net casino margin, while the Missouri Operations were
negatively impacted in St. Charles due to the increased competition
and Station Casino Kansas City which has a lower margin due to the
start-up nature of its operations, and its late entry into the Kansas
City market. 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. For the six months ended
September 30, 1997, the casino net profit margin declined to 51.3%
from 56.0% in the prior year for the same reasons as noted above.
FOOD AND BEVERAGE. Food and beverage revenues increased 61.8% to
$34.7 million for the three months ended September 30, 1997, from
$21.5 million in the prior year. For the six months ended September
30, 1997, food and beverage revenues increased 49.2% to $63.6 million,
from $42.6 million in the prior year. These increases are due to the
opening of Station Casino Kansas City and Sunset Station as noted
above.
Food and beverage net profit margins improved to 32.1% for the
three months ended September 30, 1997, from 24.6% in the prior year.
For the six months ended September 30, 1997, food and beverage net
profit margins improved to 29.4%, from 24.3% in the prior year. These
increases in margin are due to improvement at the Company's Nevada
Operations primarily as a result of continued focus on cost control.
ROOM. Room revenues increased 47.7% to $9.2 million for the
three months ended September 30, 1997, from $6.2 million in the prior
year. For the six months ended September 30, 1997, room revenues
increased 36.0% to $17.2 million, from $12.7 million in the prior
year. These increases are due primarily to the opening of Station
Casino Kansas City and Sunset Station which added 632 rooms for a
total of 2,160 rooms company-wide. Room occupancy company-wide
decreased to 95% from 97%, while the average daily room rate increased
to $49 from $46 during the six months ended September 30, 1997.
OTHER. Other revenues increased 26.3% to $14.5 million for the
three months ended September 30, 1997, from $11.5 million in the prior
year. For the six months ended September 30, 1997, other revenues
increased 26.0% to $28.7 million from $22.8 million in the prior year.
These increases are due primarily to the addition of Station Casino
Kansas City and Sunset Station. Revenues from the Company's slot
route business increased 20.5% to $5.8 million and 19.3% to $12.1
million for the three and six months ended September 30, 1997,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") increased 59.7% to $43.2 million for
the three months ended September 30, 1997, from $27.1 million in the
prior year. For the six months ended September 30, 1997, SG&A
increased 47.3% to $81.9 million, from $55.6 million in the prior
year. These increases are due to the addition of Station Casino
Kansas City and Sunset Station. SG&A as a percentage of net revenues
increased to 22.3% for the three months ended September 30, 1997, from
19.6% in the prior year. For the six months ended September 30, 1997,
SG&A as a percentage of net revenues increased to 22.3% from 20.3% in
the prior year. These increases are due primarily to the new
operations at Sunset Station and Kansas City Station which, as new
properties, tend to have a higher percentage of SG&A to net revenues.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
CORPORATE EXPENSES. Corporate expenses decreased 15.3% to $3.8
million for the three months ended September 30, 1997, from $4.4
million in the prior year. For the six months ended September 30,
1997, corporate expenses decreased 11.5% to $7.6 million, from $8.6
million in the prior year. Corporate expenses declined to 1.9% of net
revenues for the three months ended September 30, 1997, from 3.2% in
the prior year. For the six months ended September 30, 1997,
corporate expenses declined to 2.1% of net revenues from 3.2% in the
prior year.
DEVELOPMENT EXPENSES. Development expenses continue to decrease.
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 67.4% to $17.2 million for the three months ended September
30, 1997, from $10.3 million in the prior year. For the six months
ended September 30, 1997, depreciation and amortization increased
65.1% to $33.2 million, from $20.1 million in the prior year. These
increases are due primarily to the addition of Station Casino Kansas
City and Sunset Station.
PREOPENING EXPENSES. The Company capitalizes preopening
expenses associated with its construction projects, including Sunset
Station which opened June 10, 1997. These amounts are expensed upon
the opening of the related project. During the six months ended
September 30, 1997, the Company expensed preopening expenses of $10.9
million related primarily to Sunset Station.
INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) increased 77.3% to $23.3 million for the three months
ended September 30, 1997. This increase is primarily attributable to
added interest costs associated with the 9 3/4% senior subordinated
notes issued by the Company in April 1997, borrowings under the
Sunset Station loan agreement and borrowings under the reducing
revolving credit facility.
3. LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 30, 1997, the Company's
sources of capital included net proceeds of $144.3 million from the
issuance of 9 3/4% senior subordinated notes, which were used to re-pay
amounts outstanding under the Company's reducing revolving bank credit
facility, cash flows from operating activities of $54.6 million, and
borrowings under the Sunset Loan Agreement (as defined herein) of
$57.0 million. At September 30, 1997, the Company had available
borrowings of $116.0 million under its reducing revolving credit
facility, subject to covenant restrictions, $7.0 million under the
Sunset Loan Agreement and $43.9 million in cash and cash equivalents.
