<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 16, 1998
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of Registrant as specified in its Charter)
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
(817) 877-0477
(Registrant's telephone number, including area code)
<PAGE> 2
On January 27, 1998, Crescent Real Estate Equities Company (the "Company")
filed a Form 8-K dated January 16, 1998 containing a description of certain
proposed transactions in Item 5 thereof. This Form 8-K/A amends the Company's
Form 8-K filed January 27, 1998 to (i) revise and restate the disclosure
contained in Item 5 and (ii) provide certain related financial information in
Item 7.
<PAGE> 3
Item 5. Other Events.
On January 16, 1998, Crescent Real Estate Equities Company (collectively
with its subsidiaries, the "Company") entered into an agreement and plan of
merger (the "Merger Agreement") pursuant to which Station Casinos, Inc.
("Station") will merge (the "Merger") with and into the Company. Station is an
established multi-jurisdictional gaming company that owns and operates, through
wholly owned subsidiaries, six distinctly themed casino/hotel properties, four
of which are located in Las Vegas, Nevada, one of which is located in Kansas
City, Missouri and one of which is located in St. Charles, Missouri. The Merger
Agreement also provides for certain alternative structures to facilitate the
combinations of the businesses of the Company and Station. As a result of the
Merger, the Company will acquire the real estate and other assets of Station,
except to the extent the operating assets are transferred immediately prior to
the Merger, as described below.
It is currently anticipated that, as part of the transactions associated
with the Merger, but immediately prior to the Merger, certain operating assets
and the employees of Station will be transferred to a limited liability company
to be formed (the "Operating Company"). The Operating Company will be owned 50%
by Crescent Operating, Inc. (an affiliate of the Company) or another affiliate
established by the Company, 24.9% by a newly formed entity (the "Management
Entity") owned by three of the existing directors of Station (including its
Chairman, President and Chief Executive Officer) and 25.1% by a separate newly
formed entity owned by other members of Station management (the "Secondary
Management Entity"). It is anticipated that the Operating Company will operate
the six casino/hotel properties currently operated by Station pursuant to a
lease with the Company. The lease will have a 10-year term, with one five-year
renewal option. The lease will provide that the Operating Company is required to
maintain the properties in good condition at its expense. The Company will
establish and maintain a reserve account to be used under certain circumstances
for the purchase of furniture, fixtures and equipment with respect to the
properties, to be used from time to time to replace furniture, fixtures and
equipment. The lease will provide for base and percentage rent but the amount of
the rent has not yet been determined. Under the lease, the Company will have a
right of first refusal to acquire, and thereafter to include under the lease,
any additional casino and/or hotel properties which the Operating Company
desires to acquire.
In order to effect the Merger, the Company will issue .466 common shares
of beneficial interest, par value $0.01 per share (the "Common Shares"), of the
Company for each share of common stock of Station (including each restricted
share) that is issued and outstanding immediately prior to the Merger. In
addition, the Company will create a new class of preferred shares (the
"Preferred Shares") which will be exchanged, upon consummation of the Merger,
for the shares of $3.50 Convertible Preferred Stock of Station outstanding
immediately prior to the Merger. The Preferred Shares will be convertible into
Common Shares of the Company (based on a conversion ratio that will reflect the
Merger
<PAGE> 4
exchange ratio) and will be entitled to receive dividends of $3.50 per annum
prior to the payment of distributions to holders of the Common Shares. The
holders of the Preferred Shares generally will have no voting rights, unless
required by law.
The total value of the Merger transaction, including the Company's
issuance of Common Shares and Preferred Shares in connection with consummation
of the Merger and the Company's assumption and/or refinancing of approximately
$919 million in existing indebtedness of Station and its subsidiaries, is
currently valued at approximately $1.7 billion.
Consummation of the Merger is subject to various conditions, including
Station's receipt of the approval of two-thirds of the holders of both its
common stock and its preferred stock, expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, and the
receipt by the Company and certain of its officers, directors and affiliates of
the approvals required under applicable gaming laws. It is anticipated that the
Merger and the associated transactions will be consummated in the third quarter
of 1998. Certain individuals who own in the aggregate approximately 41% of the
outstanding capital stock of Station have agreed to vote in favor of the Merger.
The Company will be entitled to receive a break-up fee of $54 million if
the Merger Agreement is terminated (i) by either the Company or the Board of
Directors of Station if any required approval of the Merger by the holders of
each class of capital stock of Station shall not have been obtained by reason
of the failure to obtain the required vote of stockholders, (ii) by the Company
if the Board of Directors of Station shall not recommend the Merger or shall
recommend a superior proposal or (iii) by the Board of Directors of Station if
it receives a superior proposal that the Company does not match or exceed.
The Company has agreed to invest up to $115 million in Station prior to
completion of the Merger through the purchase, upon one or more calls by
Station, of a new class of convertible preferred stock of Station. The Company
must fund the purchase price for shares of the preferred stock (at a purchase
price of $1,000 per share) on the 10th business day following notice from
Station requiring the purchase of at least 5,000 (but less than 25,000) shares
and on the 20th business day following notice from Station requiring the
purchase of 25,000 shares or more. The Company generally is not required to
purchase shares of the preferred stock more than two times in any 30-day
period. The preferred stock is redeemable at any time at the option
of Station for cash equal to the redemption price (the purchase price plus any
unpaid dividends) or for common stock of Station with a market value of
approximately 111% of such redemption price (with the market value determined
based on a 20-day trading average preceding notice). Dividends of $100 per
share are payable annually on the shares of preferred stock outstanding. The
preferred stock has no voting rights except as required by law. Station must
use the proceeds of the sales of the preferred stock to repay indebtedness used
to complete acquisitions or development of master-planned expansion projects at
existing hotel/casino properties, unless the Company agrees to an alternative
use of proceeds.
<PAGE> 5
In connection with the transaction, the Company will enter into a Right of
First Refusal and Noncompetition Agreement with the Operating Company. Under
the agreement, the Company will grant the Operating Company a right of first
refusal as to any lease arrangement (a "master lease") for a casino/hotel
property (defined as real estate on which hotel and casino or other
gaming-related operations are conducted) in which the operators of the business
conducted at the property prior to the date the property is owned or acquired
by the Company will cease to operate the business. The Operating Company will
grant the Company a right of first refusal to invest, directly or indirectly,
(i) in casino/hotel properties (including the opportunity to provide services
related to real estate or to invest in a hotel property), real estate
mortgages, real estate derivatives, or entities that invest primarily in or
have a substantial portion of their assets in such types of real estate assets
or (ii) any other gaming-related investments that can be structured as
REIT-suitable investments. In addition, without the prior written consent of
the Management Entity, the Company, Crescent Operating, Inc. and their
affiliates may not own, operate or otherwise engage in activities related to
any casino/hotel properties other than casino/hotel properties operated and
leased by the Operating Company or an entity under its control, provided that
the Company may own a casino/hotel property if a master lease arrangement
already exists at the property, if casino/hotel activities conducted at the
property are incidental to the primary business operations at the property or
if the sellers or operators desire to enter into a master lease arrangement
with the Company. Under the agreement, without the prior written consent of the
Company, neither the Management Entity, the Secondary Management Entity, nor
any of the affiliates of either, may own, operate or otherwise engage in any
activities related to casino/hotel properties that are not operated and leased
by the Operating Company or an entity under its control.
Upon consummation of the merger, the number of members of the Board of
Trust Managers of the Company will be increased by two. The two new members
will be Frank J. Fertitta III, the Chairman, Chief Executive Officer and a
director of Station, and Lorenzo J. Fertitta, currently a director of Station
and brother of Frank J. Fertitta III.
<PAGE> 6
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-05 OF REGULATION S-X
FINANCIAL STATEMENTS FOR STATION CASINOS, INC. AS OF DECEMBER 31, 1997
(UNAUDITED)
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1997
Consolidated Statements of Operations for the three months and nine
months ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1997 and 1996
Notes to the Consolidated Financial Statements
FINANCIAL STATEMENTS FOR STATION CASINOS, INC. AS OF MARCH 31, 1997
(AUDITED)
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for the years ended March 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1996, and 1995
Notes to the Consolidated Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Crescent Real Estate Equities Company
Pro Forma Consolidated Balance Sheet as of September 30, 1997
(unaudited) and notes thereto.
Pro Forma Consolidated Statements of Operations for the nine months
ended September 30, 1997 (unaudited) and notes thereto.
Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1996 (unaudited) and notes thereto.
<PAGE> 7
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this Form
8-K/A.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
2.01 Agreement and Plan of Merger, dated as of
January 16, 1998, by and between the
Registrant and Station Casinos, Inc.
(previously filed)
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated February 10, 1998
(filed herewith).
</TABLE>
<PAGE> 8
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: February 13, 1998 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ DALLAS E. LUCAS
-----------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial Officer
<PAGE> 9
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS FOR STATION CASINOS, INC. AS OF DECEMBER 31, 1997 (UNAUDITED)
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1997.................................... F-2
Consolidated Statements of Operations for the three months and the nine
months ended December 31, 1997 and 1996................................................................... F-3
Consolidated Statements of Cash Flows for the nine months ended December 31, 1997 and 1996................ F-4
Notes to the Consolidated Financial Statements........................................................... F-5
FINANCIAL STATEMENTS FOR STATION CASINOS, INC. AS OF MARCH 31, 1997 (AUDITED)
Report of Independent Public Accountants.................................................................. F-22
Consolidated Balance Sheets as of March 31, 1997 and 1996................................................. F-23
Consolidated Statements of Operations for the years ended March 31, 1997, 1996, and 1995.................. F-24
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996
and 1995.............................................................................................. F-25
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995................... F-26
Notes to the Consolidated Financial Statements........................................................... F-27
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of September 30, 1997 (unaudited) and notes thereto............... F-46
Pro Forma Consolidated Statements of Operations for the nine months ended September 30, 1997
(unaudited) and notes thereto.......................................................................... F-49
Pro Forma Consolidated Statements of Operations for the year ended December 31, 1996
(unaudited) and notes thereto.......................................................................... F-53
</TABLE>
F-1
<PAGE> 10
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATION CASINOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 53,662 $ 42,522
Accounts and notes receivable, net ...................................... 16,455 7,852
Inventories ............................................................. 4,825 3,473
Prepaid gaming taxes .................................................... 7,022 4,291
Prepaid expenses and other .............................................. 14,618 11,231
----------- -----------
TOTAL CURRENT ASSETS ................................................ 96,582 69,369
Property and equipment, net ................................................. 1,141,268 1,069,052
Land held for development ................................................... 27,114 26,354
Other assets, net ........................................................... 59,432 69,343
----------- -----------
TOTAL ASSETS ........................................................ $ 1,324,396 $ 1,234,118
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................................... $ 14,955 $ 18,807
Accounts payable ........................................................ 15,762 21,106
Accrued payroll and related ............................................. 19,243 13,460
Construction contracts payable .......................................... 12,543 94,835
Accrued interest payable ................................................ 13,970 10,625
Accrued expenses and other .............................................. 39,102 26,433
----------- -----------
TOTAL CURRENT LIABILITIES ........................................... 115,575 185,266
Long-term debt, less current portion ........................................ 904,609 742,156
Deferred income taxes, net .................................................. 12,975 7,848
----------- -----------
TOTAL LIABILITIES .................................................. 1,033,159 935,270
----------- -----------
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 .............................................. 167,155 167,397
Deferred compensation - restricted stock ................................ (652) (1,225)
Retained earnings ....................................................... 20,881 28,823
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .......................................... 291,237 298,848
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 1,324,396 $ 1,234,118
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 11
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino ............................................ $ 154,172 $ 102,002 $ 436,872 $ 314,074
Food and beverage ................................. 34,282 20,954 97,859 63,580
Room .............................................. 10,474 7,053 27,692 19,711
Other ............................................. 12,557 12,440 41,233 35,192
--------- --------- --------- ---------
Gross revenues ............................... 211,485 142,449 603,656 432,557
Less promotional allowances ....................... (14,289) (8,682) (38,847) (25,316)
--------- --------- --------- ---------
Net revenues ................................. 197,196 133,767 564,809 407,241
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Casino ............................................ 73,910 45,976 211,502 139,254
Food and beverage ................................. 22,764 15,499 67,626 47,774
Room .............................................. 3,520 2,328 10,001 7,425
Other ............................................. 5,744 5,659 19,225 16,919
Selling, general and administrative ............... 45,523 26,781 127,419 82,387
Corporate expenses ................................ 3,524 4,735 11,168 13,377
Development expenses .............................. -- 377 104 979
Depreciation and amortization ..................... 17,227 10,876 50,396 30,968
Preopening expenses ............................... -- -- 10,866 --
--------- --------- --------- ---------
172,212 112,231 508,307 339,083
--------- --------- --------- ---------
OPERATING INCOME ...................................... 24,984 21,536 56,502 68,158
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net ............................. (19,884) (7,631) (55,597) (23,891)
Other ............................................. 199 (116) (4,797) (50)
--------- --------- --------- ---------
(19,685) (7,747) (60,394) (23,941)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ..................... 5,299 13,789 (3,892) 44,217
Income tax (provision) benefit ........................ (1,874) (5,033) 1,384 (15,884)
--------- --------- --------- ---------
NET INCOME (LOSS) ..................................... 3,425 8,756 (2,508) 28,333
PREFERRED STOCK DIVIDENDS ............................. (1,812) (1,812) (5,434) (5,434)
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK .......... $ 1,613 $ 6,944 $ (7,942) $ 22,899
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE ...................... $ 0.05 $ 0.20 $ (0.22) $ 0.65
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ............ 35,307 35,318 35,309 35,315
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 12
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................... $ (2,508) $ 28,333
--------- ---------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization .................................................. 50,396 30,968
Increase in deferred income taxes .............................................. 3,089 7,772
Preopening expenses ............................................................ 10,866 --
Changes in assets and liabilities:
Increase in accounts and notes receivable, net ............................... (8,603) (6,586)
Increase in inventories and prepaid expenses and other ....................... (5,432) (3,532)
(Decrease) increase in accounts payable ...................................... (5,344) 4,007
Increase in accrued expenses and other ....................................... 20,265 7,384
Other, net ..................................................................... 10,597 5,196
--------- ---------
Total adjustments .......................................... 75,834 45,209
--------- ---------
Net cash provided by operating activities ............................ 73,326 73,542
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................... (121,824) (373,496)
(Decrease) increase in construction contracts payable .......................... (82,292) 56,882
Preopening expenses ............................................................ (8,516) --
Other, net ..................................................................... 3,523 (22,659)
--------- ---------
Net cash used in investing activities ................................ (209,109) (339,273)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under bank facility, net ................................. (47,000) 183,500
Borrowings under Sunset loan agreement ......................................... 64,000 22,500
Proceeds from the issuance of notes payable .................................... 16,250 2,250
Principal payments on notes payable ............................................ (23,381) (25,147)
Proceeds from the issuance of senior subordinated notes, net ................... 144,287 --
Proceeds from the issuance of preferred stock, net ............................. -- 13,095
Dividends paid ................................................................. (5,434) (5,174)
Other, net ..................................................................... (1,799) (4,735)
--------- ---------
Net cash provided by financing activities ............................ 146,923 186,289
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents ............................... 11,140 (79,442)
Balance, beginning of period ................................................... 42,522 114,868
--------- ---------
Balance, end of period ......................................................... $ 53,662 $ 35,426
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized ............................. $ 47,121 $ 18,287
Cash paid for income taxes ..................................................... $ 92 $ 5,950
Property and equipment purchases financed by debt .............................. $ 3,532 $ 361
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-4
<PAGE> 13
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.
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", opened January 16, 1997), Sunset
Station, Inc. ("Sunset Station", opened June 10, 1997) 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 nine months ended
December 31, 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.
2. MERGER AGREEMENT
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Crescent Real Estate Equities Company, a
Texas real estate investment trust ("Crescent"). Pursuant to the Merger
Agreement, the Company will be merged with and into Crescent (the "Merger").
The Merger Agreement also provides for certain alternative structures to
facilitate the combination of the businesses of the Company and Crescent.
