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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 MARCH 31, 1999
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
(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 APRIL 30, 1999
- ---------------------------- -----------------------------
Common stock, $.01 par value 35,330,995
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<PAGE>
STATION CASINOS, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
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
</TABLE>
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>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 50,985 $ 59,040
Cash - restricted for payment of long-term debt - defeased January 4, 1999 .... - 202,383
Accounts and notes receivable, net ............................................ 11,202 18,372
Inventories ................................................................... 5,435 5,466
Prepaid gaming taxes .......................................................... 8,405 8,908
Prepaid expenses and other .................................................... 14,325 11,767
----------- ------------
Total current assets ...................................................... 90,352 305,936
Property and equipment, net ....................................................... 1,153,604 1,147,890
Land held for development ......................................................... 17,022 17,009
Other assets, net ................................................................. 59,718 63,096
----------- ------------
Total assets .............................................................. $ 1,320,696 $ 1,533,931
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................. $ 11,461 $ 13,323
Accounts payable .............................................................. 14,740 18,636
Accrued payroll and related ................................................... 27,744 25,081
Construction contracts payable ................................................ 9,076 10,399
Accrued interest payable ...................................................... 16,422 15,306
Accrued expenses and other current liabilities ................................ 40,208 42,110
----------- ------------
Total current liabilities ................................................. 119,651 124,855
Long-term debt, less current portion .............................................. 928,828 946,308
9 5/8% Senior subordinated notes - defeased January 4, 1999 ....................... - 187,635
Deferred income taxes, net ........................................................ 6,378 5,372
----------- ------------
Total liabilities ......................................................... 1,054,857 1,264,170
----------- ------------
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;
35,312,192 shares issued and outstanding ................................... 353 353
Additional paid-in capital .................................................... 167,216 167,216
Deferred compensation - restricted stock ...................................... (36) (159)
Accumulated deficit ........................................................... (5,194) (1,149)
----------- ------------
Total stockholders' equity ................................................ 265,839 269,761
----------- ------------
Total liabilities and stockholders' equity ................................ $ 1,320,696 $ 1,533,931
----------- ------------
----------- ------------
</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
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Operating revenues:
Casino .................................................. $ 186,124 $ 163,975
Food and beverage ....................................... 36,121 33,506
Room .................................................... 10,744 9,638
Other ................................................... 14,400 12,261
--------- ---------
Gross revenues ..................................... 247,389 219,380
Promotional allowances .................................. (17,458) (14,579)
--------- ---------
Net revenues ....................................... 229,931 204,801
--------- ---------
Operating costs and expenses:
Casino .................................................. 89,088 79,600
Food and beverage ....................................... 22,419 22,302
Room .................................................... 3,855 3,460
Other ................................................... 6,988 5,433
Selling, general and administrative ..................... 49,043 45,074
Corporate expense ....................................... 4,825 4,230
Depreciation and amortization ........................... 17,937 17,018
--------- ---------
194,155 177,117
--------- ---------
Operating income ............................................ 35,776 27,684
--------- ---------
Other expense:
Interest expense, net ................................... (21,327) (23,229)
Merger and related legal costs .......................... (1,250) -
Write off costs to elect REIT status .................... - (2,914)
Other ................................................... (202) (1,769)
--------- ---------
(22,779) (27,912)
--------- ---------
Income (loss) before income taxes and extraordinary item .... 12,997 (228)
Income tax provision ........................................ (4,881) (418)
--------- ---------
Income (loss) before extraordinary item ..................... 8,116 (646)
Extraordinary item - loss on early retirement of debt, net of
applicable income tax benefit ........................... (10,350) (2,042)
--------- ---------
Net loss .................................................... (2,234) (2,688)
Preferred stock dividends ................................... (1,811) (1,811)
--------- ---------
Net income (loss) applicable to common stock ................ $ (4,045) $ (4,499)
--------- ---------
--------- ---------
Basic and diluted earnings (loss) per common share:
Earnings (loss) applicable to common stock, before
extraordinary item
Basic ............................................... $ 0.18 $ (0.07)
Diluted ............................................. $ 0.18 $ (0.07)
Earnings (loss) applicable to common stock
Basic ............................................... $ (0.11) $ (0.13)
Diluted ............................................. $ (0.11) $ (0.13)
Weighted average common shares outstanding
Basic ............................................... 35,312 35,309
Diluted ............................................. 35,726 35,309
</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>
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................................... $ (2,234) $ (2,688)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ...................................................... 17,937 17,018
Amortization of debt discount and issuance costs ................................... 679 6,443
Loss on early retirement of debt ................................................... 15,923 2,668
Write off of expired land options .................................................. - 5,011
Write off of costs to elect REIT status ............................................ - 2,914
Decrease in deferred income taxes .................................................. (1,543) (235)
Changes in assets and liabilities:
Decrease in accounts and notes receivable, net ................................... 7,170 3,758
Decrease in inventories and prepaid expenses and other current assets ............ 519 2,204
(Decrease) increase in accounts payable .......................................... (3,896) 736
Increase in accrued expenses and other current liabilities ....................... 3,425 2,895
Other, net ......................................................................... (340) (9,095)
--------- ---------
Total adjustments .............................................. 39,874 34,317
--------- ---------
Net cash provided by operating activities ................................ 37,640 31,629
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................................... (23,919) (9,029)
Proceeds from sale of property and equipment ....................................... 438 4,925
Decrease in construction contracts payable ......................................... (1,323) (2,009)
Other, net ......................................................................... 147 (4,185)
--------- ---------
Net cash used in investing activities .................................... (24,657) (10,298)
--------- ---------
Cash flows from financing activities:
(Payments) borrowings under bank facility, net ..................................... (14,000) 94,000
Payments under Sunset loan agreement, net .......................................... - (110,000)
Principal payments on notes payable ................................................ (5,465) (3,649)
Defeasance of 9 5/8% senior subordinated notes ..................................... (201,670) -
Dividends paid ..................................................................... (1,811) (1,811)
Other, net ......................................................................... (475) (3,375)
--------- ---------
Net cash used in financing activities .................................... (223,421) (24,835)
--------- ---------
Cash and cash equivalents:
Decrease in cash and cash equivalents .............................................. (210,438) (3,504)
Balance, beginning of period ....................................................... 261,423 53,662
--------- ---------
Balance, end of period ............................................................. $ 50,985 $ 50,158
--------- ---------
--------- ---------
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts capitalized ................................. $ 19,554 $ 19,570
Cash paid for income taxes ......................................................... $ 1,501 $ -
</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-jurisdictional gaming and entertainment enterprise that
currently owns and operates four major hotel/casino properties and two
smaller 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.