During the six months ended September 30, 1997, total capital
expenditures were approximately $103.6 million, of which approximately
(i) $40.7 million was associated with the development and construction
of Sunset Station, (ii) $23.9 million was associated with the
development and construction of the expansion project at Station
Casino St. Charles, (iii) $7.0 million was associated with the
acquisition of land adjacent to Boulder Station, and (iv) $32.0
million was associated with various other projects, maintenance
capital expenditures and net construction period interest.
The Company's primary requirements during the remainder of fiscal
year 1998 are expected to include (i) the payment of construction contracts
payable of approximately $19.9 million as of September
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
30, 1997, (ii) maintenance capital expenditures, (iii) principal and
interest payments on indebtedness, (iv) dividend payments on
convertible preferred stock, and (v) general corporate purposes.
In addition, the Company has commenced construction of an
expansion project at Station Casino St. Charles (the "St. Charles
Expansion Project"). In connection with this expansion project, the
Company has constructed a man-made backwater basin that contains two
new gaming vessels, which upon completion 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 $123.5 million had
been incurred at September 30, 1997. As of September 30, 1997,
construction on the project has slowed and management does not expect
that any major construction on the project will resume before the end
of fiscal year 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 reducing revolving bank credit
facility as restricted by the maximum funded debt to EBITDA (as
adjusted for preopening expenses) ratio described herein. In
addition, the Company had entered into a non-binding letter of intent
with the Gordon Group Holdings, Ltd. (the "Gordon Group") to develop a
substantial portion of the new retail and entertainment complex
portion of the St. Charles Expansion Project. The letter of intent is
subject to various termination provisions and a 90-day due diligence
period which the parties have continued to conduct beyond the original
June 19, 1997 due diligence expiration date. The Company anticipates
that an additional $50 million to $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 or that the Gordon Group will be able
to develop and operate the project successfully.
The Company believes that cash flows from operations, borrowings
under the reducing revolving bank credit facility, the Sunset Loan
Agreement, 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 1998. The Company's
ability to finance the St. Charles Expansion Project, however, will
depend on the maximum funded debt to EBITDA ratio which limits
available borrowings under the Company's reducing revolving credit
facility or on obtaining other sources of capital. The Company,
however, continually is evaluating its financing needs. If more
attractive financing alternatives become available to the Company,
the Company may amend its financing plans assuming such financing
would be permitted under its existing debt agreements (see "Description
of Certain Indebtedness and Capital Stock") and other applicable
agreements.
DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK
BANK FACILITY
The Company's secured, Amended and Restated Reducing Revolving
Loan Agreement, dated as of March 19, 1996, as amended on June 27,
1997 (the "Bank Facility"), is a reducing revolving credit facility
which provides for borrowings up to an aggregate principal amount of
$330 million as of September 30, 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 Southwest
Gaming Services, Inc. guarantee the borrowings under
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
the Bank Facility (collectively the "Guarantors"). The Bank Facility
matures on September 30, 2000. In July 1997, the Company reduced the
total amount available under the Bank Facility by $30 million. As a
result, no additional reductions are required until June 30, 1998 at
which time the Bank Facility will reduce by $22.4 million each fiscal
quarter through March 31, 2000. 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 Borrowers' 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 September 30,
1997, the Company's margin above the Eurodollar Rate on borrowings
under the Bank Facility was 2.25%. 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 September 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 September 30, 1997, the Borrowers
funded debt to EBITDA ratio was 1.95 to 1.00 and the fixed charge
coverage ratio for the proceeding four quarters ended September 30,
1997 was 1.57 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
September 30, 1997, Palace Station's tangible net worth exceeded the
requirement by approximately $7.7 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 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
September 30, 1997, the Company's consolidated net worth exceeded the
requirement by approximately $18.2 million. In March and June 1997,
the Company obtained certain amendments to the Bank Facility in order
to enhance its borrowing capacity under its Bank Facility. 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
5.75 to 1.00 for the fiscal quarter ended June 30, 1997, 5.85 to 1.00
for the fiscal quarter ended September 30, 1997, 5.75 to 1.00 for each
fiscal quarter through March 31, 1998, 5.00 to 1.00 for the fiscal
quarter ending 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 September 30, 1997, the
Company's funded debt to EBITDA ratio was 5.74 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
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
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 $528.0 million, net of unamortized discount of
$13.0 million, of senior subordinated notes outstanding as of
September 30, 1997, $186.6 million of these notes bear interest,
payable semi-annually, at a rate of 9 5/8% per year, $196.9 million of
these notes bear interest, payable semi-annually, at a rate of 10 1/8%
per year and $144.5 million of the notes bear interest, payable semi-
annually, at a rate of 9 3/4% per year (collectively the "Notes"). The
indentures governing the Notes (the "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 (the Line A Commitment), of which no amounts were
outstanding as of September 30, 1997 and (h) certain other
indebtedness. At September 30, 1997, the Company's Consolidated
Coverage Ratio was 2.17 to 1.00. Management estimates that for the
quarter ended December 31, 1997, the Company's Consolidated Coverage
Ratio may fall below the 2.00 to 1.00 threshold which will prohibit
the Company from incurring any additional indebtedness, except as noted
above, specifically the $72 million noted in (g). 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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 September 30, 1997, Sunset Station had borrowed
$103 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 situated, 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 of any quarter end
after opening of not less then $52 million plus 80% of net income (not
reduced by net losses), plus 100% of certain additional equity
contributions by the Company and Supplemental Loans (as defined). As
of September 30, 1997, Sunset Station's fixed charge coverage ratio
was 4.55 to 1.00 and the funded debt to EBITDA ratio was 3.50 to 1.00.