Upon consummation of the Merger, each share of the Company's $.01 par
value common stock issued and outstanding immediately prior to the effective
time of the Merger (the "Effective Time") together with the associated rights
issued pursuant to the Rights Agreement dated October 6, 1997 shall as of the
Effective Time, be converted into the right to receive 0.466 validly issued,
fully paid and nonassessable shares of Crescent's $.01 par value common shares
of beneficial interest. Each share of the Company's $3.50 Convertible Preferred
Stock issued and outstanding immediately prior to the Effective Time shall as
of the Effective Time be converted into the right to receive one validly
issued, fully paid and nonassessable $3.50 Convertible Preferred Share of
Crescent convertible into the number of Crescent common shares and having the
terms required by the Company's Convertible Preferred Stock. In addition, at
the option of the Company, the Company will issue to Crescent and Crescent has
agreed to purchase subject to the terms, conditions and procedures set forth in
the Merger Agreement up to an aggregate of 115,000 shares of a new series of
preferred stock of the Company (the "Redeemable Preferred Stock") at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000
shares. The Redeemable Preferred Stock is convertible at the option of the
holder any time after January
F-5
<PAGE> 14
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. MERGER AGREEMENT (CONTINUED)
16, 1999, unless previously redeemed, into shares of common stock at a
conversion rate of 60.606 Shares of Common Stock for each share of Redeemable
Preferred Stock subject to ordinary antidilution provisions. Unless written
consent from Crescent is received, the Company has agreed to use the net
proceeds from the sale of the Redeemable Preferred Stock to repay indebtedness
under its revolving loan agreement, borrowings under which were used for
acquisitions and master-planned expansions.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions, including the approval of the Company's stockholders,
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1974 and the approval of any other governmental
entity with jurisdiction in respect of gaming laws required or necessary in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement. The Merger Agreement entitles Crescent to
a $54 million break-up fee if such agreement is terminated (i) by either
Crescent or the Board of Directors of the Company if any required approval of
the Merger is not obtained by reason of the failure to obtain the required vote
of stockholders, (ii) by Crescent, if the Board of Directors of the Company
withdraws its approval or recommendation of the Merger, recommends a superior
proposal or (iii) by the Board of Directors of the Company, if it receives a
superior proposal that Crescent does not match or exceed.
Upon consummation of the Merger, it is anticipated that an operating
company owned equally by the Company's management team and Crescent Operating,
Inc. (the "Operating Company") will operate the six casino properties currently
operated by the Company pursuant to a lease with Crescent. The lease will be a
10-year lease with one, five-year renewal option. The lease also will be a
triple-net lease, and will provide that the Operating Company is required to
maintain the property in good condition at its expense during the term of the
lease. The lease provides for base and percentage rent but the amount of the
rent has not yet been determined.
Immediately prior to the execution of the Merger Agreement, the
Company amended its Rights Agreement dated October 6, 1997 (the "Rights
Agreement"), to exclude Crescent and its affiliates from the definition of
Acquiring Person to the extent that it is a Beneficial Owner (as defined in the
Rights Agreement) as a result of the approval, execution or delivery of, or the
consummation of the transactions contemplated by, the Merger Agreement,
including, without limitation, the purchase by Crescent of the Redeemable
Preferred Stock.
F-6
<PAGE> 15
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31, 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 December 31,
1997, due September 2000, interest at a margin above the bank's prime rate
or the Eurodollar Rate (8.21% at December 31, 1997) ............................. $ 230,000 $ 277,000
9 5/8% senior subordinated notes, payable interest only semi-annually,
principal due June 1, 2003, net of unamortized discount of $6.2 million
at December 31, 1997 ............................................................ 186,841 186,248
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 December 31, 1997 ............................................................ 144,541 --
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 December 31, 1997 .................................................... 196,885 196,818
Notes payable to banks and others, collateralized by slot machines, furniture
and equipment, monthly installments including interest ranging
from 7.8% to 8.0% at December 31, 1997 .......................................... 16,710 27,564
Capital lease obligations, collateralized by furniture and equipment ................ 18,488 7,703
Other long-term debt ................................................................ 16,099 19,630
--------- ---------
Sub-total ............................................................ 809,564 714,963
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
(9.58% at December 31, 1997), due September 2000 ................................ 110,000 46,000
--------- ---------
Total long-term debt ................................................. 919,564 760,963
Current portion of long-term debt ................................................... (14,955) (18,807)
--------- ---------
Total long-term debt, less current portion ............................ $ 904,609 $ 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 December 31, 1997, 5.75 to
1.00
F-7
<PAGE> 16
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. LONG-TERM DEBT (CONTINUED)
for the fiscal quarter ending 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.
For the quarter ended December 31, 1997, the Company obtained a one time waiver
modifying the funded debt to EBITDA ratio to a maximum of 5.90 to 1.00. As of
December 31, 1997, the Company's funded debt to EBITDA ratio was 5.80 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.
4. 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 nine months ended December 31, 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 nine
months ended December 31, 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.
F-8
<PAGE> 17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands)
(unaudited)
1. OVERVIEW
The following table highlights the results of operations for the Company and its
subsidiaries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NEVADA OPERATIONS:
PALACE STATION
Net revenues ...................... $ 32,314 $ 32,059 $ 95,704 $ 100,559
Operating income .................. $ 7,087 $ 7,222 $ 21,075 $ 23,407
EBITDA (1) ........................ $ 9,018 $ 9,214 $ 27,232 $ 29,444
BOULDER STATION
Net revenues ...................... $ 34,814 $ 35,904 $ 103,897 $ 105,948
Operating income .................. $ 9,214 $ 9,054 $ 28,060 $ 27,267
EBITDA (1) ........................ $ 12,063 $ 11,818 $ 36,805 $ 35,285
TEXAS STATION
Net revenues ...................... $ 24,560 $ 19,435 $ 67,217 $ 59,239
Operating income .................. $ 3,962 $ 476 $ 8,618 $ 2,324
EBITDA (1) ........................ $ 6,228 $ 2,814 $ 15,296 $ 8,153
SUNSET STATION
Net revenues ...................... $ 32,479 $ -- $ 74,629 $ --
Operating income (loss) ........... $ 5,661 $ -- $ 2,275 $ --
EBITDAR (1) ....................... $ 9,847 $ -- $ 21,674 $ --
EBITDA (1) ........................ $ 7,420 $ -- $ 16,696 $ --
TOTAL NEVADA OPERATIONS:
Net revenues ...................... $ 124,167 $ 87,398 $ 341,447 $ 265,746
Operating income .................. $ 25,924 $ 16,752 $ 60,028 $ 52,998
EBITDA (1) ........................ $ 34,729 $ 23,846 $ 96,029 $ 72,882
MISSOURI OPERATIONS:
STATION CASINO ST. CHARLES
Net revenues ...................... $ 29,629 $ 39,209 $ 90,779 $ 120,026
Operating income .................. $ 2,159 $ 9,221 $ 8,749 $ 27,451
EBITDA (1) ........................ $ 5,441 $ 12,235 $ 18,588 $ 36,317
STATION CASINO KANSAS CITY
Net revenues ...................... $ 37,601 $ -- $ 112,595 $ --
Operating loss .................... $ (77) $ -- $ (2,391) $ --
EBITDA (1) ........................ $ 4,534 $ -- $ 11,052 $ --
TOTAL MISSOURI OPERATIONS:
Net revenues ...................... $ 67,230 $ 39,209 $ 203,374 $ 120,026
Operating income .................. $ 2,082 $ 9,221 $ 6,358 $ 27,451
EBITDA (1) ........................ $ 9,975 $ 12,235 $ 29,640 $ 36,317
</TABLE>
F-9
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands)
(unaudited)
1. OVERVIEW (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATION CASINOS, INC. AND OTHER:
Net revenues ................................ $ 5,799 $ 7,160 $ 19,988 $ 21,469
Operating loss .............................. $ (3,022) $ (4,437) $ (9,884) $(12,291)
EBITDA (1) .................................. $ (2,493) $ (3,669) $ (7,905) $(10,073)
</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.
F-10
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS
Three and Nine months ended December 31, 1997 Compared to Three and
Nine months ended December 31, 1996.
Consolidated net revenues increased 47.4% to $197.2 million for the
three months ended December 31, 1997, from $133.8 million in the prior year. The
Company's Nevada Operations contributed $124.2 million of net revenues for the
three months ended December 31, 1997, an increase of 42.1% 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. Net
revenues at Boulder Station declined 3.0% due primarily to the opening of Sunset
Station on June 10, 1997. The Company's Missouri Operations contributed $67.2
million of net revenues for the three months ended December 31, 1997, an
increase of 71.5% over the prior year. This increase in net revenues is due to
the opening of Station Casino Kansas City in January 1997, offset by a decline
of 24.4% 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 nine months ended December 31, 1997,
consolidated net revenues increased 38.7% to $564.8 million, as compared to
$407.2 million in the prior year. The Nevada Operations contributed $341.4
million of net revenues for the nine months ended December 31, 1997, an increase
of $75.7 million over the prior year. The Missouri Operations contributed $203.4
million of net revenues for the nine months ended December 31, 1997, an increase
of $83.3 million over the prior year. These net improvements are due to the
factors noted above.
Consolidated operating income increased 16.0% to $25.0 million for the
three months ended December 31, 1997, from $21.5 million in the prior year.
Operating income at the Company's Nevada Operations increased 54.8% to $25.9
million for the three months ended December 31, 1997, from $16.8 million in the
prior year. Operating income at the Company's Missouri Operations declined 77.4%
to $2.1 million for the three months ended December 31, 1997, from $9.2 million
in the prior year. The increase in consolidated operating income, together with
an increase in net interest expense of $12.3 million and a decrease in the
income tax provision resulted in net income applicable to common stock of $1.6
million, or earnings per common share of $0.05 for the three months ended
December 31, 1997. For the nine months ended December 31, 1997, consolidated
operating income decreased 17.1% to $56.5 million, from $68.2 million in the
prior year. The Nevada Operations generated operating income of $60.0 million,
an increase of 13.3% compared to the prior year. Excluding $10.9 million of
preopening expenses primarily related to the opening of Sunset Station, the
Nevada Operations generated operating income of $70.9 million, an increase of
33.8% over the prior year. The Missouri Operations generated operating income of
$6.4 million, a decrease of 76.8% due primarily to a decrease of $18.7 million
at Station Casino St. Charles related to increased competition and an operating
loss of $2.4 million at Station Casino Kansas City. The decline in consolidated
operating income, an increase in net interest expense of $31.7 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 $7.9 million, or a loss per common share of $0.22
for the nine months ended December 31, 1997, compared to net income applicable
to common stock of $22.9 million, or earnings per common share of $0.65 in the
prior year.
Casino. Casino revenues increased 51.1% to $154.2 million for the three
months ended December 31, 1997, from $102.0 million in the prior year. For the
nine months ended December 31, 1997, casino revenues increased 39.1% to $436.9
million, from $314.1 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 a decrease at
Station Casino St. Charles due to the factors noted above.
F-11
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
Casino expenses increased 60.8% to $73.9 million for the three months
ended December 31, 1997, from $46.0 million in the prior year. For the nine
months ended December 31, 1997, casino expenses increased 51.9% to $211.5
million, from $139.3 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 52.1% for the three months ended December
31, 1997, from 54.9% 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 nine months ended December 31, 1997, the casino
net profit margin declined to 51.6% from 55.7% in the prior year for the same
reasons as noted above.
Food and Beverage. Food and beverage revenues increased 63.6% to $34.3
million for the three months ended December 31, 1997, from $21.0 million in the
prior year. For the nine months ended December 31, 1997, food and beverage
revenues increased 53.9% to $97.9 million, from $63.6 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 33.6% for the three
months ended December 31, 1997, from 26.0% in the prior year. For the nine
months ended December 31, 1997, food and beverage net profit margins improved to
30.9%, from 24.9% in the prior year. These increases in margin are due to
improvement at the Company's Nevada Operations, especially Texas Station,
primarily as a result of continued focus on cost control.
Room. Room revenues increased 48.5% to $10.5 million for the three
months ended December 31, 1997, from $7.1 million in the prior year. For the
nine months ended December 31, 1997, room revenues increased 40.5% to $27.7
million, from $19.7 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 93% from 96%, while the average daily room rate increased to $52
from $48 during the nine months ended December 31, 1997.
Other. Other revenue increased 1.0% to $12.6 million for the three
months ended December 31, 1997, from $12.4 million in the prior year. For the
nine months ended December 31, 1997, other revenues increased 17.2% to $41.2
million from $35.2 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 10.4% to $17.0 million for the nine
months ended December 31, 1997.
Selling, General and Administrative. Selling, general and
administrative expenses ("SG&A") increased 70.0% to $45.5 million for the three
months ended December 31, 1997, from $26.8 million in the prior year. For the
nine months ended December 31, 1997, SG&A increased 54.7% to $127.4 million,
from $82.4 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 23.1% for the three months ended December 31, 1997, from
20.0% in the prior year. For the nine months ended December 31, 1997, SG&A as a
percentage of net revenues increased to 22.6% from 20.2% in the prior year.
These increases are due primarily to the new operations at Sunset Station and
Station Casino Kansas City which, as new properties, tend to have a higher
percentage of SG&A to net revenues.
F-12
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2. RESULTS OF OPERATIONS (CONTINUED)
Corporate Expenses. Corporate expenses decreased 25.6% to $3.5 million
for the three months ended December 31, 1997, from $4.7 million in the prior
year. For the nine months ended December 31, 1997, corporate expenses decreased
16.5% to $11.2 million, from $13.4 million in the prior year. Corporate expenses
declined to 1.8% of net revenues for the three months ended December 31, 1997,
from 3.5% in the prior year. For the nine months ended December 31, 1997,
corporate expenses declined to 2.0% of net revenues from 3.3% in the prior year.
These reductions were the result of management's efforts to lower corporate
expenses.
Development Expenses. The Company incurred no development expenses
during the three months ended December 31, 1997. Such costs have historically
been 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
58.4% to $17.2 million for the three months ended December 31, 1997, from $10.9
million in the prior year. For the nine months ended December 31, 1997,
depreciation and amortization increased 62.7% to $50.4 million, from $31.0
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 nine months ended December 31, 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 57.9% to $23.7 million for the three months ended
December 31, 1997. For the nine months ended December 31, 1997 interest costs
incurred increased 67.3% to $68.9 million. 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. Effective January 1, 1998, the Company will stop capitalizing interest
on the St. Charles Expansion Project.
3. LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 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 repay amounts outstanding under
the Company's reducing revolving bank credit facility, cash flows from operating
activities of $73.3 million, and borrowings under the Sunset Loan Agreement (as
defined herein) of $64.0 million. At December 31, 1997, the Company had
available borrowings of $100.0 million under its reducing revolving credit
facility, subject to covenant restrictions and $53.7 million in cash and cash
equivalents. Also, in connection with the Merger Agreement, the Company will
issue to Crescent and Crescent has agreed to purchase up to an aggregate of
115,000 shares of a new series of preferred stock of the Company at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000 shares
(See Liquidity and Capital Resources - New Series of Preferred Stock).
F-13
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the nine months ended December 31, 1997, total capital expenditures were
approximately $125.4 million, of which approximately (i) $43.6 million was
associated with the development and construction of Sunset Station, (ii) $31.6
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) $43.2 million was
associated with various other projects, maintenance capital expenditures and net
construction period interest.
The Company's primary capital requirements during the remainder of
fiscal year 1998 are expected to include (i) the payment of construction
contracts payable of approximately $12.5 million as of December 31, 1997, (ii)
maintenance capital expenditures, (iii) principal and interest payments on
indebtedness, (iv) dividend payments on convertible preferred stock, and (v)
general corporate purposes.
The Company has commenced construction of an expansion project at
Station Casino St. Charles (the "St. Charles Expansion Project"). As of December
31, 1997, approximately $131.2 million (excluding construction period interest)
had been incurred. As of December 31, 1997, construction on the project has
ceased and management does not expect that any major construction on the project
will resume before the Merger with Crescent is consummated (See Note 2 to
Condensed Consolidated Financial Statements). Once the merger is consummated,
the Company jointly with Crescent will determine the scope and timing of the
project. Effective January 1, 1998, the Company will stop capitalizing interest
on the St. Charles Expansion Project.