The accompanying condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Palace Station Hotel & Casino, Inc. ("Palace Station"), Boulder Station,
Inc. ("Boulder Station"), Texas Station, Inc. ("Texas Station"), Sunset
Station, Inc. ("Sunset Station"), St. Charles Riverfront Station, Inc.
("Station Casino St. Charles"), Kansas City Station Corporation ("Station
Casino Kansas City"), Southwest Gaming Services, Inc. ("SGSI"), and
Tropicana Station, Inc., the operator of the Wild Wild West Gambling Hall
("Wild Wild West"), which opened in July 1998. The Company also owns a 50%
interest in Town Center Amusements, Inc., d.b.a. Barley's Casino & Brewing
Company ("Barley's"). All significant 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 months ended March 31, 1999 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 Transition Report on Form 10-K for the transition period from
April 1, 1998 to December 31, 1998.
Certain amounts in the three months ended March 31, 1998
consolidated financial statements have been reclassified to be consistent
with the current year presentation. 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 (amounts in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- --------------
<S> <C> <C>
Amended and restated reducing revolving credit facility and term loan (the
"Amended Bank Facility"), secured by substantially all of the assets of
Palace Station, Boulder Station, Texas Station, Sunset Station, Station
Casino St. Charles and Station Casino Kansas City, $350.0 million limit at
March 31, 1999 on the revolving facility, reducing quarterly by varying
amounts until September 2003 when the remaining principal balance is due,
interest at a margin above the bank's prime rate or the Eurodollar Rate
(7.33% at March 31, 1999), $75.0 million limit at March 31, 1999 on the term
loan, amortizing quarterly by $187,500 through December 2004, then by $17.8
million each quarter thereafter until maturity on December 31, 2005,
interest at 3.25% above the Eurodollar Rate
(8.33% at March 31, 1999)................................................... $ 365,000 $ 379,000
8 7/8% senior subordinated notes, payable interest only semi-annually,
principal due December 1, 2008.............................................. 199,900 199,900
9 3/4% senior subordinated notes, payable interest only semi-annually,
principal due April 15, 2007, net of unamortized discount of $5.0 million
at March 31, 1999........................................................... 145,012 144,914
10 1/8% senior subordinated notes, payable interest only semi-annually,
principal due March 15, 2006, net of unamortized discount of $1.0
million at March 31, 1999................................................... 197,006 196,981
Other long-term debt, collateralized by various assets, including slot
machines, furniture and equipment, and land, monthly installments
including interest ranging from 6.93% to 9.75% at March 31, 1999............ 33,371 38,836
------------- --------------
Total long-term debt................................................. 940,289 959,631
Current portion of long-term debt............................................... (11,461) (13,323)
------------- --------------
Total long-term debt, less current portion........................... 928,828 946,308
9 5/8% senior subordinated notes, net of unamortized discount of $5.4 million
at December 31, 1998, defeased January 4, 1999.............................. - 187,635
------------- --------------
Total................................................................ $ 928,828 $ 1,133,943
------------- --------------
------------- --------------
</TABLE>
In December 1998, the Company completed an offering of $199.9 million
of senior subordinated notes due in December 2008, that have equal priority with
the Company's other senior subordinated notes. The $199.9 million senior
subordinated notes bear interest payable semi-annually, at a rate of 8 7/8% per
year. At December 31, 1998, the Company had deposited the net proceeds from the
sale of the 8 7/8% Notes and a portion of the funds borrowed under the Amended
Bank Facility in a separate trust account with the trustee under the indenture
relating to the 9 5/8% Notes to redeem and to pay accrued interest and
redemption premiums related to the 9 5/8% Notes on the redemption date. The
redemption occurred on January 4, 1999. The Company recorded an extraordinary
charge of $10.4 million (net of applicable tax benefit) to reflect the
write-off of the unamortized debt discount, unamortized loan costs and the
premium to redeem the notes.
7
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT (CONTINUED)
In November 1998, the Company secured a $425.0 million bank credit
facility which amended the Company's existing reducing revolving credit
facility and repaid a supplemental facility which had been obtained in
September 1998. The Amended Bank Facility consists of three secured
tranches. Two revolving tranches constitute a reducing revolving credit
facility (the "Revolving Facility") which provides for borrowings up to an
aggregate principal amount of $350.0 million and the third tranche
constitutes a $75.0 million term loan (the "Term Loan"). The availability
under the Revolving Facility will reduce by $7.0 million on September 30,
1999; by $12.25 million on each of December 31, 1999, March 31, 2000 and
June 30, 2000; by $14.0 million on September 30, 2000, December 31, 2000,
March 31, 2001 and June 30, 2001; and by $17.5 million on each fiscal
quarter end thereafter. The Term Loan matures on December 31, 2005 and
amortizes in installments of $187,500 on each fiscal quarter end from March
31, 2000 until and including December 31, 2004 and of $17.8 million on each
fiscal quarter end thereafter. Borrowings under the Revolving Facility bear
interest at a margin above the Alternate Base Rate or the Eurodollar Rate
(each, as defined in the Amended Bank Facility), as selected by the Company.