As of September 30, 1997, Sunset Station's net worth exceed the
minimum requirement by approximately $8 million. 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 Indentures 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 $100 million notional amount at September 1997 and then
decreases to $95 million at June 1998. The agreement expires in
December
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. As of September
30, 1997, $35.7 million of this facility had been drawn and no further
draws pursuant to the lease will be made. 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, $0.01 par value per share (the "Common Stock"),
35,306,657 shares of which were issued and outstanding as of September
30, 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 other than pursuant to the Rights Plan
described below. 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.
RIGHTS PLAN
On October 6, 1997, the Company declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share
of Common Stock. The dividend was paid on October 21, 1997. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock, par value $0.01
per share ("Preferred Shares") of the Company at a price of $40.00 per
one one-hundredth of a Preferred Share, subject to adjustment. The
Rights are not exercisable until the earlier of 10 days following a
public announcement that a person or group of affiliated or associated
persons have acquired beneficial ownership of 15% or more of the
outstanding Common Stock ("Acquiring Person") or 10 business days (or
such later date as may be determined by
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the
outstanding Common Stock. The Rights will expire on October 21,
2007. Acquiring Persons do not have the same rights to
receive Common Stock as other holders upon exercise of the Rights.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of one one-hundredth interest in a
Preferred Share purchasable upon exercise of each Right should
approximate the value of one Common Share. In the event that any
person or group of affiliated or associated persons becomes an
Acquiring Person, the proper provisions will be made so that each
holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter become void), will thereafter
have the rights to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right.
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated
assets or earning power are sold after a person or group has become an
Acquiring Person, proper provision will be made so that each holder of
a Right will thereafter have the right to receive, upon exercise
thereof, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value
of two times the exercise price of the Right. Because of the
characteristics of the Rights in connection with a person or group of
affiliated or associated persons becoming an Acquiring Person, the
Rights may have the effect of making an acquisition of the Company
more difficult and may discourage such an acquisition.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of its
preferred stock, $0.01 par value per share (the "Preferred Stock"). As
of September 30, 1997, 2,070,000 shares of $3.50 Convertible Preferred
Stock (the "Convertible Preferred Stock") has been issued and are
outstanding. 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
Each of the Convertible Preferred Stock shares outstanding, have
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
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 and the terms
of the Indentures governing the Company's Notes, the Company's ability
to meet its interest expense and principal repayment obligations, 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-
4 (File No. 333-30685) (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, 1997, 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.
20
<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 Complaint 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 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. On November 3, 1997, the court held hearings on the motions
to dismiss. The court took the motions under advisement and indicated
that a ruling would be forthcoming within 30 days. 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
plaintiff Nicole Anderson, et. al, as class representative, on
September 24, 1997, in the Eastern District of Missouri, Eastern
Division. The lawsuit alleges certain racially based discriminatory
action at Station Casino St. Charles. The Company has not yet
responded to the complaint. The Company does not believe the suit has
merit and intends to defend itself vigorously in this suit.
21
<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
The Company's Annual Meeting of Stockholders was held July 28, 1997.
At the meeting R. Hal Dean and Lowell M. Lebermann, Jr., were re-
elected to the Board of Directors to serve for a term of three years
until the 2000 Annual Meeting of Stockholders. The result of the
stockholder vote for each nominee was as follows:
In Favor Withheld
--------- --------
R. Hal Dean 32,878,524 272,407
Lowell M. Lebermann, Jr. 32,878,477 272,454
The stockholders also ratified the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the 1998 fiscal
year with 32,942,136 shares in favor, 110,998 shares opposed and
97,797 shares abstained.
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 - On August 7, 1997, the Company filed a
current report on Form 8-K dated July 30, 1997. The Company
reported under Item 5 the results of its operations for the
first quarter of fiscal year 1998.
22
<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: November 12, 1997 /s/ Glenn C. Christenson
-----------------------------
Glenn C. Christenson,
Executive Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Accounting Officer)
23
<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
SIX MONTHS ENDED SEPTEMBER 30, 1997, 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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103,500
<COMMON> 353
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<INCOME-PRETAX> (9,191)
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