The Company believes that cash flows from operations, borrowings under
the reducing revolving bank credit facility, vendor and lease financing of
equipment, the Redeemable Preferred Stock (see Note 2 to Condensed Consolidated
Financial Statements) 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, 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, including the Merger Agreement
which requires the Company to obtain the consent of the other party prior to
issuing additional securities or selling assets.
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 December
31, 1997. The Bank Facility is secured by substantially all of the assets of
Palace Station, Boulder Station, Texas Station, Station Casino Kansas City and
Station Casino St. Charles (collectively, the "Borrowers"). The Company and
Southwest Gaming Services, Inc. guarantee the borrowings under 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
F-14
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
debt to earnings before interest, taxes, depreciation and amortization
("EBITDA") adjusted for preopening expenses. As of December 31, 1997, the
Borrowers' 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 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 December 31, 1997, the Borrowers funded debt to
EBITDA ratio was 2.01 to 1.00 and the fixed charge coverage ratio for the
preceeding four quarters ended December 31, 1997 was 1.38 to 1.00. A tranche of
the Bank Facility contains a minimum tangible net worth requirement for Palace
Station ($10 million plus 95% of net income determined as of the end of each
fiscal quarter with no reduction for net losses) and certain restrictions on
distributions of cash from Palace Station to the Company. As of December 31,
1997, Palace Station's tangible net worth exceeded the requirement by
approximately $7.9 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 December 31, 1997, the Company's
consolidated net worth exceeded the requirement by approximately $18.5 million.
In March and June 1997, the Company obtained certain amendments to the Bank
Facility in order to enhance its borrowing capacity under the 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
December 31, 1997, 5.75 to 1.00 for the fiscal quarter ending 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. For the quarter ended December 31, 1997, the Company obtained a
one time waiver modifying the funded debt to EBITDA ratio to a maximum of 5.90
to 1.00. As of December 31, 1997, the Company's funded debt to EBITDA ratio was
5.80 to 1.00. Such consolidated calculations for the Company do not include
Sunset Station. In addition, the Bank Facility prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and preferred stock, the amounts necessary to fund casino
bankroll in the ordinary course of business and $2.0 million. The Guarantors
waive certain defenses and rights including rights of subrogation and
reimbursement. The Bank Facility contains customary events of default and
remedies and is cross-defaulted to the Company's senior subordinated notes and
the Change of Control Triggering Event as defined in the indentures governing
the senior subordinated notes.
F-15
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
SENIOR SUBORDINATED NOTES
The Company has $528.2 million, net of unamortized discount of $12.8
million, of senior subordinated notes outstanding as of December 31, 1997,
$186.8 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 December 31, 1997 and (h) certain other indebtedness. At
December 31, 1997, the Company's Consolidated Coverage Ratio was 2.01 to 1.00.
In addition, the Indentures prohibit the Company from paying dividends on any of
its capital stock unless at the time of and after giving effect to such
dividends, among other things, the aggregate amount of all Restricted Payments
and Restricted Investments (as defined in the Indentures, and which include any
dividends on any capital stock of the Company) do not exceed the sum of (i) 50%
of Cumulative Consolidated Net Income (as defined) of the Company (less 100% of
any consolidated net losses), (ii) certain net proceeds from the sale of equity
securities of the Company, and (iii) $15 million. The limitation on the
incurrence of additional indebtedness and dividend restrictions in the
Indentures may significantly affect the Company's ability to pay dividends on
its capital stock. The Indentures also give the holders of the Notes the right
to require the Company to purchase the Notes at 101% of the principal amount of
the Notes plus accrued interest thereon upon a Change of Control and Rating
Decline (each as defined in the Indentures) of the Company.
SUNSET LOAN AGREEMENT, SUPPLEMENTAL LOAN AGREEMENT AND SUNSET OPERATING LEASE
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the
Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan
Agreement") with Bank of America National Trust and Savings Association ("Bank
of America NT&SA"), Bank of Scotland, Societe Generale and each of the other
lenders party to such agreement, pursuant to which Sunset Station received a
commitment for $110 million to finance the remaining development and
construction costs of Sunset Station. The Company also entered into an operating
lease for certain furniture, fixtures and equipment with a cost of $40 million
to be subleased to Sunset Station.
The Sunset Loan Agreement includes a first mortgage term note in the
amount of $110 million (the "Sunset Note") which is non-recourse to the Company,
except as to certain construction matters pursuant to a completion guarantee
dated as of September 25, 1996, executed by the Company on behalf of Sunset
Station, and except that the Company has pledged all of the stock of Sunset
Station as security for the Sunset Loan Agreement. As of December 31, 1997,
Sunset Station had borrowed the full $110 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
F-16
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 than $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 December 31, 1997, Sunset Station's fixed
charge coverage ratio was 2.98 to 1.00 and the funded debt to EBITDA ratio was
3.76 to 1.00. As of December 31, 1997, Sunset Station's net worth exceed the
minimum requirement by approximately $8.5 million. In addition, the Sunset Loan
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 up to $10
million during the first year after September 30, 1997, 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 December
1997 and then decreases to $95 million at June 1998. The agreement expires in
December 1998. The difference paid or received pursuant to the swap agreement is
accrued as interest rates change and recognized as an adjustment to interest
expense for the Sunset Note. Sunset Station is exposed to credit risk in the
event of non-performance by the counterparty to the agreement. The Company
believes the risk of non-performance by the counterparty is minimal.
The Company has also entered into an operating lease for furniture,
fixtures and equipment (the "Equipment") with a cost of $40 million, dated as of
September 25, 1996 (the "Sunset Operating Lease") between the Company and First
Security Trust Company of Nevada. The Sunset Operating Lease expires in October
2000 and carries a lease rate of 225 basis points above the Eurodollar Rate. As
of December 31, 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
F-17
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 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"), 35,306,657 shares
of which were issued and outstanding as of December 31, 1997. Each holder of the
Common Stock is entitled to one vote for each share held of record on each
matter submitted to a vote of stockholders. Holders of the Common Stock have no
cumulative voting, conversion, redemption or preemptive rights or other rights
to subscribe for additional shares 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 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
F-18
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
Immediately prior to the execution of the Merger Agreement, the Company
amended its Rights Agreement dated October 6, 1997 to exclude Crescent and its
affiliates from the definition of Acquiring Person to the extent that it is a
Beneficial Owner (as defined in the Rights Agreement) as a result of the
approval, execution or delivery of, or the consummation of the transactions
contemplated by, the Merger Agreement, including, without limitation, the
purchase by Crescent of the Redeemable Preferred Stock.
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
December 31, 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 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
F-19
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
New Series of Preferred Stock
At the option of the Company, the Company will issue to Crescent and
Crescent has agreed to purchase subject to the terms, conditions and procedures
set forth in the Merger Agreement up to an aggregate of 115,000 shares of a new
series of preferred stock of the Company (the "Redeemable Preferred Stock") at a
price of $1,000 per share (plus accrued dividends) in cash in increments of
5,000 shares. The Redeemable Preferred Stock is convertible at the option of the
holder any time after January 16, 1999, unless previously redeemed, into shares
of common stock at a conversion rate of 60.606 shares of Common Stock for each
share of Redeemable Preferred Stock subject to ordinary antidilution provisions.
Crescent must fund the purchase price for the purchase of shares of Redeemable
Preferred Stock on the 10th business day following notice from the Company or,
in the case of a notice to sell 25,000 or more shares of Redeemable Preferred
Stock, the 20th business day following such notice. The Company may not require
Crescent to purchase shares of Redeemable Preferred Stock more than two times in
any 30-day period. The Company may redeem the Redeemable Preferred Stock at any
time for cash or for common stock of the Company that has a then market price
(determined on the basis of closing prices for such stock for the 20 trading
days immediately preceding the redemption notice) equal to approximately 111% of
the redemption price for the Redeemable Preferred Shares to be redeemed. Any
such issuance in redemption will be made such that stock held by each owner of
such common stock so issued in excess of 9.9% of the Company's outstanding
common stock will generally be non-voting common stock. The Redeemable Preferred
Stock will have no voting rights except as required by law. Dividends of $100
per share of Redeemable Preferred Stock per annum shall accrue without interest
and be payable when, as, and if declared out of legally available funds on a
fully cumulative basis. Unless written consent from Crescent is received, the
Company has agreed to use the net proceeds from the sale of the Redeemable
Preferred Stock to repay indebtedness under its revolving loan agreement,
borrowings under which were used for acquisitions and master-planned expansions.
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
F-20
<PAGE> 29
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.
F-21
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Station Casinos, Inc.:
We have audited the accompanying consolidated balance sheets of Station
Casinos, Inc. (a Nevada corporation) and subsidiaries as of March 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Station Casinos, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 23, 1997 (except for Note 5
as to which the date is June 27, 1997
and Note 14 as to which the date is
January 16, 1998)
F-22
<PAGE> 31
STATION CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 42,522 $114,868
Accounts and notes receivable, net........................ 7,852 5,151
Inventories............................................... 3,473 2,299
Prepaid gaming taxes...................................... 4,291 3,726
Prepaid expenses and other................................ 11,231 7,395
---------- --------
Total current assets.............................. 69,369 133,439
Property and equipment, net................................. 1,069,052 616,211
Land held for development................................... 26,354 28,934
Other assets, net........................................... 69,343 48,730
---------- --------
Total assets...................................... $1,234,118 $827,314
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 18,807 $ 23,256
Accounts payable.......................................... 21,106 11,091
Accrued payroll and related............................... 13,460 11,519
Construction contracts payable............................ 94,835 27,879
Accrued interest payable.................................. 10,625 6,875
Accrued expenses and other current liabilities............ 26,433 16,706
---------- --------
Total current liabilities......................... 185,266 97,326
Long-term debt, less current portion........................ 742,156 441,742
Deferred income taxes, net.................................. 7,848 9,776
---------- --------
Total liabilities................................. 935,270 548,844
---------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.01; authorized 5,000,000
shares; 2,070,000 and 1,800,000 convertible preferred
shares issued and outstanding.......................... 103,500 90,000
Common stock, par value $.01; authorized 90,000,000
shares; 35,318,057 and 35,303,346 shares issued and
outstanding............................................ 353 353
Additional paid-in capital................................ 167,397 167,623
Deferred compensation -- restricted stock................. (1,225) (1,811)
Retained earnings......................................... 28,823 22,305
---------- --------
Total stockholders' equity........................ 298,848 278,470
---------- --------
Total liabilities and stockholders' equity........ $1,234,118 $827,314
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE> 32
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Casino.............................................. $ 450,013 $ 358,495 $ 210,534
Food and beverage................................... 92,220 73,057 43,208
Room................................................ 27,420 23,614 17,690
Other............................................... 48,957 39,099 36,561
----------- ----------- -----------
Gross revenues................................... 618,610 494,265 307,993
Promotional allowances.............................. (35,095) (27,408) (17,715)
----------- ----------- -----------
Net revenues..................................... 583,515 466,857 290,278
----------- ----------- -----------
Operating costs and expenses:
Casino.............................................. 203,857 150,805 92,812
Food and beverage................................... 68,994 57,659 34,045
Room................................................ 10,318 9,147 7,014
Other............................................... 23,927 24,902 27,270
Selling, general and administrative................. 120,285 97,466 60,810
Corporate expense................................... 18,284 15,979 13,141
Restructuring charge................................ 2,016 -- --
Development expenses................................ 1,302 3,960 7,200
Depreciation and amortization....................... 44,589 35,039 22,220
Preopening expenses................................. 31,820 2,436 19,378
----------- ----------- -----------
525,392 397,393 283,890
----------- ----------- -----------
Operating income...................................... 58,123 69,464 6,388
Other income (expense):
Interest expense, net............................... (36,698) (30,563) (19,967)
Other............................................... (47) 1,150 2,160
----------- ----------- -----------
(36,745) (29,413) (17,807)
----------- ----------- -----------
Income (loss) before income taxes..................... 21,378 40,051 (11,419)
Income tax (provision) benefit........................ (7,615) (14,579) 3,477
----------- ----------- -----------
Net income (loss)..................................... 13,763 25,472 (7,942)
Preferred stock dividends............................. (7,245) (53) --
----------- ----------- -----------
Net income (loss) applicable to common stock.......... $ 6,518 $ 25,419 $ (7,942)
=========== =========== ===========
Earnings (loss) per common share...................... $ 0.18 $ 0.75 $ (0.26)
=========== =========== ===========
Weighted average common shares outstanding............ 35,316,077 33,917,646 30,112,851
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-24
<PAGE> 33
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED RETAINED
ADDITIONAL COMPENSATION -- EARNINGS TOTAL
PREFERRED COMMON PAID-IN RESTRICTED (ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL STOCK DEFICIT) EQUITY
--------- ------ ---------- --------------- ------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1994...... $ -- $300 $ 90,663 $ -- $ 4,828 $ 95,791
Restricted stock grant (Note
9).......................... -- 1 2,929 (2,930) -- --
Amortization of deferred
compensation................ -- -- -- 37 -- 37
Net loss...................... -- -- -- -- (7,942) (7,942)
-------- ---- -------- ------- ------- --------
Balances, March 31, 1995...... -- 301 93,592 (2,893) (3,114) 87,886
Issuance of common stock
(Note 7).................... -- 52 77,309 -- -- 77,361
Issuance of preferred stock
(Note 7).................... 90,000 -- (3,278) -- -- 86,722
Amortization of deferred
compensation................ -- -- -- 1,082 -- 1,082
Preferred stock dividends..... -- -- -- -- (53) (53)
Net income.................... -- -- -- -- 25,472 25,472
-------- ---- -------- ------- ------- --------
Balances March 31, 1996....... 90,000 353 167,623 (1,811) 22,305 278,470
Issuance of preferred stock
(Note 7).................... 13,500 -- (405) -- -- 13,095
Exercise of stock options..... -- -- 179 -- -- 179
Amortization of deferred
compensation................ -- -- -- 586 -- 586
Preferred stock dividends..... -- -- -- -- (7,245) (7,245)
Net income.................... -- -- -- -- 13,763 13,763
-------- ---- -------- ------- ------- --------
Balances March 31, 1997....... $103,500 $353 $167,397 $(1,225) $28,823 $298,848
======== ==== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE> 34
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 13,763 $ 25,472 $ (7,942)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 44,589 35,039 22,220
Amortization of debt discount and issuance costs...... 5,279 3,141 1,211
Preopening expenses................................... 31,820 2,436 19,378
(Decrease) increase in deferred income taxes.......... (3,752) 8,995 (5,449)
Changes in assets and liabilities:
Increase in accounts and notes receivable, net..... (1,151) (522) (955)
Increase in inventories and prepaid expenses and
other............................................ (3,751) (2,428) (3,152)
(Decrease) increase in accounts payable............ 10,015 (2,710) 10,547
Increase in accrued expenses and other current
liabilities...................................... 13,723 4,822 12,041
Other, net............................................ 1,268 3,708 595
--------- --------- ---------
Total adjustments............................. 98,040 52,481 56,436
--------- --------- ---------
Net cash provided by operating activities..... 111,803 77,953 48,494
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (505,735) (279,340) (141,165)
Proceeds from sale of land, property and equipment.... 8,900 6,578 12,483
Land held for development............................. (36) (5,018) (5,507)
Other long-term assets................................ (15,772) (1,638) (2,489)
Refund on land held for development................... -- -- 9,500
Increase (decrease) in construction contracts
payable............................................ 66,956 21,460 (10,337)
Preopening expenses................................... (31,820) (2,436) (19,378)
Other, net............................................ (1,501) (6,541) (692)
--------- --------- ---------
Net cash used in investing activities......... (479,008) (266,935) (157,585)
--------- --------- ---------
Cash flows from financing activities:
Borrowings (payments) under bank facility, net........ 277,000 (65,000) 37,000
Borrowings under Sunset loan agreement................ 46,000 -- --
Proceeds from notes payable........................... 2,250 42,438 13,757
Principal payments on notes payable................... (30,444) (34,958) (8,195)
Proceeds from the issuance of common stock............ -- 78,246 --
Proceeds from the issuance of senior subordinated
notes.............................................. -- 191,292 72,091
Proceeds from the issuance of preferred stock......... 13,095 87,300 --
Distributions paid to stockholders.................... -- -- (4,014)
Dividends paid on preferred stock..................... (6,985) -- --
Debt issuance costs and other, net.................... (6,057) (12,429) (746)
--------- --------- ---------
Net cash provided by financing activities..... 294,859 286,889 109,893
--------- --------- ---------
Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents...... (72,346) 97,907 802
Balance, beginning of year............................ 114,868 16,961 16,159
--------- --------- ---------
Balance, end of year.................................. $ 42,522 $ 114,868 $ 16,961
========= ========= =========
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts capitalized.... $ 28,577 $ 27,817 $ 17,021
Cash paid for income taxes, net....................... $ 9,250 $ 8,668 $ 1,303
Property and equipment purchases financed by debt..... $ 361 $ 28,405 $ 22,719
Assets sold for note receivable....................... $ 1,550 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 35
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation and Organization
Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdictional gaming enterprise that currently owns and
operates three hotel/casino properties in Las Vegas, Nevada, a gaming and
entertainment complex in St. Charles, Missouri and a gaming and entertainment
complex in Kansas City, Missouri. The Company also owns and provides slot route
management services in Southern Nevada and Louisiana. Additionally, the Company
is constructing a new hotel/casino property in Las Vegas.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Palace Station Hotel & Casino, Inc. ("Palace
Station"), Boulder Station, Inc. ("Boulder Station"), Texas Station, Inc.