The margin above such rates, and the fee on the unfunded portions of the
Revolving Facility, will vary quarterly based on the Company's combined
consolidated ratio of average quarterly adjusted funded debt to net income
before interest, taxes, depreciation and amortization adjusted for
non-recurring gains and losses and preopening expenses, if any ("Adjusted
EBITDA"). As of March 31, 1999, the Borrowers' margin above the Eurodollar
Rate on borrowings under the Revolving Facility was 2.25%. The maximum
margin for Eurodollar Rate borrowings is 2.75%. The maximum margin for
alternate base rate borrowings is 1.50%. The maximum fee for the unfunded
portion of the Revolving Facility is 0.50% multiplied by the average of the
unfunded portion of the Revolving Facility. The interest rate on the Term
Loan is 3.25% above the Eurodollar Rate.
The Amended Bank Facility contains certain financial and other
covenants. These include a maximum funded debt to Adjusted EBITDA ratio for
the Borrowers combined of 2.50 to 1.00 for each fiscal quarter, a minimum
fixed charge coverage ratio for the preceding four quarters for the
Borrowers combined of 1.40 to 1.00 until and including March 31, 1999 and
for each quarter thereafter, 1.50 to 1.00, limitations on indebtedness,
limitations on asset dispositions, limitations on investments, limitations
on prepayments of indebtedness and rent and limitations on capital
expenditures. As of March 31, 1999, the Borrowers combined funded debt to
Adjusted EBITDA ratio was 2.04 to 1.00 and their combined fixed charge
coverage ratio for the preceding four quarters ended March 31, 1999 was 1.90
to 1.00. A tranche of the Revolving Facility contains a minimum tangible net
worth requirement for Palace Station ($10 million plus 95% of net income
determined as of the end of each fiscal quarter with no reduction for net
losses) and certain restrictions on distributions of cash from Palace
Station to the Company. As of March 31, 1999, Palace Station's tangible net
worth exceeded the requirement by approximately $8.7 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 Amended Bank Facility has financial and other
covenants relating to the Company. These include a tangible net worth
covenant of $265.0 million (adjusted upward for 95% of cumulative net income
(without deduction for any net loss) and 100% of capital stock issuances and
downward for certain capital stock repurchases, preferred stock dividends,
or certain permissible asset dispositions, required write down of assets and
preopening expense, if any) and a consolidated funded debt to Adjusted
EBITDA ratio of no more than 5.45 to 1.00 on March 31, 1999 and reducing
quarterly to 4.00 to 1.00 on September 30, 2001. Other covenants limit
prepayments of indebtedness or rent (including, subordinated debt other than
refinancings meeting certain criteria), limitations on asset dispositions,
limitation on dividends, limitations on indebtedness, limitations on
investments and limitations on capital expenditures. The Amended Bank
Facility also prohibits the Company from holding cash and cash equivalents
in excess of
8
<PAGE>
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT (CONTINUED)
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, any amount required to be held by the Company or any restricted
subsidiary by any gaming boards, and $2.0 million. As of March 31, 1999, the
Company's consolidated funded debt to Adjusted EBITDA ratio was 4.74 to
1.00. The Company has pledged the stock of all of its subsidiaries except
Kansas City Station Corporation and St. Charles Riverfront Station, Inc. and
has agreed to pledge the stock of the latter two subsidiaries upon
regulatory approval (which is expected to be obtained). The Company and the
Guarantors waive certain defenses and rights including rights of subrogation
and reimbursement. The Amended Bank Facility contains customary events of
default and remedies and is cross-defaulted to the Company's senior
subordinated notes and a change of control default (which definition is
substantially similar to the definition of Change of Control Triggering
Event in the indentures governing the senior subordinated notes).
3. OTHER MATTERS
PALACE STATION FIRE AND FLOOD
On July 20, 1998, Palace Station suffered damage to its casino and
hotel tower as a result of a thunderstorm in the Las Vegas Valley. In
November 1998, repairs were completed to the casino and all of the rooms in
the 21-story hotel tower became fully functional. Losses associated with the
property damage and business interruption were covered under the Company's
insurance policies. During the quarter ended March 31, 1999, the Company
received its final payment from its insurance company on these claims.
4. COMMITMENTS AND CONTINGENCIES
SETTLEMENT OF CRESCENT LITIGATION
On April 14, 1999, the Company announced that it has settled its
lawsuits with Crescent Real Estate Equities, Inc. ("Crescent") arising out
of the proposed merger of the two companies, which was terminated in August
1998. Under the terms of the settlement agreement, Crescent has paid the
Company $15 million, and the parties have released each other from claims.
The settlement payment was received on April 22, 1999.