("Texas Station"), Sunset Station, Inc. ("Sunset Station"), St. Charles
Riverfront Station, Inc. ("Station Casino St. Charles"), Kansas City Station
Corporation ("Station Casino Kansas City"), and Southwest Gaming Services, Inc.
("SGSI"). The Company owns a 50% interest in Town Center Amusements, Inc. d.b.a.
Barley's Casino & Brewing Company. The Company accounts for this investment
using the equity method of accounting. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments purchased with an original
maturity of 90 days or less.
Inventories
Inventories are stated at the lower of cost or market; cost being
determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets or the terms of the capitalized lease, whichever is less. Costs of
major improvements are capitalized, while costs of normal repairs and
maintenance are charged to expense as incurred.
Capitalization of Interest
The Company capitalizes interest costs associated with debt incurred in
connection with major construction projects. Interest capitalization ceases once
the project is complete. When no debt is specifically identified as being
incurred in connection with such construction projects, the Company capitalizes
interest on amounts expended on the project at the Company's average cost of
borrowed money. Interest capitalized for the fiscal years ended March 31, 1997,
1996 and 1995 was approximately $21.1 million, $6.1 million and $6.0 million,
respectively.
F-27
<PAGE> 36
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term
debt are capitalized and amortized to interest expense over the terms of the
related debt agreements.
Development Activities
The Company expenses all internal salaries and related expenses with
respect to development activities. Other development costs, including legal,
lobbying, and consulting are expensed, until such time as the jurisdiction has
approved gaming and the Company has a specific site identified. Costs incurred
subsequent to these criteria being met are capitalized. At March 31, 1997 and
1996, the Company had capitalized costs of $0.7 million and $1.3 million,
respectively, related to various development projects. These costs are included
in other assets, net in the accompanying consolidated balance sheets.
Preopening Expenses
Prior to the opening of a facility, all operating expenses, including
incremental salaries and wages, related thereto are capitalized as preopening
expenses. At March 31, 1997, $2.4 million of preopening expenses related to a
new hotel/casino under construction known as Sunset Station had been capitalized
and are included in other assets, net in the accompanying consolidated balance
sheets. The Company expenses preopening expenses upon the opening of the related
facility. During the fiscal year ended March 31, 1995, the Company incurred
preopening expenses of $7.5 million and $11.9 million related to Boulder Station
and Station Casino St. Charles, respectively. During the fiscal year ended March
31, 1996, the Company incurred preopening expenses of $2.4 million related to
new projects for Texas Station and Barley's Casino & Brewing Company and
expansion projects at Boulder Station and Station Casino St. Charles. During the
fiscal year ended March 31, 1997, the Company incurred preopening expenses of
$31.8 million substantially related to the opening of Station Casino Kansas
City.
Revenues and Promotional Allowances
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. All other revenues are recognized as the service is
provided. Revenues include the retail value of accommodations and food and
beverage provided on a complimentary basis to customers. The estimated
departmental costs of providing such promotional allowances are included in
casino costs and expenses and consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Food and beverage..................................... $27,418 $23,483 $14,276
Room.................................................. 1,439 1,203 874
Other................................................. 1,263 653 313
------- ------- -------
Total....................................... $30,120 $25,339 $15,463
======= ======= =======
</TABLE>
Earnings (Loss) per Common Share
Earnings (loss) per common share is computed by dividing net income (loss)
applicable to common stock by the weighted average common shares outstanding
during the period. Earnings per share assuming full dilution is not presented
because the exercise of stock options and the conversion of the convertible
preferred stock does not have a dilutive effect on the per share amounts.
F-28
<PAGE> 37
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the fiscal year ending March 31, 1998.
Management believes the adoption of SFAS No. 128 will have no impact on the
Company's previously reported earnings per share.
2. ACCOUNTS AND NOTES RECEIVABLE
Components of accounts and notes receivable are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- ------
<S> <C> <C>
Casino...................................................... $ 3,698 $2,569
Hotel....................................................... 1,331 1,144
Other....................................................... 3,876 2,082
------- ------
8,905 5,795
Allowance for doubtful accounts............................. (1,053) (644)
------- ------
Accounts and notes receivable, net................ $ 7,852 $5,151
======= ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31, 1997 and
1996 (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
ESTIMATED LIFE ----------------------
(YEARS) 1997 1996
-------------- ---------- ---------
<S> <C> <C> <C>
Land............................................. -- $ 27,718 $ 16,962
Land leases acquired............................. 48-52 4,395 4,395
Buildings and leasehold improvements............. 31-45 554,294 285,558
Boats and barges................................. 20-45 123,774 81,463
Furniture, fixtures and equipment................ 3-7 192,546 163,580
Construction in progress......................... -- 273,188 165,513
---------- ---------
1,175,915 717,471
Accumulated depreciation and amortization........ (106,863) (101,260)
---------- ---------
Property and equipment, net............ $1,069,052 $ 616,211
========== =========
</TABLE>
At March 31, 1997 and 1996, substantially all property and equipment of the
Company is pledged as collateral for long-term debt.
4. LAND HELD FOR DEVELOPMENT
The Company has acquired several parcels of land in various jurisdictions
as part of the Company's development activities. The Company's decision whether
to proceed with any new gaming opportunity is dependent upon future economic and
regulatory factors, the availability of financing and competitive and strategic
considerations. As many of these considerations are beyond the Company's
control, no assurances can be made that the Company will be able to obtain
appropriate licensing or be able to secure additional, acceptable financing in
order to proceed with any particular project. At March 31, 1997 and 1996, $22.6
million and $22.7 million, respectively, of land had been acquired for potential
gaming projects in
F-29
<PAGE> 38
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
jurisdictions where gaming has been approved. In addition, at March 31, 1997 and
1996, $3.7 million and $6.2 million, respectively, of land had been acquired in
certain jurisdictions where gaming has not yet been approved. No assurances can
be made that these jurisdictions will approve gaming in the future.
The Company has entered into various purchase agreements whereby the
Company has the option to acquire or lease land for development of potential new
gaming projects totaling $31.3 million and $34.2 million at March 31, 1997 and
1996, respectively. In consideration for these options, the Company has paid or
placed in escrow $6.0 million and $2.4 million at March 31, 1997 and 1996,
respectively. Should the Company not exercise its option to acquire or lease the
land, it would forfeit all amounts paid or placed in escrow as of March 31,
1997. These option payments are included in other assets, net in the
accompanying consolidated balance sheets.
5. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Station Casinos, Inc. (excluding Sunset Station):
Reducing revolving credit facility, secured by substantially
all of the assets of Palace Station, Boulder Station,
Texas Station, Station Casino St. Charles and Station
Casino Kansas City, $368 million limit at March 31, 1997,
reducing quarterly by varying amounts until September 2000
when the remaining principal balance is due, interest at a
margin above the bank's prime rate or the Eurodollar Rate
(7.89% at March 31, 1997)................................. $277,000 $ --
9 5/8% senior subordinated notes, payable interest only
semi-annually, principal due June 1, 2003, net of
unamortized discount of $6.8 million at March 31, 1997.... 186,248 185,531
10 1/8% senior subordinated notes, payable interest only
semi-annually, principal due March 15, 2006, net of
unamortized discount of $1.2 million at March 31, 1997.... 196,818 196,737
Notes payable to banks and others, collateralized by slot
machines and related equipment, monthly installments
including interest ranging from 7.47% to 7.94%............ 15,952 24,726
Capital lease obligations, collateralized by furniture and
equipment................................................. 7,703 12,171
Other long-term debt........................................ 31,242 45,833
-------- --------
Sub-total......................................... 714,963 464,998
Sunset Station, Inc.:
$110 million Sunset Station first mortgage construction/term
loan agreement, secured by substantially all of the assets
of Sunset Station, interest at a margin of 375 basis
points above the Eurodollar Rate (9.37% at March 31,
1997), due September 2000................................. 46,000 --
-------- --------
Total long-term debt.............................. 760,963 464,998
Current portion of long-term debt........................... (18,807) (23,256)
-------- --------
Total long-term debt, less current portion........ $742,156 $441,742
======== ========
</TABLE>
F-30
<PAGE> 39
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1993, the Company completed an offering at par of $110 million in
9 5/8% senior subordinated notes due in June 2003. In May 1994, the Company
completed an offering of $83 million in senior subordinated notes that rank pari
passu with the existing $110 million senior subordinated notes, and have
identical maturities and covenants as the original issue. The $83 million senior
subordinated notes have a coupon rate of 9 5/8% and were priced to yield 11.5%
to maturity. The discount on the $83 million senior subordinated notes has been
recorded as a reduction to long-term debt in the accompanying consolidated
balance sheets.
In March 1996, the Company completed an offering of $198 million of senior
subordinated notes due in March 2006, that rank pari passu with the existing
$193 million of senior subordinated notes. The $198 million senior subordinated
notes have a coupon rate of 10 1/8% and were priced to yield 10.24% to maturity.
The discount on the $198 million senior subordinated notes has been recorded as
a reduction to long-term debt in the accompanying consolidated balance sheets.
In April 1997, the Company completed an offering of $150 million of senior
subordinated notes due in April 2007, that rank pari passu with the Company's
existing senior subordinated notes. The $150 million senior subordinated notes
have a coupon rate of 9 3/4% and were priced to yield 10.37% to maturity. The
discount on the $150 million senior subordinated notes will be recorded as a
reduction to long-term debt. Proceeds from the offering were used to pay down
amounts outstanding under the reducing revolving credit facility.
The indentures governing the Company's senior subordinated notes ("the
Indentures") contain certain customary financial and other covenants, which
among other things, govern the Company and certain of its subsidiaries ability
to incur indebtedness (except, as specifically allowed) unless after giving
effect thereto, a 2.0 to 1.0 pro forma Consolidated Coverage Ratio (as defined
in the Indentures) has been met. As of March 31, 1997, the Company's
Consolidated Coverage Ratio was 2.66 to 1.00.
On July 5, 1995, the Company obtained a $275 million reducing revolving
credit facility. On March 25, 1996, the Company amended and restated this bank
facility, providing for borrowings up to an aggregate principal amount of $400
million. On March 21, 1997, the Company obtained certain amendments to the
reducing revolving bank credit facility in order to enhance its borrowing
capacity (the "Bank Facility"). The Bank Facility is secured by substantially
all the assets of Palace Station, Boulder Station, Texas Station, Station Casino
St. Charles and Station Casino Kansas City (collectively, the "Borrowers"). The
Company and SGSI guarantee the borrowings under the Bank Facility (collectively
the "Guarantors"). The Bank Facility matures on September 30, 2000 and reduces
quarterly by varying amounts (including $8 million for the fiscal quarter ending
on June 30, 1997 and $10 million for each quarter ending September 30, 1997,
December 31, 1997 and March 31, 1998). Borrowings under the Bank Facility bear
interest at a margin above the bank's prime rate or LIBOR, as selected by the
Company. The margin above such rates, and the fee on the unfunded portions of
the Bank Facility, will vary quarterly based on the combined Borrower's and the
Company's consolidated ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA").
The Bank Facility contains certain financial and other covenants. These
include a maximum funded debt to EBITDA ratio for the Borrowers combined of 3.00
to 1.00 for each fiscal quarter through June 30, 1997, 2.75 to 1.00 for each
fiscal quarter through June 30, 1998, and 2.50 to 1.00 for each fiscal quarter
thereafter, a minimum fixed charge coverage ratio for the preceding four
quarters for the Borrowers combined of 1.35 to 1.00 for periods March 31, 1996
through June 30, 1998, and 1.50 to 1.00 for periods thereafter, a limitation on
indebtedness, and limitations on capital expenditures. As of March 31, 1997, the
Borrowers funded debt to EBITDA ratio was 1.97 to 1.00 and the fixed charge
coverage ratio for the fiscal year ended March 31, 1997 was 2.54 to 1.00. A
tranche of the Bank Facility contains a minimum tangible net worth requirement
for Palace Station (as defined) and certain restrictions on distributions of
cash from Palace Station to the Company. A tranche of the Bank Facility contains
a minimum tangible net worth requirement for Palace
F-31
<PAGE> 40
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Station (as defined) and certain restrictions on distributions of cash from
Palace Station to the Company. As of March 31, 1997, Palace Station's tangible
net worth exceeded the requirement by approximately $7 million. These covenants
limit Palace Station's ability to make payments to the Company, a significant
source of anticipated cash for the Company.
In addition, the Bank Facility has financial covenants relating to the
Company. These include prohibitions on dividends on or redemptions of the
Company's common stock, restrictions on repayment of any subordinated debt,
limitations on indebtedness beyond existing indebtedness, the Company's senior
subordinated notes and up to $25 million of purchase money indebtedness, minimum
consolidated net worth requirements for the Company of $165 million plus post
October 1, 1995 preopening expenses, 95% of post October 1, 1995 net income (not
reduced by net losses) and 100% of net equity offering proceeds, and limitations
on capital expenditures. As of March 31, 1997, the Company's consolidated net
worth exceeded the requirement by approximately $20 million. The Bank Facility
also includes a maximum funded debt to EBITDA (adjusted for preopening expenses)
ratio including annualized EBITDA (adjusted for preopening expenses) for any new
venture, as defined, open less than a year for the Company on a consolidated
basis of 5.00 to 1.00 for the fiscal quarter ended March 31, 1997, 5.25 to 1.00
for each fiscal quarter through December 31, 1997, 5.00 to 1.00 for each fiscal
quarter through June 30, 1998, 4.75 to 1.00 for the fiscal quarter ending
September 30, 1998, 4.50 to 1.00 for the fiscal quarter ending December 31,
1998, 4.25 to 1.00 for each fiscal quarter through June 30, 1999, 4.00 to 1.00
for the fiscal quarter ending September 30, 1999 and 3.75 to 1.00 thereafter. As
previously discussed, in June 1997, the Company obtained an amendment to 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, 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. 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. As of March 31, 1997, the Company's funded debt to EBITDA ratio was 4.54
to 1.00. Such consolidated calculations for the Company do not include Sunset
Station (see below). In addition, the Bank Facility prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and the Convertible Preferred Stock (see Note 7), the amounts
necessary to fund casino bankroll in the ordinary course of business, and
$2,000,000. The Guarantors waive certain defenses and rights including rights of
subrogation and reimbursement. The Bank Facility contains customary events of
default and remedies and is cross-defaulted to the Company's senior subordinated
notes and the Change of Control Triggering Event as defined in the Indentures.
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the
Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan
Agreement") with Bank of America National Trust and Savings Association, Bank of
Scotland, Societe Generale and each of the other lenders party to such
agreement, pursuant to which Sunset Station received a commitment for $110
million to finance the remaining development and construction costs of Sunset
Station. The Company also entered into an operating lease for certain furniture,
fixtures and equipment with a cost of $40 million to be subleased to Sunset
Station as part of the Sunset Station Project (See Note 6).
The Sunset Loan Agreement includes a first mortgage term note in the amount
of $110 million (the "Sunset Note") which is non-recourse to the Company, except
as to certain construction matters pursuant to a completion guarantee dated as
of September 25, 1996, executed by the Company on behalf of Sunset Station and
except that the Company has pledged all of the stock of Sunset Station as
security for the Sunset
F-32
<PAGE> 41
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loan Agreement. The Sunset Note is to reduce $1.8 million for each fiscal
quarter ending March 1998 through December 1998, $2.3 million for each fiscal
quarter ending March 1999 through December 1999, and $2.0 million for the fiscal
quarters ending March 2000 and June 2000 and matures in September 2000. In
addition, the Sunset Note is subject to prepayment subsequent to July 1998 by an
amount equal to a specified percentage of Excess Cash Flow, as defined. The
Sunset Note carries an interest rate of 375 basis points above the Eurodollar
Rate (as defined in the Sunset Loan Agreement). The Sunset Note is secured by
substantially all of the assets of Sunset Station, including a deed of trust
with respect to the real property on which Sunset Station is being constructed,
a portion of which is subject to a lease from the Company to Sunset Station, and
the remainder of which property is owned by Sunset Station and a security
agreement as to all tangible and intangible personal property including Sunset
Station's rights under an operating lease for certain furniture, fixtures and
equipment to be used by Sunset Station.
The Sunset Loan Agreement contains certain customary financial and other
covenants (related exclusively to Sunset Station) including a minimum fixed
charge coverage ratio as of the last day of any quarter after the opening of
Sunset Station of not less than 1.10 to 1.00, a maximum senior funded debt to
EBITDA (adjusted for certain cash contributions or advances by the Company)
ratio after opening of 4.50 to 1.00 for the first full quarter, reducing by 0.25
on certain quarters thereafter to 3.25 to 1.00 for the tenth quarter and each
quarter thereafter, and a minimum net worth as of any quarter end after opening
of not less than $52 million plus 80% of net income (not reduced by net losses)
for each quarter after opening, plus 100% of certain additional equity
contributions by the Company and Supplemental Loans, as defined. In addition,
the agreement places restrictions on indebtedness and guarantees, dividends,
stock redemptions, mergers, acquisitions, sale of assets or sale of stock in
subsidiaries and limitations on capital expenditures.
In addition, the Company has provided a funding commitment to Sunset
Station of up to an additional $25 million pursuant to a supplemental loan
agreement (the "Supplemental Loan Agreement"). The Sunset Loan Agreement
requires Sunset Station to draw amounts under the Supplemental Loan Agreement in
the event of the failure of certain financial covenants under the Sunset Loan
Agreement. Loans under this funding commitment may be drawn down beginning on
the last day of the first full calendar quarter ending after Sunset Station
opens for business in the amount of up to $10 million during the first year
after such date, up to $10 million during the second year after such date and up
to $5 million during the third year after such date. The Supplemental Loan
Agreement also provides for an additional, separate funding commitment up to $40
million in connection with a purchase option for certain furniture, fixtures and
equipment under the Sunset Operating Lease. Sunset Station will pay interest at
a rate per annum equal to the three-month Eurodollar Rate, the interest being
payable solely in the form of commensurate additions to the principal of the
Supplemental Loans. The Supplemental Loan Agreement expires in September 2001.
The funding commitments under the Supplemental Loan Agreement are subject to
limitations imposed by the indentures governing the Company's existing senior
subordinated notes and the Bank Facility.
In order to manage the interest rate risk associated with the Sunset Note,
Sunset Station entered into an interest rate swap agreement with Bank of America
National Trust and Savings Association. This agreement swaps the variable rate
interest pursuant to the Sunset Note to a fixed rate of 9.58% on $35 million
notional amount as of January 1997 increasing to $60 million at March 1997, $90
million at June 1997, $100 million at September 1997 and then decreasing to $95
million at June 1998. The agreement expires in December 1998. The difference
paid or received pursuant to the swap agreement is accrued as interest rates
change and recognized as an adjustment to interest expense on the Sunset Note.
Sunset Station is exposed to credit risk in the event of non-performance by the
counterparty to the agreement. The Company believes the risk of non-performance
by the counterparty is minimal. As of March 31, 1997, the market value of this
interest rate swap was $1.0 million.
The estimated fair value of the Company's long-term debt at March 31, 1997
was approximately $755.6 million, compared to its book value of approximately
$761.0 million. The estimated fair value amounts
F-33
<PAGE> 42
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were based on quoted market prices on or about March 31, 1997 for the Company's
debt securities that are publicly traded. For debt securities that are not
publicly traded, fair value was estimated based on the quoted market prices for
similar issues or the current rates offered to the Company for debt having the
same remaining maturities.
Scheduled maturities of long-term debt are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
MARCH 31,
------------------
<S> <C>
1998......................................... $ 18,807
1999......................................... 12,948
2000......................................... 11,141
2001......................................... 333,373
2002......................................... 1,288
Thereafter................................... 383,406
--------
Total.............................. $760,963
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Station Casino St. Charles
In September 1994, Station Casino St. Charles entered into an agreement for
property acquisitions with the City of St. Charles, Missouri which allows for
the acquisition by the Company of property within a designated 107-acre
Redevelopment Project Area, a portion of which is adjacent to Station Casino St.
Charles. This land is being acquired for the construction of a mixed use
development which may include retail space, a hotel, office space, convention
space or restaurants. The Company has a right to terminate the agreement if all
related acquisition costs exceed $13.7 million. As of March 31, 1997, the
Company has incurred $3.4 million of acquisition costs included in property and
equipment, net in the accompanying consolidated balance sheets.
Boulder Station Lease
The Company entered into a ground lease for 27 acres of land on which
Boulder Station is located. The Company leases this land from a trust pursuant
to a long-term ground lease. The trustee of this trust is Bank of America NT&SA,
the beneficiary of which is KB Enterprises, an affiliated company owned by Frank
J. Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the parents of
Frank J. Fertitta III, Chairman of the Board and Chief Executive Officer of the
Company. The lease has a term of 65 years with monthly payments of $125,000
through June 1998. In June 1998, and every ten years thereafter, the rent will
be adjusted to the product of the fair market value of the land and the greater
of (i) the then prevailing annual rate of return for comparably situated
property or (ii) 8% per year. The rent will be further adjusted in June 2003,
and every ten years thereafter by a cost of living factor. In no event will the
rent for any period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year intervals
beginning in June 1998, to purchase the land at fair market value. The Company's
leasehold interest in the property is subject to a lien to secure borrowings
under the Bank Facility.
Texas Station Lease
The Company entered into a ground lease for 47 acres of land on which Texas
Station is located. The Company leases this land from a trust pursuant to a
long-term ground lease. The trustee of this trust is Bank of America NT&SA, the
beneficiary of which is Texas Gambling Hall & Hotel, Inc. an affiliate company
of the Related Lessor. The lease has a term of 65 years with monthly rental
payments of $150,000 through July 2000. In July 2000, and every ten years
thereafter, the rent will be adjusted to the product of the fair market value of
F-34
<PAGE> 43
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the land and the greater of (i) the then prevailing annual rate of return being
realized for owners of comparable land in Clark County or (ii) 8% per year. The
rent will be further adjusted by a cost of living factor after the first ten
years and every ten years thereafter. In no event will the rent for any period
be less than the immediately prior period. Pursuant to the ground lease, the
Company will have an option, exercisable at five-year intervals beginning in May
2000, to purchase the land at fair market value. The Company's leasehold
interest in the property is subject to a lien to secure borrowings under the
Bank Facility.
Sunset Station Lease
In June 1994, the Company entered into a lease agreement for approximately
47.5 acres of land in the Southeast area of Las Vegas on which Sunset Station is
being developed. The lease has a term of 65 years with monthly rental payments
of $120,000, adjusted on each subsequent five-year anniversary by a cost of
living factor. On the seventh anniversary of the lease, the Company has an
option to purchase this land for $23.8 million. Additionally, on the seventh
anniversary of the lease, the lessor has an option to sell this land to the
Company for $21.8 million.
Station Casino Kansas City Lease
The Company has entered into a joint venture which owns the land on which
Station Casino Kansas City is located. At March 31, 1997, $3.5 million related
to this investment is included in other assets, net in the accompanying
consolidated balance sheets.
In April 1994, Station Casino Kansas City entered into an agreement with
the joint venture to lease this land. The agreement requires monthly payments of
$85,000 through March 31, 1997 and $90,000 through the remainder of the lease
term. The lease expires March 31, 2006, with an option to extend the lease for
up to eight renewal periods of ten years each, plus one additional seven year
period. Commencing April 1, 1998 and every anniversary thereafter, the rent
shall be adjusted by a cost of living factor. In connection with the joint
venture agreement, the Company received an option providing for the right to
acquire the joint venture partner's interest in this joint venture. The Company
has the option to acquire this interest at any time after April 1, 2002 through
April 1, 2011 for $11.7 million, however, commencing April 1, 1998 the purchase
price will be adjusted by a cost of living factor of not more than 5% or less
than 2% per annum. At March 31, 1997, $2.6 million paid by the Company in
consideration for this option is included in other assets, net in the
accompanying consolidated balance sheets.
Southern Florida
In October 1994, the Company entered into an agreement to form a limited
partnership with the existing operator of a pari-mutuel facility in Southern
Florida. In the event casino gaming is approved by the voters of Florida by
October 2000 and in the event the site is licensed by the state, the Company
will be obligated to make capital contributions to the partnership totaling $35
million, reduced by credits for amounts previously contributed to any Florida
gaming referendum campaign.
Operating Leases
The Company leases several parcels of land and equipment used in operations
at Palace Station, Boulder Station, Texas Station, Station Casino St. Charles
and Station Casino Kansas City and for land on which Sunset Station is being
developed. Leases on various parcels ranging from 13 acres to 171 acres have
terms expiring between March 2006 and July 2060. Future minimum lease payments
required under these operating
F-35
<PAGE> 44
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases and other noncancelable operating leases are as follows for the fiscal
years ending March 31, (amounts in thousands):
FUTURE MINIMUM LEASE PAYMENTS
<TABLE>
<S> <C>
1998.............................................. $ 6,423
1999.............................................. 6,296
2000.............................................. 5,932
2001.............................................. 5,932
2002.............................................. 5,932
Thereafter........................................ 280,479
--------
Total................................... $310,994
========
</TABLE>
Rent expense totaled approximately $5.4 million, $6.5 million and $4.9
million for the years ended March 31, 1997, 1996 and 1995, respectively. Rents
of $2.2 million and $2.1 million were capitalized in connection with the
construction of Station Casino Kansas City and Sunset Station for the fiscal
years ended March 31, 1997 and 1996, respectively.
During fiscal 1995, the Company sold approximately $13.0 million of
equipment and leased it back under lease agreements ranging from three to seven
years. The transactions produced gains of approximately $665,000 which have been
deferred and are being amortized against lease expense over the remaining lease
terms.
Equipment Lease
In connection with the Sunset Loan Agreement, the Company entered into an
operating lease for furniture, fixtures and equipment (the "Equipment") with a
cost of $40 million, dated as of September 25, 1996 (the "Sunset Operating
Lease") with First Security Trust Company of Nevada. The Sunset Operating Lease
expires in October 2000 and carries a lease rate of 225 basis points above the
Eurodollar Rate. The Company has entered into a sublease with Sunset Station for
the Equipment pursuant to an operating lease with financial terms substantially
similar to the Sunset Operating Lease. In the event that Sunset Station elects
to purchase the Equipment, the Company has provided a funding commitment up to
the amount necessary for such purchase pursuant to the Supplemental Loan
Agreement (subject to the limitations on funding contained in the Supplemental
Loan Agreement) (See Note 5).
In connection with the Sunset Operating Lease, the Company also entered
into a participation agreement, dated as of September 25, 1996 (the
"Participation Agreement") with the trustee, as lessor under the Sunset
Operating Lease, and holders of beneficial interests in the Lessor Trust (the
"Holders"). Pursuant to the Participation Agreement, the Holders will advance
funds to the trustee for the purchase by the trustee of, or to reimburse the
Company for, the purchase of the Equipment, which will then be leased to the
Company, and in turn subleased to Sunset Station. Pursuant to the Participation
Agreement, the Company also agreed to indemnify the Lessor and the Holders
against certain liabilities.
Legal Matters
The Company is a litigant in legal matters arising in the normal course of
business. In the opinion of management, all pending legal matters are either
adequately covered by insurance or, if not insured, will not have a material
adverse effect on the financial position or the results of operations of the
Company.
F-36
<PAGE> 45
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDER'S EQUITY
In July 1995, the Company completed a public offering of 5,175,000 shares
of common stock at $16 per share generating net proceeds of approximately $78.2
million, before deducting $0.8 million of offering costs paid by the Company.
The proceeds from this offering were primarily used to acquire the assets of
Texas Station located in North Las Vegas, which commenced operations July 12,
1995. The seller of the assets is a wholly-owned subsidiary of a trust of which
the Related Lessor is the sole trustee (the "Seller"). The purchase price of
such assets was an amount equal to the Seller's out-of-pocket costs incurred in
connection with the financing, development and construction of the hotel/casino
through the closing date. At closing, the Company paid $62.8 million to the
Seller and assumed various liabilities and contracts to complete construction of
the facility. The total cost of the property was approximately $84.9 million.
The land on which the Texas Station facility is situated is being leased to the
Company by the Seller pursuant to a long-term ground lease (See Note 6).
In March 1996, the Company completed a public offering of 1,800,000 shares
of convertible preferred stock (the "Convertible Preferred Stock") at $50.00 per
share generating net proceeds of approximately $87.3 million, before deducting
$0.6 million of offering costs paid by the Company. In April 1996, the
underwriters exercised their option to purchase an additional 270,000 shares of
the Convertible Preferred Stock generating net proceeds to the Company of
approximately $13.1 million. The Convertible Preferred Stock is convertible at
an initial conversion rate of 3.2573 shares of common stock for each share of
Convertible Preferred Stock. The Convertible Preferred Stock is redeemable, at
the option of the Company in whole or in part, for shares of the Company's
common stock at any time after March 15, 1999, initially at a redemption price
of $52.45 per share and thereafter at prices decreasing annually to $50.00 per
share of Convertible Preferred Stock on and after March 15, 2006, plus accrued
and unpaid dividends. The common shares to be issued is determined by dividing
the redemption price by the lower of the average daily closing price for the
Company's common stock for the preceding 20 trading days or the closing price of
the Company's common stock on the first business day preceding the date of the
redemption notice. Any fractional shares would be paid in cash. Dividends on the
Convertible Preferred Stock of $3.50 per share annually, accrue and are
cumulative from the date of issuance. The Convertible Preferred Stock has a
liquidation preference of $50.00 per share, plus accrued and unpaid dividends.
8. RELATED PARTIES
The Company has employed McNabb/McNabb/DeSoto/Salter & Co. ("MMDS") to
provide advertising and marketing research services. Certain stockholders of the
Company own a 50% interest in MMDS. During the fiscal years ended March 31,
1997, 1996 and 1995 the Company paid MMDS $27.2 million, $17.4 million and $12.7
million respectively, for advertising, market research and other costs related
to these activities. In management's opinion, these transactions were conducted
with terms as fair to the Company as could have been obtained from unaffiliated
companies. In April 1997, the Company purchased the assets of MMDS for
approximately $0.8 million.
9. BENEFIT PLANS
Stock Compensation Program
The Company has adopted a Stock Compensation Program (the "Program") which
includes (i) an Incentive Stock Option Plan for the grant of incentive stock
options, (ii) a Compensatory Stock Option Plan providing for the grant of
non-qualified stock options, and (iii) a Restricted Shares Plan providing for
the grant of restricted shares of common stock. Officers, key employees,
directors (whether employee directors or non-employee directors) and independent
contractors or agents of the Company and its subsidiaries are eligible to
participate in the program. However, only employees of the Company and its
subsidiaries are eligible to receive incentive stock options.
F-37
<PAGE> 46
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A maximum of 6,307,000 shares of common stock have been reserved for
issuance under the Program. Options are granted at the current market price at
the date of grant. The plan provides for a variety of vesting schedules, ranging
from immediate to twenty percent a year for five years, to be determined at the
time of grant. All options have an exercise period of ten years from the date of
grant.