CLASS ACTION/DERIVATIVE ACTION
A suit seeking status as a class action and a derivative action was
filed by plaintiff, Crandon Capital Partners, as class representative, on
August 7, 1998, in Clark County District Court, State of Nevada, naming the
Company and its Board of Directors as defendants. The lawsuit, which was
filed as a result of the failed merger between the Company and Crescent,
alleges, among other things, a breach of fiduciary duty owed to the
shareholders/class members. The lawsuit seeks damages allegedly suffered by
the shareholders/class members as a result of the transactions with
Crescent, as well as all costs and disbursements of the lawsuit. Although no
assurance can be provided with respect to any litigation, the Company and
the Board of Directors do not believe the suit has merit and intend to
defend themselves vigorously.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
1. OVERVIEW
The following table highlights the results of operations for the Company and
its subsidiaries (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- ----------
<S> <C> <C> <C>
NET REVENUES - TOTAL $ 229,931 $ 204,801 12.3%
Nevada Operations (a) 141,189 128,946 9.5%
Missouri Operations (a) 78,356 70,426 11.3%
Other 10,386 5,429 91.3%
OPERATING INCOME (LOSS) - TOTAL $ 35,776 $ 27,684 29.2%
Nevada Operations (a) 32,478 28,233 15.0%
Missouri Operations (a) 7,956 3,528 125.5%
Other (4,658) (4,077) (14.3%)
OPERATING MARGIN - TOTAL 15.6% 13.5%
Nevada Operations (a) 23.0% 21.9%
Missouri Operations (a) 10.2% 5.0%
CASH FLOWS FROM:
Operating activities $ 37,640 $ 31,629 19.0%
EBITDA (b) - TOTAL $ 53,713 $ 44,702 20.2%
Nevada Operations (a) 42,013 37,129 13.2%
Missouri Operations (a) 15,683 11,151 40.6%
Other (3,983) (3,578) (11.3%)
EBITDA, AS ADJUSTED FOR THE SUNSET
EQUIPMENT LEASE (c) - TOTAL $ 55,698 $ 46,766 19.1%
Nevada Operations (a) 43,998 39,193 12.3%
</TABLE>
(a) The Nevada Operations include the accounts of: Palace Station,
Boulder Station, Texas Station and Sunset Station. The Missouri
Operations include the accounts of: Station Casino St. Charles and
Station Casino Kansas City.
(b) EBITDA consists of operating income plus depreciation and amortization.
The Company believes that in addition to cash flows and net income,
EBITDA is a useful financial performance measurement for assessing the
operating performance of the Company. Together with net income and cash
flows, EBITDA provides investors with an additional basis to evaluate
the ability of the Company to incur and service debt and incur capital
expenditures. To evaluate EBITDA and the trends it depicts, the
components should be considered. The impact of interest, taxes,
depreciation and amortization, each of which can significantly affect
the Company's results of operations and liquidity and should be
considered in evaluating the Company's operating performance, cannot be
determined from EBITDA. Further, EBITDA does not represent net income
or cash flows from operating, financing and investing activities as
defined by generally accepted accounting principles ("GAAP") and does
not necessarily indicate cash flows will be sufficient to fund cash
needs. It should not be considered as an alternative to net income, as
an indicator of the Company's operating performance or to cash flows as
a measure of liquidity. In addition, it should be noted that not all
gaming companies that report EBITDA or adjustments to such measures may
calculate EBITDA, or such adjustments in the same manner as the
Company, and therefore, the Company's measure of EBITDA may not be
comparable to similarly titled measures used by other gaming companies.
(c) EBITDA, As adjusted for the Sunset equipment lease consists of EBITDA
(described above) plus the rent related to the Sunset Station equipment
lease.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS
CONSOLIDATED NET REVENUES
The increase in consolidated net revenues for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998 is due to
increasing revenues at all of the Company's properties, with the exception of
Station Casino St. Charles, which declined 2.7% as a result of significant
competition in the St. Louis market. Increased revenues at the Nevada Operations
are partially a result of the completed master-planned expansions at Texas
Station and Sunset Station, which were completed in February 1999 and November
1998, respectively.
OPERATING INCOME/OPERATING MARGIN
Consolidated operating income improved by $8.1 million in the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998. The only casino property experiencing a decline in operating income was
Station Casino St. Charles, which experienced a $1.2 million decline primarily
related to $1.4 million of costs related to ongoing dredging requirements and
costs related to low-water levels. See "Legal Proceedings - Low Water Level at
Station Casino St. Charles; EPA Investigation".
Consolidated operating margin improved in the three months ended March
31, 1999 as compared to the three months ended March 31, 1998, primarily due to
operating margins at Station Casino Kansas City improving from 2.4% to 13.6%.
The following table highlights the various sources of revenues and
expenses for the Company as compared to prior periods (dollars in thousands,
unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------- PERCENT
1999 1998 CHANGE
----------- ----------- ----------
<S> <C> <C> <C>
Casino revenues 186,124 163,975 13.5%
Casino expenses 89,088 79,600 11.9%
MARGIN 52.1% 51.5%
Food and beverage revenues 36,121 33,506 7.8%
Food and beverage expenses 22,419 22,302 0.5%
MARGIN 37.9% 33.4%
Room revenues 10,744 9,638 11.5%
Room expenses 3,855 3,460 11.4%
MARGIN 64.1% 64.1%
Other revenues 14,400 12,261 17.4%
Selling, general and administrative 49,043 45,074 8.8%
PERCENT OF NET REVENUES 21.3% 22.0%
Corporate expense 4,825 4,230 14.1%
PERCENT OF NET REVENUES 2.1% 2.1%
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CASINO. Casino revenues increased for the three months ended March
31, 1999 as compared to the three months ended March 31, 1998 as a result of
the same factors affecting consolidated net revenues discussed above. Casino
profit margin for the three months ended March 31, 1999 remained relatively
consistent with results for the three months ended March 31, 1998.
FOOD AND BEVERAGE. Food and beverage revenues for the three months
ended March 31, 1999 increased 7.8% over food and beverage revenues for the
three months ended March 31, 1998. This increase is primarily due to the
completion of the expansion projects at Sunset Station and Texas Station,
which were completed in November 1998 and February 1999, respectively.
Food and beverage net profit margins improved to 37.9% for the
three months ended March 31, 1999, from 33.4% in the prior year. This
increase in margin is due to improvement at the Company's Nevada Operations,
primarily as a result of continued focus on cost control, purchasing
efficiencies, as well as selected menu price increases.
ROOM. Room revenues for the three months ended March 31, 1999
increased 11.5% over room revenues for the three months ended March 31,
1998. This increase is primarily due to the opening of the Wild Wild West in
July 1998, which contributed $0.6 million of room revenues in the three
months ended March 31, 1999.