The Program will terminate ten years from the date of adoption, unless
terminated earlier by the Board of Directors, and no options or restricted
shares may be granted under the Program after such date. Summarized information
for the Program is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Beginning of the
Year............................. 2,697,012 $16.24 2,372,100 $19.05 1,943,725 $20.09
Granted.......................... 2,160,822 $14.01 1,593,305 $13.42 541,750 $15.50
Exercised........................ (14,711) $12.16 (46) $12.00 -- $ --
Canceled......................... (410,941) $15.70 (1,268,347) $17.95 (113,375) $19.89
--------- ---------- ---------
Outstanding End of the Year........ 4,432,182 $15.22 2,697,012 $16.24 2,372,100 $19.05
========= ========== =========
Restricted Stock Grants............ -- -- 170,500
========= ========== =========
Exercisable at End of Year......... 1,408,893 $16.50 993,032 $16.67 721,200 $20.06
========= ========== =========
Options Available for Grant........ 1,689,561 649,942 479,910
========= ========== =========
</TABLE>
The following table summarizes information about the options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED NUMBER
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE AT AVERAGE
EXERCISE AT MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 9.38 - $ 9.88............. 228,000 9.9 $ 9.50 -- $ --
$11.63 - $13.75............. 890,081 7.3 $12.07 549,284 $12.04
$14.38 - $15.00............. 2,149,101 8.9 $14.59 100,709 $14.44
$18.00 - $20.00............. 1,075,000 6.3 $19.72 695,900 $19.83
$22.00 - $22.00............. 90,000 2.8 $22.00 63,000 $22.00
--------- --- ------ --------- ------
4,432,182 7.9 $15.22 1,408,893 $16.50
========= === ====== ========= ======
</TABLE>
Restricted stock grants in the amount of 170,500 shares were issued during
the fiscal year ended March 31, 1995. The effect of these grants is to increase
the issued and outstanding shares of the Company's common stock and decrease the
number of shares available for grant in the plan. Deferred compensation is
recorded for the restricted stock grants equal to the market value of the
Company's common stock on the date of grant. The deferred compensation is
amortized over the period the restricted stock vests and recorded as
compensation expense in selling, general, and administrative expense in the
accompanying consolidated statements of operations.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Program. Accordingly, compensation expense recognized was
different than what would have been otherwise recognized under the fair value
based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation".
Had compensation expense for the plans been determined in accordance with SFAS
No. 123, the effect on the
F-38
<PAGE> 47
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's net income applicable to common stock and earnings per common share
would have been as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1997 1996
------- --------
<S> <C> <C>
Net income applicable to common stock:
As reported............................................... $6,518 $25,419
Proforma.................................................. $3,640 $23,562
Earnings per common share:
As reported............................................... $ 0.18 $ 0.75
Proforma.................................................. $ 0.10 $ 0.69
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing method with the following assumptions: (i) no
dividends, (ii) expected volatility for both years of 45.5%, (iii) risk free
interest rate of 6.46% for 1997 and 6.04% for 1996, and (iv) the expected
average life of 3.92 years for 1997 and 3.05 years for 1996. The weighted
average fair value of options granted in 1997 and 1996 were $5.64 and $4.91,
respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma net income may
not be representative of that to be expected in future years.
In May 1995, the Board of Directors of the Company authorized the repricing
of 1,156,900 options with option prices ranging from of $13.00 to $20.00.
Options held by certain members of the Company's Board of Directors, including
the Chairman and Chief Executive Officer of the Company were not repriced. The
effect of the repricing of all the subject options was the cancellation of
1,116,500 options and the reissuance of 872,680 options ("replacement options")
with a price of $12.00 (market value at date of the repricing) which are
included in granted and canceled options in the table above. The number of
replacement options was determined, based upon a valuation model, so that the
value of the replacement options was equivalent to the value of the options
originally granted.
401(k) Plans
The Company has a defined contribution 401(k) plan, which covers all
employees who meet certain age and length of service requirements and allows an
employer contribution up to 25 percent of the first four percent of each
participating employee's compensation. Plan participants can elect to defer
before tax compensation through payroll deductions. These deferrals are
regulated under Section 401(k) of the Internal Revenue Code. The Company's
matching contribution was $442,000, $293,000, and $203,000 for the fiscal years
ended March 31, 1997, 1996 and 1995, respectively.
10. EXECUTIVE COMPENSATION PLANS
The Company has employment agreements with certain of its executive
officers. These contracts provide for, among other things, an annual base salary
with annual adjustments and an annual cash bonus equal to at least 5 percent of
the executive's base salary, and supplemental long-term disability and
supplemental life insurance benefits in excess of the Company's normal coverage
for employees. The Company elected to self-insure with respect to the long-term
disability benefits. In addition, the Company has adopted a Supplemental
Executive Retirement Plan for its Chief Executive Officer and a Supplemental
Management Retirement Plan for certain key executives as selected by the Human
Resources Committee of the Company's Board of Directors. Other executive plans
include a Deferred Compensation Plan and a Long-Term Stay-On
F-39
<PAGE> 48
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Performance Incentive Plan. The expenses related to these plans are included in
corporate expenses in the accompanying consolidated statements of operations.
11. RESTRUCTURING CHARGE
In March 1997, the Company introduced a plan designed to reduce costs and
improve efficiency of operations. This plan resulted in a one-time charge to
earnings in the fourth quarter of fiscal 1997 totaling $2,016,000, primarily
related to employee severance payments.
12. INCOME TAXES
The Company files a consolidated federal income tax return. The provision
(benefit) for income taxes consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 7,708 $ 4,784 $ 721
State............................................... (1,834) 374 (1,053)
------- ------- -------
5,874 5,158 (332)
Deferred.............................................. 1,741 9,421 (3,145)
------- ------- -------
Total income taxes.......................... $ 7,615 $14,579 $(3,477)
======= ======= =======
</TABLE>
The income tax provision (benefit) differs from that computed at the
federal statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.................................. 35.0% 35.0% (35.0)%
State income taxes, net of federal benefit.............. (5.5) 0.6 (6.0)
Meals and entertainment................................. 0.2 0.6 4.1
Other, net.............................................. 5.9 0.2 6.5
----- ----- -----
Effective tax rate...................................... 35.6% 36.4% (30.4)%
===== ===== =====
</TABLE>
F-40
<PAGE> 49
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences representing net
deferred tax assets and liabilities are as follows (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued vacation, bonuses and group insurance.......... $ 2,981 $ 2,119
Prepaid gaming taxes................................... (1,341) (1,177)
Other.................................................. 2,261 1,135
-------- --------
Total current............................................. 3,901 2,077
-------- --------
Long-term:
Preopening and other costs, net of amortization........ 15,077 4,485
State deferred taxes................................... 1,907 462
Alternative minimum tax credits........................ 9,000 4,600
-------- --------
Total long-term................................... 25,984 9,547
-------- --------
Total deferred tax assets......................... 29,885 11,624
-------- --------
Deferred tax liabilities:
Long-term:
Temporary differences related to property and
equipment............................................ (32,583) (18,201)
Other.................................................. (1,249) (1,122)
-------- --------
Total deferred tax liabilities.................... (33,832) (19,323)
-------- --------
Net............................................... $ (3,947) $ (7,699)
======== ========
</TABLE>
The excess of the alternative minimum tax over the regular Federal income
tax is a tax credit which can be carried forward indefinitely to reduce future
regular Federal income tax liabilities. The Company did not record a valuation
allowance at March 31, 1997 relating to recorded tax benefits because all
benefits are likely to be realized.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET
INCOME INCOME EARNINGS
(LOSS) (LOSS) (LOSS)
OPERATING BEFORE APPLICABLE PER
NET INCOME INCOME TO COMMON COMMON
REVENUES (LOSS) TAXES STOCK SHARE
--------- --------- -------- ---------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
First quarter........................................ $ 135,440 $ 22,813 $ 14,581 $ 7,648 $ 0.22
Second quarter....................................... $ 138,034 $ 23,809 $ 15,847 $ 8,307 $ 0.24
Third quarter........................................ $ 133,767 $ 21,536 $ 13,789 $ 6,944 $ 0.20
Fourth quarter....................................... $ 176,274 $(10,035) $(22,839) $(16,381) $(0.46)
YEAR ENDED MARCH 31, 1996
First quarter........................................ $ 94,145 $ 13,043 $ 5,530 $ 3,511 $ 0.12
Second quarter....................................... $ 119,850 $ 17,666 $ 11,459 $ 7,257 $ 0.21
Third quarter........................................ $ 122,929 $ 18,969 $ 11,509 $ 7,360 $ 0.21
Fourth quarter....................................... $ 129,933 $ 19,786 $ 11,553 $ 7,291 $ 0.21
YEAR ENDED MARCH 31, 1995
First quarter........................................ $ 47,672 $ (8,361) $(11,055) $ (7,399) $(0.25)
Second quarter....................................... $ 62,384 $ (6,962) $(11,428) $ (7,379) $(0.25)
Third quarter........................................ $ 83,641 $ 6,295 $ 807 $ 483 $ 0.02
Fourth quarter....................................... $ 96,581 $ 15,416 $ 10,257 $ 6,353 $ 0.22
</TABLE>
F-41
<PAGE> 50
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENT
On January 16, 1997, the Company's gaming licenses for Station Casino
Kansas City were formally issued for its facility which is located in a man-made
basin filled with water piped in from the surface of the Missouri River. In
reliance on numerous approvals from the Missouri Gaming Commission specific to
the configuration and granted prior to the formal issuance of its gaming
license, the Company built and opened the Station Casino Kansas City facility.
The licenses issued to the Company and the resolutions related thereto
specifically acknowledge that the Missouri Gaming Commission had reviewed and
approved this configuration.
On November 25, 1997, the Supreme Court of Missouri ruled, in a case
challenging the gaming licensing of certain operators located in Maryland
Heights, Missouri who compete with Station Casino St. Charles, that gaming may
occur only in artificial spaces that are contiguous to the surface stream of the
Missouri or Mississippi Rivers. The case was remanded to the trial court for a
factual determination as to whether such competing operators meet this
requirement.
Based upon this Missouri Supreme Court ruling (the so-called "Akin
Ruling"), the Missouri Gaming Commission attempted to issue preliminary orders
for disciplinary action to all licensees in Missouri that operate gaming
facilities in artificial basins. These preliminary orders started the hearing
process which allow the affected licensees to demonstrate that they are in fact,
contiguous to the surface stream of the Missouri or Mississippi River. The
preliminary orders were challenged by the licensees. The Circuit Court of Cole
County has entered writs of prohibition preventing the Missouri Gaming
Commission from proceeding with such hearings under the Missouri Gaming
Commission's existing procedures. The Missouri Gaming Commission is currently
seeking further review of these writs of prohibition in the Missouri Supreme
Court, which has not yet ruled on the matter.
Further, the Akin case was dismissed by the plaintiffs without prejudice
after the Akin Ruling was entered by the Missouri Supreme Court, but before any
further proceedings on remand. Therefore, the status of the Akin Ruling is
unclear.
On January 16, 1998, Station Casino Kansas City's licenses were renewed for
one year, subject to the satisfactory resolution of the issues raised in the
Akin Ruling. This renewal occurred before any writs of prohibition were entered
preventing the Missouri Gaming Commission from proceeding with hearings
concerning Station Casino Kansas City or any other licensees for alleged
non-compliance with the Akin Ruling.
Because of the open questions raised but not answered in the Akin Ruling,
it is not possible to predict what effect the Akin Ruling or Missouri Gaming
Commission's actions will have on operations at Station Casino Kansas City.
At this time, based on discussions with Missouri legal counsel, management
believes that it has potentially meritorious defenses in any lawsuit or
administrative action based on the Akin Ruling. In addition, based on its
current understanding of the ruling, management believes that if it were to be
required to take remedial action with respect to Station Casino Kansas City,
such remediation could be completed at a cost that would not have a material
adverse effect on the Company's financial condition.
However, management cannot provide any assurance as to whether the Station
Casino Kansas City facility would be found to comply with the guidelines
described in the Akin Ruling, whether it would be permitted to modify the
facility to comply with such standards, or whether the Company's legal defenses,
legislative alternatives, or other means available to permit the continued use
of this current configuration would succeed.
Further, it is unclear, in the event of a determination that the
configuration at Station Casino Kansas City does not comply with the Akin
Ruling, whether Station Casino Kansas City would be able to continue to operate
or whether such findings would result in the possible temporary or permanent
closure of Station Casino Kansas City. The Company cannot provide any assurance
that there would not be a material adverse impact in such an eventuality.
F-42
<PAGE> 51
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company does not believe the Akin Ruling will have a material adverse
impact on the Station Casino St. Charles operations.
MERGER AGREEMENT (UNAUDITED)
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Crescent Real Estate Equities Company, a
Texas real estate investment trust ("Crescent"). Pursuant to the Merger
Agreement, the Company will be merged with and into Crescent (the "Merger"). The
Merger Agreement also provides for certain alternative structures to facilitate
the combination of the businesses of the Company and Crescent.
Upon consummation of the Merger, each share of the Company's $.01 par value
common stock issued and outstanding immediately prior to the effective time of
the Merger (the "Effective Time") together with the associated rights issued
pursuant to the Rights Agreement dated October 6, 1997 shall as of the Effective
Time, be converted into the right to receive 0.466 validly issued, fully paid
and nonassessable shares of Crescent's $.01 par value common shares of
beneficial interest. Each share of the Company's $3.50 Convertible Preferred
Stock issued and outstanding immediately prior to the Effective Time shall as of
the Effective Time be converted into the right to receive one validly issued,
fully paid and nonassessable $3.50 Convertible Preferred Share of Crescent
convertible into the number of Crescent common shares and having the terms
required by the Company's Convertible Preferred Stock. In addition, at the
option of the Company, the Company will issue to Crescent and Crescent has
agreed to purchase subject to the terms, conditions and procedures set forth in
the Merger Agreement up to an aggregate of 115,000 shares of a new series of
preferred stock of the Company ("the Redeemable Preferred Stock") at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000 shares.
The Redeemable Preferred Stock is convertible at the option of the holder any
time after January 16, 1999, unless previously redeemed, into shares of common
stock at a conversion rate of 60.606 Shares of Common Stock for each share of
Redeemable Preferred Stock subject to ordinary antidilution provisions. Unless
written consent from Crescent is received, the Company has agreed to use the net
proceeds from the sale of the Redeemable Preferred Stock to repay indebtedness
under its revolving loan agreement, borrowings under which were used for
acquisitions and master-planned expansions.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions, including the approval of the Company's stockholders,
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1974 and the approval of any other governmental
entity with jurisdiction in respect of gaming laws required or necessary in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement. The Merger Agreement entitles Crescent to
a $54 million break-up fee if such agreement is terminated (i) by either
Crescent or the Board of Directors of the Company if any required approval of
the Merger is not obtained by reason of the failure to obtain the required vote
of stockholders, (ii) by Crescent if the Board of Directors of the Company
withdraws its approval or recommendation of the Merger, or recommends a superior
proposal or (iii) by the Board of Directors of the Company if it receives a
superior proposal that Crescent does not match or exceed.
Upon consummation of the Merger, it is anticipated that an operating
company owned equally by the Company's management team and Crescent Operating,
Inc. (the "Operating Company") or another affiliate established by Crescent will
operate the six casino properties currently operated by the Company pursuant to
a lease with Crescent. The lease will be a 10-year lease with one, five-year
renewal option. The lease also will be a triple-net lease, and will provide that
the Operating Company is required to maintain the property in good condition at
its expense during the term of the lease. The lease provides for base and
percentage rent but the amount of the rent has not yet been determined.
Immediately prior to the execution of the Merger Agreement, the Company
amended its Rights Agreement dated October 6, 1997 (the "Rights Agreement"), to
exclude Crescent and its affiliates from the
F-43
<PAGE> 52
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
definition of Acquiring Person to the extent that it is a Beneficial Owner (as
defined in the Rights Agreement) as a result of the approval, execution or
delivery of, or the consummation of the transactions contemplated by, the Merger
Agreement, including, without limitation, the purchase by Crescent of the
Redeemable Preferred Stock.
F-44
<PAGE> 53
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) Crescent Real Estate Equities Company's (the "Company")
public offering of its common shares that closed on October 2, 1996 (the
"October 1996 Offering") and the additional public offering of 450,000 common
shares that closed on October 9, 1996 and the use of the net proceeds there
from were to repay approximately $168,000 of indebtedness and to fund
approximately $289,000 of Property acquisitions in the fourth quarter of 1996
and the first quarter of 1997, (ii) the Company's public offering of its common
shares in April 1997 (the "April 1997 Offering") and the additional public
offering of 500,000 common shares that closed on May 14, 1997 and the use of
the net proceeds therefrom were used to fund approximately $593,500 of
acquisitions in the second quarter of 1997, (iii) the Company's offering of
4,700,000 common shares to an affiliate of Union Bank of Switzerland (the "UBS
Offering") and the use of net proceeds therefrom to repay approximately
$145,000 of indebtedness under the Credit Facility, (iv) the Operating
Partnership's offering of an aggregate principal amount of $400 million of
senior notes (the "September 1997 Note Offering") and the use of the net
proceeds therefrom to fund approximately $337,600 of the purchase price of two
Properties and to repay approximately $57,200 of indebtedness incurred under
the Credit Facility and other short-term indebtedness, (v) the Company's public
offering of its Common Shares in October 1997 (the "October 1997 Offering") and
and the use of the net proceeds therefrom, to fund approximately $45,000 of
the purchase price of one Property and to repay approximately $325,100 of
short-term indebtedness and indebtedness incurred under the Credit Facility,
(vi) the Company's offering of 5,375,000 common shares to Merrill Lynch (the
"Merrill Offering") and the use of the net proceeds therefrom to repay
approximately $199,900 of indebtedness under the Credit Facility, (vii)
Property acquisitions, other investments and related financing and share
issuances during 1996, 1997 and 1998, and (viii) Pending Investments and
related financing, including $1,054,200 for refinancing and/or assumption of
indebtedness, and associated refinancing and transaction costs, in connection
with the Merger.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) the April 1997 Offering and the additional public
offering of 500,000 common shares that closed on May 14, 1997 and the use of the
net proceeds therefrom to fund approximately $593,500 of Property acquisitions
and other investments in the second quarter of 1997, (ii) the UBS Offering and
the use of the net proceeds therefrom were used to repay approximately $145,000
of indebtedness under the Credit Facility, (iii) the September 1997 Note
Offering and the use of the net proceeds therefrom to fund approximately
$337,600 of the purchase price of two Properties and to repay approximately
$57,200 of indebtedness incurred under the Credit Facility and other short-term
indebtedness, (iv) the October 1997 Offering and the use of the net proceeds
therefrom were used to fund approximately $45,000 of the purchase price of one
Property and to repay approximately $325,100 of short-term indebtedness and
indebtedness incurred under the Credit Facility, (v) the Merrill Offering and
the use of the net proceeds therefrom were used to repay approximately $199,900
of indebtedness under the Credit Facility, (vi) Property acquisitions, other
investments and related financing and share issuances during 1997 and 1998, and
(vii) Pending Investments and related financing, including $1,054,200 for
refinancing and/or assumption of indebtedness, and associated refinancing and
transaction costs, in connection with the Merger.
The unaudited pro forma Consolidated Balance Sheet and Statements of
Operations should be read in conjunction with the historical audited financial
statements of the Company for the year ended December 31, 1996, filed herein.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited pro forma Consolidated
Balance Sheet and Statements of Operations are not necessarily indicative of
what actual results of operations of the Company would have been for the
period, nor does it purport to represent the Company's results of operations
for future periods.
F-45
<PAGE> 54
CRESCENT REAL ESTATE EQUITIES COMPANY
Pro Forma Consolidated Balance Sheet
As of September 30, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
COMPANY PRO FORMA PRO FORMA
HISTORICAL (A) ADJUSTMENTS CONSOLIDATED
---------------- ----------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in real estate $ 3,113,743 $ 2,261,016 (B) $ 5,374,759
Less - accumulated depreciation (256,204) -- (256,204)
---------------- ------------ ------------
Net investment in real estate 2,857,539 2,261,016 5,118,555
Cash and cash equivalents 47,082 67,625 (C) 114,707
Restricted cash and cash equivalents 32,462 -- 32,462
Accounts receivable, net 24,010 -- 24,010
Deferred rent receivable 30,649 -- 30,649
Investments in mortgages and equity
of unconsolidated companies 369,779 218,075 (D) 587,854
Notes receivable, net 163,219 7,800 (E) 171,019
Other assets, net 87,293 -- 87,293
---------------- ------------ ------------
Total assets $ 3,612,033 $ 2,554,516 $ 6,166,549
================ ============ ============
LIABILITIES:
Borrowings under Credit Facility $ 316,500 $ 207,550 (F) $ 524,050
Notes payable 1,460,404 (85,000)(G) 2,571,704
1,196,300 (H)
Accounts payable, accrued expenses and other liabilities 88,230 (25,000)(I) 63,230
---------------- ------------ ------------
Total liabilities 1,865,134 1,293,850 3,158,984
---------------- ------------ ------------
MINORITY INTERESTS:
Operating partnership, 6,445,227 units 110,648 -- 110,648
Investment joint ventures 28,396 -- 28,396
---------------- ------------ ------------
Total minority interests 139,044 -- 139,044
---------------- ------------ ------------
SHAREHOLDER'S EQUITY:
7% convertible preferred shares -- 103,500 103,500
Common stock, $.01 par value, authorized 250,000,000
shares, 102,442,050 issued and outstanding
at September 30, 1997 1,024 319 1,343
Additional paid-in capital 1,666,978 1,156,847 2,823,825
Deferred compensation on restricted shares (283) -- (283)
Retained deficit (59,864) -- (59,864)
---------------- ------------ ------------
Total shareholder's equity 1,607,855 1,260,666 (J) 2,868,521
---------------- ------------ ------------
Total liabilities and shareholders' equity $ 3,612,033 $ 2,554,516 $ 6,166,549
================ ============ ============
</TABLE>
See accompanying notes to Pro Forma
Consolidated Balance Sheet
F-46
<PAGE> 55
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
Adjustments
(dollars in thousands)
<TABLE>
<S> <C>
(A) Reflects Crescent Real Estate Equities Company unaudited
consolidated historical balance sheet as of September 30, 1997........................ --
(B) Increase reflects the following:
Acquisition of U.S. Home Building office property..................................... $ 45,000
Acquisition of Fountain Place office property......................................... 114,000
Acquisition of Ventana Country Inn hotel property..................................... 30,000
Acquisition of Energy Centre office property.......................................... 75,000
Acquisition of Austin Centre office property and Omni Austin Hotel property........... 96,900
Pending acquisition of Post Oak Central office property............................... 155,250
Pending acquisition of Station's casino/hotel properties.............................. 1,744,866
-----------
$ 2,261,016
===========
(C) Net increase reflects the following:
Proceeds from the October 1997 Offering............................................... $ 370,100
Acquisition of U.S. Home Building office property..................................... (45,000)
Partial repayment under the Credit Facility using proceeds from
the October 1997 Offering........................................................... (325,100)
Draw under the Credit Facility for working capital.................................... 21,500
Borrowings under the Bridge Loan for working capital.................................. 43,100
Acquisition of Energy Centre office property.......................................... (5,000)
Proceeds from sale of voting common stock to COI for the Refrigerated
Warehouse investment.................................................................. 8,025
-----------
$ 67,625
===========
(D) Net increase reflects the following:
Refrigerated Warehouse Transaction - 40% equity investment............................ $ 160,500
Sale of 100% of voting common stock to COI representing 5% equity interest
in Refrigerated Warehouses........................................................... (8,025)
Investment in a partnership that owns Bank One Center office property
- 50% equity investment ............................................................. 41,500
Additional investments in equity of unconsolidated companies........................... 24,100
-----------
$ 218,075
===========
(E) Increase in notes receivable reflects the following:
Loan to a residential development corporation......................................... $ 7,800
===========
</TABLE>
F-47
<PAGE> 56
<TABLE>
<S> <C>
(F) Net increase in borrowings under the Credit Facility as a result of:
Partial repayment under the Credit Facility using proceeds from
the October 1997 Offering............................................................ $ (325,100)
Draw to repay the BankBoston Note I................................................... 235,000
Draw to partially repay the BankBoston Note II........................................ 100,000
Investment in a partnership that owns Bank One Center office property
- 50% equity investment ............................................................. 41,500
Draw for working capital.............................................................. 21,500
Refrigerated Warehouse Transaction - 40% equity investment ........................... 160,500
Partial repayment under the Credit Facility using proceeds from the
Equity Offering in December 1997 to Merrill Lynch.................................... (199,900)
Acquisition of Austin Centre office property and Omni Austin Hotel property........... 96,900
Draw for additional investments in equity of unconsolidated compananies............... 21,900
Pending acquisition of Post Oak Central office property............................... 55,250
----------
$ 207,550
==========
(G) Net decrease in short-term borrowings as a result of:
Repayment of BankBoston Note I through a draw under the Credit Facility............... $ (235,000)
Partial repayment of BankBoston Note II through a draw under the Credit Facility (100,000)
Borrowings under the Bridge Loan for working capital and property taxes.............. 68,100
Borrowings under the Bridge Loan to partially fund the acquisition of
Fountain Place office property....................................................... 16,900
Borrowings under the Bridge Loan for the acquisition of Ventana
Country Inn hotel property........................................................... 30,000
Borrowings under the Bridge Loan to partially fund the acquisition of
Energy Centre office property........................................................ 25,000
Borrowings under the Bridge Loan for a residential development corporation
loan and additional investments in equity of unconsolidated companies................ 10,000
Pending acquisition of Post Oak Central office property............................... 100,000
----------
$ (85,000)
==========
(H) Increase in notes payable reflects the following:
Assumption of debt with the acquisition of Fountain Place office property............. $ 97,100
Proceeds from Met Life note in conjunction with the acquisition of Energy
Centre office property............................................................... 45,000
Debt relating to the pending acquisition of Station's casino/hotel properties 1,054,200
----------
$1,196,300
==========
(I) Decrease reflects the following:
Payment of property taxes with borrowings under the Bridge Loan........................ $ (25,000)
==========
(J) Increase reflects the following:
Net proceeds from the October 1997 Equity Offering $ 370,100
Net proceeds from the Equity Offering in December 1997 with Merrill Lynch 199,900
The Company's issuance of preferred shares in conjunction with
the pending acquisition of Station's casino/hotel properties......................... 103,500
The Company's issuance of common shares in conjunction with
the pending acquisition of Station's casino/hotel properties......................... 587,166
----------
$1,260,666
==========
</TABLE>
F-48
<PAGE> 57
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Crescent Real
Estate Equities 1998 Acquired
Company 1997 Acquired and Pending
Historical (A) Investments (B) Investments (C)
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES:
Rental property $ 289,752 $ 120,565 $ 20,124
Interest and other income 13,508 -- --
--------- --------- ---------
Total revenues 303,260 120,565 20,124
--------- --------- ---------
EXPENSES:
Real estate taxes 28,229 10,843 2,348
Repairs and maintenance 17,244 12,843 2,563
Other rental property operating 59,100 21,045 3,990
Corporate general and administrative 9,855 -- --
Interest expense 54,687 -- --
Depreciation and amortization 50,840 21,723 4,728
Amortization of deferred financing costs 2,157 -- --
--------- --------- ---------
Total expenses 222,112 66,454 13,629
--------- --------- ---------
Operating income (loss) 81,148 54,111 6,495
OTHER INCOME:
Equity in net income of unconsolidated
companies 3,118 11,130 --
--------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS 84,266 65,241 6,495
Minority interests (12,018) -- --
--------- --------- ---------
NET INCOME (LOSS) $ 72,248 $ 65,241 $ 6,495
========= ========= =========
Preferred dividend (K)
Net income available to common shareholders
PER COMMON SHARE DATA: (L)
Net income
<CAPTION>
Station Other Pro Forma
Casinos (D) Adjustments Consolidated
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Rental property $ 130,939 $ -- $ 561,380
Interest and other income -- 6,791 (E) 20,299
--------- --------- ---------
Total revenues 130,939 6,791 581,679
--------- --------- ---------
EXPENSES:
Real estate taxes -- -- 41,420
Repairs and maintenance -- -- 32,650
Other rental property operating -- (283)(F) 82,869
(983)(G)
Corporate general and administrative -- -- 9,855
Interest expense -- 113,463 (H) 168,150
Depreciation and amortization 55,705 -- 132,996
Amortization of deferred financing costs -- 539 (I) 2,696
--------- --------- ---------
Total expenses 55,705 112,736 470,636
--------- --------- ---------
Operating income (loss) 75,234 (105,945) 111,043
OTHER INCOME:
Equity in net income of unconsolidated
companies -- -- 14,248
--------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS 75,234 (105,945) 125,291
Minority interests -- (46)(J) (12,064)
--------- --------- ---------
NET INCOME (LOSS) $ 75,234 $(105,991) $ 113,227
========= ========= =========
Preferred dividend (K) (5,434)
---------
Net income available to common shareholders $ 107,793
=========
PER COMMON SHARE DATA: (L)
Net income $ 0.80
=========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations
on following page.
F-49
<PAGE> 58
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Company's unaudited
consolidated historical statement of operations for the nine months
ended September 30, 1997.
(B) Reflects the historical incremental rental income and operating
expenses, including an adjustment for depreciation based on
acquisition price associated with all investments acquired in 1997,
assuming the investments were acquired at the beginning of the period.
<TABLE>
<CAPTION>
Acquisition
Investment Date
---------- ------------
<S> <C>
Greenway II office property 1/17/1997
Trammell Crow Center office property 2/28/1997
Three Denver office properties 2/28/1997
Carter-Crowley Real Estate Assets 5/9/1997
Magellan Real Estate Assets (i) 6/17/1997
The Woodlands (ii) (iii) 7/31/1997
Desert Mountain (iv) 8/29/1997
Houston Center mixed-use property complex 9/22/1997
Four Seasons Hotel - Houston hotel property (v) 9/22/1997
Miami Center office property 9/30/1997
U.S. Home Building office property 10/15/1997
Bank One Center office property (vi) 10/22/1997
Refrigerated Warehouse Investment (vii) 10/31/1997
Fountain Place office property 11/7/1997
Ventana Country Inn hotel property (v) 12/19/1997
Energy Centre office property 12/22/1997
</TABLE>
(i) Calculated to reflect the lease payment from the behavioral
healthcare facilities' lessee to the Company by applying the rent
provisions (as set forth in the facilities' lease agreement).
Rent provisions include no percentage rent component.
(ii) The Company has an indirect 40.375% (after sale of voting common
stock to COI) non-voting equity investment in the limited
partnership whose primary holding consists of The Woodlands land
assets.
(iii) The Company has a 42.5% equity investment in the limited
partnership whose primary holding consists of The Woodlands
commercial property assets.
(iv) The Company has an indirect 88.35% (after sale of voting common
stock to COI) non-voting equity investment in the limited
partnership that owns Desert Mountain.
(v) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Company calculated on a
pro forma basis by applying the rent provisions (as defined in
the lease agreement). Rent provisions attributable to percentage
rent were applied based on gross revenue thresholds, as defined,
in excess of historical revenues.
(vi) The Company has a 50% equity investment in the partnership that
owns Bank One Center office property.
(vii) The Company has an indirect 38% (after the sale of voting common
stock to COI) non-voting equity investment in two corporations
that own the refrigerated warehouse properties.
F-50
<PAGE> 59
(C) Reflects the historical incremental rental income and operating
expenses, including an adjustment for depreciation based on
acquisition price associated with the 1998 acquired and pending
investments, assuming the investments were acquired at the beginning
of the period.
<TABLE>
<S> <C>
Austin Centre office property 1/23/1998
Omni Austin Hotel property (i) 1/23/1998
Post Oak Central office property complex pending
</TABLE>
(i) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Company calculated
on a pro forma basis by applying the rent provisions (as
defined in the lease agreement). Rent provisions
attributable to percentage rent were applied based on gross
revenue thresholds, as defined, in excess of historical
revenues.
(D) Reflects the estimated casino/hotel properties' lease payment by
using Station's fiscal third quarter ended December 31, 1997
annualized EBITDA net of lessee leakage calculated as 1.5% of
casino/hotel property rental revenues. This quarter's information
represents the first full quarter of stabilized casino/hotel
operations, as two casinos/hotels commenced operation in 1997.