The Company's room margin remained constant, as the Company's room
expenses increased 11.4% in the three months ended March 31, 1999, over the
prior year. The majority of this increase is also due to the opening of the
Wild Wild West, as mentioned above, which added $0.3 million of room expense
in the three months ended March 31, 1999. The Company-wide room occupancy
decreased to 91% from 93%, while the average daily room rate increased to
$54 from $52.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). As a percent of net
revenues, SG&A decreased to 21.3% in the three months ended March 31, 1999,
as compared to 22.0% for the three months ended March 31, 1998. This
decrease is due primarily to the fine tuning of operations at Sunset Station
and Station Casino Kansas City. In the Company's experience, when a new
property opens, SG&A as a percent of net revenues is higher than normal, and
reduces as the property's operations mature.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $0.9 million in the three months ended March 31, 1999 to $17.9
million as compared to $17.0 million in the three months ended March 31,
1998. This increase is a result of the completion of expansion projects at
Sunset Station and Texas Station, which were completed in November 1998 and
February 1999, respectively.
INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) decreased 6.5% to $21.9 million for the three months ended
March 31, 1999, from $23.4 million in the prior year. This decrease is due
to a reduction in average interest rates to 8.9% from 9.7% in the prior
year. This decrease is partially offset by an increase in total debt.
During the three months ended March 31, 1999, the Company recorded
an extraordinary charge of $10.4 million (net of applicable tax benefit) to
reflect the write-off of the unamortized debt discount, unamortized loan
costs and the premium to redeem the 9 5/8% senior subordinated notes, which
were repaid on January 4, 1999.
3. LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, the Company's sources
of capital included cash flows from operating activities of $37.6 million.
At March 31, 1999, the Company had total available borrowings of $425.0
million under the Amended Bank Facility, of which $365.0 million were
outstanding,
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and $51.0 million in cash and cash equivalents. Total available borrowings
under the Amended Bank Facility will reduce to $418.0 million on September
30, 1999.
During the three months ended March 31, 1999, total capital
expenditures were approximately $23.9 million, of which approximately (i)
$16.2 million was associated with the expansion project at Texas Station,
and (ii) $7.7 million was associated with maintenance capital expenditures
and various other projects.
The Company's primary capital requirements during the remainder of
fiscal year 1999 are expected to include (i) the payment of construction
contracts payable of approximately $9.1 million as of March 31, 1999, (ii)
maintenance capital expenditures, and (iii) principal and interest payments
on indebtedness. The Company previously commenced construction of an
expansion project at Station Casino St. Charles (the "St. Charles Expansion
Project"). As of December 31, 1997, construction on the project and all
related capitalized interest has ceased. In the event the Company determines
that it will not complete the project it may be required to recognize an
impairment loss. As of March 31, 1999, approximately $169.0 million had been
incurred related to the St. Charles Expansion Project.
The Company believes that cash flows from operations, borrowings
under the Amended Bank Facility (see Note 2), 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
1999. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
("SOP") No. 98-5 "Reporting on the Costs of Start-up Activities." The
provisions of SOP 98-5 are effective for fiscal years beginning after
December 15, 1998, and require that the costs associated with start-up
activities (including preopening costs of casinos) be expensed as incurred.
YEAR 2000 READINESS
APPROACH
The Company has established a task force to coordinate the
Company's response to the Year 2000. This task force, which reports to the
Company's Chief Financial Officer, is led by the Vice President of
Information Technology. The Company also engaged an outside consultant which
assisted the Company in establishing an approach to dealing with the Year
2000 issue, and the Company is in the process of implementing a Year 2000
compliance program at the Company's properties. The program consists of the
following phases:
- Phase 1. Compilation of an inventory of information technology ("IT")
and non-IT systems that may be sensitive to the Year 2000 problem.
- Phase 2. Identification and prioritization of the critical systems from
the systems inventory compiled in Phase 1 and inquiries of third
parties with whom the Company does significant business (i.e. vendors
and suppliers) as to the state of their Year 2000 readiness.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- Phase 3. Analysis of critical systems to determine which systems are
not Year 2000 compliant and evaluation of the costs to repair or
replace those systems.
- Phase 4. Repair or replace noncompliant systems and testing of those
systems for which a representation as to Year 2000 compliance has not
been received or for which a representation was received but has not
been confirmed.
STATUS
Phases 1 and 2 are substantially complete, though the Company has
not received all responses to inquiries of significant third parties as to
their Year 2000 readiness. Phases 3 and 4 are ongoing and will continue
through the first three quarters of the calendar 1999. It is the Company's
goal to have this project completed by September 1999. Based upon the
analysis conducted to date, the Company believes all of the major critical
systems at the Company's properties are currently compliant or will be
compliant by September 1999. The only significant aspect of the Company's
Year 2000 compliance, which has been identified to date, is the need to
replace older computers and software packages whose systems are not Year
2000 compatible.
COSTS
The total cost to the Company of making the Company's systems Year
2000 compliant is currently estimated to be in the range of $2 million to $3
million. Of that amount the Company has incurred approximately $1.1 million
as of March 31, 1999. The Company is, however, still in the process of
identifying non-compliant systems and the cost of replacing or repairing
such systems, so the actual cost of making the Company's systems Year 2000
compliant may be materially greater than the amount the Company currently
estimates. The majority of this cost relates to the acquisition of new
computer hardware to replace the systems noted above and the purchase of new
software to replace non-compliant software. These costs will be capitalized
and depreciated over their expected useful life. To the extent existing
hardware or software is replaced, the Company will recognize a loss
currently for the undepreciated balance. This loss is included in the above
cost estimate. Furthermore, all costs related to software modification, as
well as all costs associated with the Company's administration of the
Company's Year 2000 project, are being expensed as incurred and are likewise
included in the cost estimated above.
DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK
AMENDED BANK FACILITY
In November 1998, the Company secured a $425.0 million bank credit
facility which amended the Company's existing reducing revolving credit
facility and repaid a supplemental facility which had been obtained in
September 1998. The Amended Bank Facility consists of three secured
tranches. Two revolving tranches constitute a reducing revolving credit
facility (the "Revolving Facility") which provides for borrowings up to an
aggregate principal amount of $350.0 million and the third tranche
constitutes a $75.0 million term loan (the "Term Loan"). The availability
under the Revolving Facility will reduce by $7.0 million on September 30,
1999; by $12.25 million on each of December 31, 1999, March 31, 2000 and
June 30, 2000; by $14.0 million on September 30, 2000, December 31, 2000,
March 31, 2001 and June 30, 2001; and by $17.5 million on each fiscal
quarter end thereafter. The Term Loan matures on December 31, 2005 and
amortizes in installments of $187,500 on each fiscal quarter end from March
31, 2000 until and including December 31, 2004 and of $17.8 million on each
fiscal quarter end thereafter. Borrowings under the Revolving Facility bear
interest at a margin above the Alternate Base Rate or the Eurodollar Rate
(each, as defined in the Amended Bank Facility), as selected by the Company.
The margin above such rates, and the fee on the unfunded portions of the
Revolving Facility, will vary quarterly based on the Company's combined
consolidated ratio of average quarterly adjusted funded debt to net
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
income before interest, taxes, depreciation and amortization adjusted for
non-recurring gains and losses and preopening expenses, if any ("Adjusted
EBITDA"). As of March 31, 1999, the Borrowers' margin above the Eurodollar
Rate on borrowings under the Revolving Facility was 2.25%. The maximum
margin for Eurodollar Rate borrowings is 2.75%. The maximum margin for
alternate base rate borrowings is 1.50%. The maximum fee for the unfunded
portion of the Revolving Facility is 0.50% multiplied by the average of the
unfunded portion of the Revolving Facility. The interest rate on the Term
Loan is 3.25% above the Eurodollar Rate.
The Amended Bank Facility contains certain financial and other
covenants. These include a maximum funded debt to Adjusted EBITDA ratio for
the Borrowers combined of 2.50 to 1.00 for each fiscal quarter, a minimum
fixed charge coverage ratio for the preceding four quarters for the
Borrowers combined of 1.40 to 1.00 until and including March 31, 1999 and
for each quarter thereafter, 1.50 to 1.00, limitations on indebtedness,
limitations on asset dispositions, limitations on investments, limitations
on prepayments of indebtedness and rent and limitations on capital
expenditures. As of March 31, 1999, the Borrowers combined funded debt to
Adjusted EBITDA ratio was 2.04 to 1.00 and their combined fixed charge
coverage ratio for the preceding four quarters ended March 31, 1999 was 1.90
to 1.00. A tranche of the Revolving Facility contains a minimum tangible net
worth requirement for Palace Station ($10 million plus 95% of net income
determined as of the end of each fiscal quarter with no reduction for net
losses) and certain restrictions on distributions of cash from Palace
Station to the Company. As of March 31, 1999, Palace Station's tangible net
worth exceeded the requirement by approximately $8.7 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 Amended Bank Facility has financial and other
covenants relating to the Company. These include a tangible net worth
covenant of $265.0 million (adjusted upward for 95% of cumulative net income
(without deduction for any net loss) and 100% of capital stock issuances and
downward for certain capital stock repurchases, preferred stock dividends,
or certain permissible asset dispositions, required write down of assets and
preopening expense, if any) and a consolidated funded debt to Adjusted
EBITDA ratio of no more than 5.45 to 1.00 on March 31, 1999 and reducing
quarterly to 4.00 to 1.00 on September 30, 2001. Other covenants limit
prepayments of indebtedness or rent (including, subordinated debt other than
refinancings meeting certain criteria), limitations on asset dispositions,
limitation on dividends, limitations on indebtedness, limitations on
investments and limitations on capital expenditures. The Amended Bank
Facility also 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, any amount required to be held by the Company
or any restricted subsidiary by any gaming boards, and $2.0 million. As of
March 31, 1999, the Company's consolidated funded debt to Adjusted EBITDA
ratio was 4.74 to 1.00. The Company has pledged the stock of all of its
subsidiaries except Kansas City Station Corporation and St. Charles
Riverfront Station, Inc. and has agreed to pledge the stock of the latter
two subsidiaries upon regulatory approval (which is expected to be
obtained). The Company and the Guarantors waive certain defenses and rights
including rights of subrogation and reimbursement. The Amended Bank Facility
contains customary events of default and remedies and is cross-defaulted to
the Company's senior subordinated notes and a change of control default
(which definition is substantially similar to the definition of Change of
Control Triggering Event in the indentures governing the senior subordinated
notes).
SENIOR SUBORDINATED NOTES
The Company has $541.9 million, net of unamortized discount of $6.0
million, of senior subordinated notes outstanding as of March 31, 1999,
$197.0 million of these notes bear interest, payable semi-annually, at a
rate of 10 1/8% per year, $145.0 million of the notes bear interest, payable
semi-annually, at a rate of 9 3/4% per year and $199.9 million of the notes
bear interest, payable semi-annually,
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
at a rate of 8 7/8% 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 under the
Bank Facility not to exceed the greater of $200 million or 1.5 times
Operating Cash Flow (as defined) for the four most recent quarters and (h)
certain other indebtedness. At March 31, 1999, the Company's Consolidated
Coverage Ratio was 2.13 to 1.00. In addition, the Indentures prohibit the
Company from paying dividends on any of its capital stock unless at the time
of and after giving effect to such dividends, among other things, the
aggregate amount of all Restricted Payments and Restricted Investments (as
defined in the Indentures, and which include any dividends on any capital
stock of the Company) do not exceed the sum of (i) 50% of Cumulative
Consolidated Net Income (as defined) of the Company (less 100% of any
consolidated net losses), (ii) certain net proceeds from the sale of equity
securities of the Company, and (iii) $15 million. The limitation on the
incurrence of additional indebtedness and dividend restrictions in the
Indentures may significantly affect the Company's ability to pay dividends
on its capital stock. The Indentures also give the holders of the Notes the
right to require the Company to purchase the Notes at 101% of the principal
amount of the Notes plus accrued interest thereon upon a Change of Control
and Rating Decline (each as defined in the Indentures) of the Company.