(E) Increase reflects the incremental interest income associated with
the following, assuming all had occurred at the beginning of the
period.
<TABLE>
<S> <C> <C> <C>
Carter Crowley Notes ($53,365 @ 10%) $ 5,337
Ritz Note ($8,850 @ 18%) 1,593
COI Note ($36,955 @ 12%) 4,435
Residential Development Corp Note ($7,800 @ 10%) 780
Desert Mountain Note ($26,157 @ 12%) 3,139
-----------
Total $ 15,284
Prorated for nine months 11,463
Less: Historical interest income (4,672)
-----------
Total $ 6,791
==========
(F) Reflects the elimination of historical ground lessee's expense,
as a result of the Company acquiring the land underlying Trammell
Crow Center, assuming Trammell Crow Center was acquired at the
beginning of the period. $ (283)
==========
(G) Decrease as a result of the elimination of third party property
management fees which terminated subsequent to acquisition of
certain of the properties. $ (983)
==========
</TABLE>
F-51
<PAGE> 60
(H) Net increase as a result of interest costs for long and
short-term financing, as follows, net of repayment with proceeds
of the Equity Offering to Merrill Lynch in December 1997, the
October 1997 Equity Offering, the September 1997 Note Offering ,
the Equity Offering to UBS in August 1997 and the April and May
1997 Equity Offerings, assuming the borrowings to finance
investment acquisitions and the assumption of debt and repayment,
had all occurred at the beginning of the period.
<TABLE>
<S> <C> <C> <C> <C>
Credit Facility $ 524,050 @ 6.86% $ 35,950
BankBoston Note II 100,000 @ 6.86% 6,860
Bridge Loan 250,000 @ 6.86% 17,150
Note Offering --
6.625% Notes due 2002 150,000 @ 6.625% 9,938
Note Offering --
7.125% Notes due 2007 250,000 @ 7.125% 17,813
Met Life Note 45,000 @ 6.86% 3,087
Chase Manhattan Note 97,100 @ 7.41% 7,195
Station's Refinanced Debt 1,054,200 @ 7.50% 79,065
LaSalle Note I 239,000 @ 7.83% 18,714
LaSalle Note II 161,000 @ 7.79% 12,542
Cigna Note 63,500 @ 7.47% 4,743
Metropolitan Life Note 12,188 @ 8.88% 1,082
LaSalle Note III 115,000 @ 7.82% 8,993
Nomura Funding VI Note 8,716 @ 10.07% 878
Northwestern Life Note 26,000 @ 7.66% 1,992
------------ -----------
Total annual amount $ 3,095,754 $ 226,002
Prorated for nine months 169,501
Less: Capitalized interest (1,351)
Historical interest expense (54,687)
-----------
$ 113,463
==========
(I) Amortization of capitalized costs associated with the September
1997 Note Offering ($4,731 purchaser's discount and $500 other
costs).
Amortization
of Fees
------------
Note Offering -- 6.625% Notes due 2002 $ 392
Note Offering -- 7.125% Notes due 2007 327
-----------
Total $ 719
Prorated for nine months $ 539
==========
(J) Reflects adjustment needed to reflect minority partners' weighted
average 8.76% interest in the net income of the Operating
Partnership less joint venture minority interests assuming
completion of the Equity Offerings at the beginning of the
period. $ (46)
==========
(K) 7% preferred dividend for the $103.5 million of preferred shares
issued in connection with the Station transaction. $ 5,434
==========
(L) Reflects net income per share based on 134,233,392 weighted
average common shares assumed to be outstanding
during the nine months ended September 30, 1997. --
</TABLE>
F-52
<PAGE> 61
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Crescent Real
Estate Equities 1998 Acquired
Company 1996 Acquired 1997 Acquired and Pending Station
Historical (A) Investments (B) Investments (C) Investments (D) Casinos (E)
------------- -------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental property $ 202,003 $ 89,185 $ 225,276 $ 26,163 $ 174,585
Interest and other income 6,858 - - - -
---------- ------------- -------------- ------------ ----------
Total revenues 208,861 89,185 225,276 26,163 174,585
---------- ------------- -------------- ------------ ----------
EXPENSES:
Real estate taxes 20,606 8,176 18,991 3,008 -
Repairs and maintenance 12,292 8,403 23,434 3,445 -
Other rental property operating 40,915 21,346 39,751 5,422 -
Corporate general and administrative 4,674 - - - -
Interest expense 42,926 - - - -
Depreciation and amortization 40,535 12,727 41,368 6,304 74,273
Amortization of deferred financing costs 2,812 - - - -
---------- ------------- -------------- ------------ ----------
Total expenses 164,760 50,652 123,544 18,179 74,273
---------- ------------- -------------- ------------ ----------
Operating income (loss) 44,101 38,533 101,732 7,984 100,312
OTHER INCOME:
Equity in net income of unconsolidated
companies 3,850 - 10,170 - -
---------- ------------- -------------- ------------ ----------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM 47,951 38,533 111,902 7,984 100,312
Minority interests (9,510) (533) - - -
---------- ------------- -------------- ------------ ----------
INCOME BEFORE EXTRAORDINARY ITEM 38,441 38,000 111,902 7,984 100,312
Extraordinary item (1,306) - - - -
---------- ------------- -------------- ------------ ----------
NET INCOME (LOSS) $ 37,135 $ 38,000 $ 111,902 $ 7,984 $ 100,312
========== ============= ============== ============ ==========
Preferred dividend (M)
Net income available to common shareholders
PER COMMON SHARE DATA: (N)
Income before extraordinary item
Extraordinary item
Net income
</TABLE>
<TABLE>
<CAPTION>
Other Pro Forma
Adjustments Consolidated
----------- ------------
<S> <C> <C>
REVENUES:
Rental property $ - $ 717,212
Interest and other income 15,284 (F) 22,142
---------- -----------
Total revenues 15,284 739,354
---------- -----------
EXPENSES:
Real estate taxes - 50,781
Repairs and maintenance - 47,574
Other rental property operating (1,700) (G) 103,650
(2,084) (H)
Corporate general and administrative 5,326 (I) 10,000
Interest expense 181,974 (J) 224,900
Depreciation and amortization - 175,207
Amortization of deferred financing costs 719 (K) 3,531
---------- -----------
Total expenses 184,235 615,643
---------- -----------
Operating income (loss) (168,951) 123,711
OTHER INCOME:
Equity in net income of unconsolidated
companies - 14,020
---------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM (168,951) 137,731
Minority interests (2,952)(L) (12,995)
---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM (171,903) 124,736
Extraordinary item - (1,306)
---------- -----------
NET INCOME (LOSS) $ (171,903) $ 123,430
========== ===========
Preferred dividend (M) (7,245)
-----------
Net income available to common shareholders $ 116,185
===========
PER COMMON SHARE DATA: (N)
Income before extraordinary item $ 0.88
Extraordinary item (0.01)
-----------
Net income $ 0.87
===========
</TABLE>
See accompanying notes to the Pro Forma Consolidated Statement of Operations
F-53
<PAGE> 62
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Company's audited consolidated
historical statement of operations for the year ended December 31, 1996
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1996, assuming the investments
were acquired at the beginning of the period.
<TABLE>
<CAPTION>
Acquisition
Investment Date
---------- -----------
<S> <C>
3333 Lee Parkway office property 1/5/1996
301 Congress Avenue office property (i) 4/18/1996
Central Park Plaza office property 6/13/1996
Canyon Ranch -- Tucson resort property (ii) 7/26/1996
The Woodlands office properties (iii) 7/31/1996
Three Westlake Park office property 8/16/1996
1615 Poydras office property 8/23/1996
Greenway Plaza Portfolio 10/7/1996
Chancellor Park office property 10/24/1996
The Woodlands retail properties (iii) 10/31/1996
Sonoma Mission Inn & Spa hotel property (ii) 11/18/1996
Canyon Ranch -- Lenox resort property (ii) 12/11/1996
160 Spear Street office property 12/13/1996
Greenway I and IA office properties 12/18/1996
Bank One Tower office property 12/23/1996
Frost Bank Plaza office property 12/27/1996
</TABLE>
(i) The Company has a 1% general partner and a 49%
limited partner interest in the partnership that owns 301 Congress
Avenue.
(ii) Historical operations of the hotel or/resort property
were adjusted to reflect the lease payment (base rent
and percentage rent, if applicable) from the hotel
lessee to the Company calculated on a pro forma basis by
applying the rent provisions (as defined in the lease
agreement). Rent provisions attributable to percentage
rent were applied based on gross revenue thresholds, as
defined, in excess of historical revenues.
(iii) The Company had a 75% interest in the partnership that
owns these properties, in 1996. Currently, the Company
has an approximate 85% interest.
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1997, assuming the investments
were acquired at the beginning of the period.
<TABLE>
<CAPTION>
Acquisition
Investment Date
---------- -----------
<S> <C>
Greenway II office property 1/17/1997
Trammell Crow Center office property 2/28/1997
Three Denver office properties 2/28/1997
Carter-Crowley Real Estate Assets 5/9/1997
Magellan Real Estate Assets (i) 6/17/1997
The Woodlands (ii) (iii) 7/31/1997
Desert Mountain (iv) 8/29/1997
</TABLE>
F-54
<PAGE> 63
<TABLE>
<CAPTION>
Acquisition
Investment Date
---------- -----------
<S> <C>
Houston Center mixed-use property complex 9/22/1997
Four Seasons Hotel - Houston hotel property (v) 9/22/1997
Miami Center office property 9/30/1997
U.S. Home Building office property 10/15/1997
Bank One Center office property (vi) 10/22/1997
Refrigerated Warehouse Investment (vii) 10/31/1997
Fountain Place office property 11/7/1997
Ventana Country Inn hotel property (v) 12/19/1997
Energy Centre office property 12/22/1997
</TABLE>
(i) Calculated to reflect the lease payment from the
behavioral healthcare facilities' lessee to the
Company by applying the rent provisions (as set
forth in the facilities' lease agreement). Rent
provisions include no percentage rent component.
(ii) The Company has an indirect 40.375% (after sale
of voting common stock to COI) non-voting equity
investment in the limited partnership whose
primary holding consists of The Woodlands land
assets.
(iii) The Company has a 42.5% equity investment in the
limited partnership whose primary holding
consists of The Woodlands commercial property
assets.
(iv) The Company has an indirect 88.35% (after sale
of voting common stock to COI) non-voting equity
investment in the limited partnership that owns
Desert Mountain.
(v) Historical operations of the hotel property were
adjusted to reflect the lease payment (base rent
and percentage rent, if applicable) from the
hotel lessee to the Company calculated on a pro
forma basis by applying the rent provisions (as
defined in the lease agreement). Rent provisions
attributable to percentage rent were applied
based on gross revenue thresholds, as defined, in
excess of historical revenues.
(vi) The Company has a 50% equity investment in the
partnership that owns Bank One Center office
property.
(vii) The Company has an indirect 38% (after the sale
of voting common stock to COI) non-voting equity
investment in two corporations that own the
refrigerated warehouse properties.
(D) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with the 1998 acquired and pending investments, assuming the
investments were acquired at the beginning of the period.
<TABLE>
<S> <C>
Austin Centre office property 1/23/1998
Omni Austin Hotel property (i) 1/23/1998
Post Oak Central office property complex pending
</TABLE>
(i) Historical operations of the hotel property were
adjusted to reflect the lease payment (base rent
and percentage rent, if applicable) from the
hotel lessee to the Company calculated on a pro
forma basis by applying the rent provisions (as
defined in the lease agreement). Rent provisions
attributable to percentage rent were applied
based on gross revenue thresholds, as defined, in
excess of historical revenues.
(E) Reflects the estimated casino/hotel properties' lease payment by using
Station's third quarter ended December 31, 1997 annualized EBITDA net of
lessee leakage calculated as 1.5% of casino/hotel property rental
revenues.
F-55
<PAGE> 64
This quarter's information represents the first full quarter of stabilized
casino/hotel operations, as two casinos/hotels commenced operations in
1997.
(F) Increase reflects the incremental income associated with the following,
assuming all had occurred at the beginning of the period.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Carter Crowley Notes ($53,365 @ 10%) $ 5,337
Ritz Note ($8,850 @ 18%) 1,593
COI Note ($36,955 @ 12%) 4,435
Residential Development Corp Note ($7,800 @ 10%) 780
Desert Mountain Note ($26,157 @ 12%) 3,139
-------
Total $ 15,284
========
(G) Reflects the elimination of historical ground lessee's expense, as a
result of the Company acquiring the land underlying Trammell Crow
Center, assuming Trammell Crow Center was acquired at the
beginning of the period. $ (1,700)
========
(H) Decrease as a result of the elimination of third party property management
fees which terminated subsequent to acquisition of certain of the
properties. $ (2,084)
========
(I) Increase reflects the estimated incremental general and administrative
costs associated with the increase in personnel due to numerous
acquisitions in 1996 and 1997. $ 5,326
========
(J) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the Equity
Offering to Merrill Lynch in December 1997, the October 1997 Equity
Offering, the September 1997 Note Offering, the Equity Offering to UBS in
August 1997 and the April and May 1997 Equity Offerings, and the 1996
Equity Offerings, assuming the borrowings to finance investment
acquisitions and the assumption of debt and repayment, had all occurred at
the beginning of the period.
Credit Facility $ 524,050 @ 6.86% $ 35,950
BankBoston Note II 100,000 @ 6.86% 6,860
Bridge Loan 250,000 @ 6.86% 17,150
Note Offering --
6.625% Notes due 2002 150,000 @ 6.625% 9,938
Note Offering --
7.125% Notes due 2007 250,000 @ 7.125% 17,813
Met Life Note 45,000 @ 6.86% 3,087
Chase Manhattan Note 97,100 @ 7.41% 7,195
Stations Refinanced Debt 1,054,200 @ 7.50% 79,065
LaSalle Note I 239,000 @ 7.83% 18,714
LaSalle Note II 161,000 @ 7.79% 12,542
Cigna Note 63,500 @ 7.47% 4,743
Metropolitan Life Note 12,188 @ 8.88% 1,082
LaSalle Note III 115,000 @ 7.82% 8,993
Nomura Funding VI Note 8,716 @ 10.07% 878
Northwestern Life Note 26,000 @ 7.66% 1,992
------ --------
Total annual amount $3,095,754 $226,002
Less: Capitalized interest (1,102)
Historical interest expense (42,926)
--------
$181,974
========
</TABLE>
F-56
<PAGE> 65
(K) Amortization of capitalized costs associated with the September 1997 Note
Offering ($4,731 purchaser's discount and $500 other costs).
<TABLE>
<CAPTION>
Amortization
of Fees
------------
<S> <C> <C>
Note Offering -- 6.625% Notes due 2002 $ 392
Note Offering -- 7.125% Notes due 2007 327
-----
Total $ 719
========
(L) Reflects adjustment needed to reflect minority partners' weighted average
8.76% interest in the net income of the Company less joint venture
minority interests assuming completion of the Equity Offerings at the
beginning of the period. $ (2,952)
========
(M) 7% preferred dividend for the $103.5 million of preferred shares issued in
connection with the Station transaction. $ 7,245
========
(N) Reflects net income per share based on 134,233,392 weighted average common
shares assumed to be outstanding during the year ended December 31, 1997. --
</TABLE>
F-57
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
2.01 Agreement and Plan of Merger, dated as of
January 16, 1998, by and between the
Registrant and Station Casinos, Inc.
(previsouly filed)
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated February 10, 1998
(filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated April 23, 1997 (except for Note 5 as to which the
date is June 27, 1997 and Note 14 as to which the date is January 16, 1998),
with respect to the consolidated financial statements of Station Casinos, Inc.
as of March 31, 1997 and 1996 and for each of the three years in the period
ended March 31, 1997, included in this Form 8-K/A into Crescent Real Estate
Equities Company's previously filed Registration Statements No. 33-91438, No.
333-92548, No. 333-3450, No. 333-3452, No. 333-3454, No. 333-13521, No.
333-21905, No. 333-23005, No. 333-33893, No. 333-37273, No. 333-38071, No.
333-37565, No. 333-41049 and No. 333-42417.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 10, 1998