SUNSET OPERATING LEASE
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 "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. A total of $35.7 million of this facility has 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. The Company currently incurs approximately $2.0
million of rent expense per quarter related to this 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. The Company
has an option to purchase the equipment for $29.2 million at March 31, 1999.
This amount reduces throughout the term of the lease to $21.4 million at
October 2000.
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
advanced funds to the trustee for the purchase by the trustee of, or to
reimburse the Company for the purchase, of the Equipment, which is currently
being 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"), 35,312,192
shares of which were issued and outstanding as of March 31, 1999. 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
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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
March 31, 1999, 2,070,000 shares of $3.50 Convertible Preferred Stock (the
"Convertible Preferred Stock") have been issued and are outstanding, all of
which the Company will call for redemption on June 14, 1999. 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 to $50.00 per share of
Convertible Preferred Stock on and after March 15, 2006, plus accrued and
unpaid dividends. The Company notified holders of such stock that it will
call all such shares for redemption on June 14, 1999. 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 20
trading days preceding the first business day preceding the date of the
redemption notice 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 in connection with certain extraordinary
events 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
When used in this report and elsewhere by management from time to
time, the words "believes", "anticipates", and "expects" and similar
expressions are intended to identify forward-looking statements with respect
to the financial condition, results of operations and the business of the
Company and its subsidiaries including the expansion, development and
acquisition projects, legal proceedings and employee matters of the Company
and its subsidiaries. Certain important factors, including but not limited
to, competition from other gaming operations, leverage, construction risks,
the inherent uncertainty and costs associated with litigation, and licensing
and other regulatory risks, could cause the Company's actual results to
differ materially from those expressed in the Company's forward-looking
statements. Further information on potential factors which could affect the
financial condition, results of operations and business of the Company and
its subsidiaries including, without limitation, the expansion, development
and acquisition projects, legal proceedings and employee matters of the
Company and its subsidiaries are included in the filings of the Company with
the Securities and Exchange Commission. 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.
18
<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.
POULOS/AHEARN CASE
On April 26, 1994, a suit seeking status as a class action lawsuit
was filed by plaintiff, William H. Poulos, et al., as class representative,
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 District 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. On or about December 19, 1997, the
Court issued formal opinions granting in part and denying in part the
defendants' motion to dismiss. In so doing, the Court ordered plaintiffs to
file an amended complaint in accordance with the Court's orders in January
of 1998. Accordingly, plaintiffs amended their complaint and filed it with
the United Stated District Court for the District of Nevada in February
1998. The Company and all other defendants continue to deny the allegations
contained in the amended complaint filed on behalf of plaintiffs. The
plaintiffs are seeking compensatory, special, consequential, incidental, and
punitive damages in unspecified amounts. The defendants have committed to
vigorously defend all claims and allegations contained in the consolidated
action. The parties have fully briefed the issues regarding class
certification, which are currently pending before the court. The discovery
stay remains in effect pending resolution of these issues. The Company does
not expect that the lawsuits will have a material adverse effect on the
Company's financial position or results of operations.
NICOLE ANDERSON CASE
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 United States District Court for the Eastern District of
Missouri, Eastern Division. The lawsuit alleges certain racially based
discriminatory action at Station Casino St. Charles and seeks injunctive
relief and compensatory, special, consequential, incidental and punitive
damages in unspecified amounts. On or about October 24, 1997, plaintiff
filed her first amended complaint. On November 24, 1997, the Company filed
its answer to plaintiff's first amended complaint which denied the
allegations contained therein.
19
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
On August 25, 1998, a hearing was held to determine whether this
lawsuit could be certified as a class action. The Court conditionally
certified a subclass of dealers in the table game department; the other
plaintiffs may proceed individually with their claims. Discovery in all
these cases has begun, but as yet no trial date has been set. The Company
does not believe the suit has merit and intends to continue defending itself
vigorously.
STEPHEN B. SMALL CASE
A class action lawsuit was filed by plaintiff Stephen B. Small, et
al., as class representative, on November 28, 1997, in the United States
District Court for the Western District of Missouri, naming four gaming
operators in Kansas City, Missouri, including Kansas City Station
Corporation. The lawsuit alleged that the defendants are conducting gaming
operations that are not located on the Missouri River in violation of
certain state and federal statutes. The plaintiff also sought compensatory,
special, consequential, and incidental damages in unspecified amounts. On
September 1, 1998, the United States District Court granted Kansas City
Station Corporation's motion to dismiss the lawsuit. On February 16, 1999,
the plaintiff served the defendants with a notice of appeal of the federal
court dismissal. On October 30, 1998, the plaintiff filed a similar lawsuit
in the Circuit Court of Cole County, Missouri. The lawsuit alleged that the
operators were conducting illegal games of chance prior to December 3, 1998,
the effective date of a Constitutional amendment passed by Missouri voters
on November 3, 1998, legalizing gaming facilities within 1,000 feet of the
main channel of the Mississippi and Missouri Rivers. On February 9, 1999,
the Cole County Circuit Court granted Kansas City Station Corporation's
motion to dismiss the lawsuit. On February 19, 1999, the plaintiff served
the defendants with a notice of appeal of the state court dismissal.
Management believes that the plaintiff's claims are without merit and does
not expect that the lawsuit will have a material adverse effect on the
Company's financial position or results of operations.
LOW WATER LEVEL AT STATION CASINO ST. CHARLES; EPA INVESTIGATION
During December 1998 and January 1999, the water level of the
Missouri River was well below normal. In addition, over time silt and debris
flowing downstream have built up under the gaming barges and other ancillary
barges at Station Casino St. Charles. These circumstances have caused a
portion of these barges, at times, to touch the river bottom. Because these
barges have touched the river bottom, the American Bureau of Shipping
decertified the barges on January 8, 1999. As a result of the
decertification, the Missouri Gaming Commission expressed concern regarding
the effect of the low water level on the barges. However, based upon recent
improvement in the water level and the Company's agreement to work with
American Bureau of Shipping to re-certify all of the barges at a time when
the river levels permit, the Missouri Gaming Commission has allowed the
gaming facility to remain open. The Company continues to monitor the
situation very carefully and believes that the facility should remain in
operation. However, there can be no assurance that the Company's assessment
will not change or that the relevant authorities will continue to permit the
operation of the facility. A prolonged closure of the facility as a result
of the low water level would have a material adverse effect on the Company's
business, financial position and results of operations.
The Company has taken steps and intends to take further steps to
remedy the problems caused by the low water level. These further steps
include dredging material from under the barges and constructing a sheet
metal wall to divert silt and debris and keep it from building up under the
barges. The Company does not expect the cost of these remedial activities to
be material, although there can be no assurance that such costs will not
exceed the Company's expectations. Dredging and construction activities
generally require permits from the United States Army Corps of Engineers.
The Company has received certain permits to begin dredging activities. The
Company is in the process of applying for additional permits which will
allow it to dredge more efficiently than the current permit. There can be no
assurance that the United States Army Corps of Engineers will grant such
permits or that they will be granted on a timely basis. If there is a
significant delay in the Company receiving the required permits and
20
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
the low water level returns, the Company could be forced to close the
facility. The Company's ability to receive the required permits could be
adversely affected by the investigation described below.
On February 3, 1999, the Company received a subpoena issued by the
EPA requesting that documentation relating to the Company's dredging
activities at the facility be furnished to the Grand Jury in the United
States District Court for the Eastern District of Missouri. Several
employees and persons who contracted to work for the Company received
similar subpoenas. The Company believes that the EPA is investigating
allegations that the Company or the Company's contractors dredged and
disposed of silt and debris from the area of the facility either without
proper permits or without complying with such permits. The Company is in the
process of investigating the substance of the allegations and intends to
cooperate fully with the EPA's investigation. The investigation could lead
to further proceedings against the Company which could result in significant
fines and other penalties imposed on the Company. Based on the initial
results of the Company's own investigation, the Company believes that any
fines or other penalties, if imposed, would not have a material adverse
effect on the Company's business, financial position or results of
operations.
SETTLEMENT OF CRESCENT LITIGATION
On April 14, 1999, the Company announced that it has settled its
lawsuits with Crescent Real Estate Equities, Inc. ("Crescent") arising out
of the proposed merger of the two companies, which was terminated in August
1998. Under the terms of the settlement agreement, Crescent has paid the
Company $15 million, and the parties have released each other from claims.
The settlement payment was received on April 22, 1999.
CLASS ACTION/DERIVATIVE ACTION
A suit seeking status as a class action and a derivative action was
filed by plaintiff, Crandon Capital Partners, as class representative, on
August 7, 1998, in Clark County District Court, State of Nevada, naming the
Company and its Board of Directors as defendants. The lawsuit, which was
filed as a result of the failed merger between the Company and Crescent,
alleges, among other things, a breach of fiduciary duty owed to the
shareholders/class members. The lawsuit seeks damages allegedly suffered by
the shareholders/class members as a result of the transactions with
Crescent, as well as all costs and disbursements of the lawsuit. Although no
assurance can be provided with respect to any litigation, the Company and
the Board of Directors do not believe the suit has merit and intend to
defend themselves vigorously.
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 - 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 -
On January 26, 1999, the Company filed a current report on Form 8-K dated
January 21, 1999. The Company reported under Item 5 the results of its
operations for the third fiscal quarter ended December 31, 1998. The
Company also reported under Item 7 the financial statements and exhibits
for the third fiscal quarter ended December 31, 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: May 14, 1999 /S/ GLENN C. CHRISTENSON
--------------------------
Glenn C. Christenson,
Executive Vice President,
Chief Financial Officer, and
Chief Administrative Officer
(Principal Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<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 THREE
MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 50,985
<SECURITIES> 0
<RECEIVABLES> 11,202
<ALLOWANCES> 0
<INVENTORY> 5,435
<CURRENT-ASSETS> 90,352
<PP&E> 1,370,280
<DEPRECIATION> 216,676
<TOTAL-ASSETS> 1,320,696
<CURRENT-LIABILITIES> 119,651
<BONDS> 541,918
0
103,500
<COMMON> 353
<OTHER-SE> 161,986
<TOTAL-LIABILITY-AND-EQUITY> 1,320,696
<SALES> 0
<TOTAL-REVENUES> 229,931
<CGS> 0
<TOTAL-COSTS> 122,350
<OTHER-EXPENSES> 17,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,327
<INCOME-PRETAX> 12,997
<INCOME-TAX> 4,881
<INCOME-CONTINUING> 8,116
<DISCONTINUED> 0
<EXTRAORDINARY> (10,350)
<CHANGES> 0
<NET-INCOME> (4,045)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>