Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____ to_____.
Commission file number 000-21640
STATION CASINOS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0136443
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2411 West Sahara Avenue, Las Vegas, Nevada 89102
------------------------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (702) 367-2411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
$3.50 Convertible
Preferred Stock,
$0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to the Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates (all
persons other than executive officers or directors) of the registrant
as of May 30, 1997, based on the closing price per share as reported
on the New York Stock Exchange was $185,815,715.
As of May 31, 1997, the registrant has 35,318,057 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants' 1997 Annual Meeting
of Stockholders to be held July 28, 1997 (which has not been filed as
of the date of this filing) are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Station Casinos, Inc. (the "Company") is an established multi-
jurisdictional gaming company that owns and operates five distinctly-
themed casino properties, three of which are located in Las Vegas,
Nevada, one which is located in Kansas City, Missouri and one which is
located in St. Charles, Missouri. The Company also owns and provides
slot route management services in southern Nevada and Louisiana.
Management's growth strategy includes the master-planned expansion of
the Company's existing gaming facilities in Nevada and Missouri, as
well as the evaluation and pursuit of additional development
opportunities in Nevada and other emerging gaming markets.
In Las Vegas, the Company owns and operates Palace Station Hotel
& Casino ("Palace Station"), Boulder Station Hotel & Casino ("Boulder
Station") and Texas Station Gambling Hall & Hotel ("Texas Station").
Palace Station caters primarily to Las Vegas residents and repeat
visitors and aggressively markets itself as "The Local Favorite."
Located on Sahara Avenue adjacent to Interstate 15, Palace Station is
near major attractions on the Las Vegas Strip and downtown Las Vegas.
Boulder Station is situated on 40 acres along the Boulder Highway,
immediately adjacent to Interstate 515, and is strategically located
on the opposite side of Las Vegas from Palace Station. Boulder Station
caters primarily to Las Vegas residents living on the eastern side of
Las Vegas. Texas Station is strategically located on 47 acres at the
corner of Lake Mead Boulevard and Tonopah Highway in North Las Vegas
and draws customers from the rapidly growing North Las Vegas and
Summerlin residential areas. To expand its established presence in the
Las Vegas market, the Company currently is constructing Sunset Station
Hotel & Casino ("Sunset Station"), a Spanish/Mediterranean-themed
hotel-casino located in the Henderson/Green Valley area of Las Vegas.
Sunset Station, which is expected to open in June 1997, will cater
primarily to the rapidly growing Henderson/Green Valley area.
In Missouri, the Company owns and operates Station Casino Kansas
City and Station Casino St. Charles. Station Casino Kansas City, which
commenced operations in January 1997, is situated on 171 acres
immediately east of the heavily traveled Interstate 435 bridge, seven
miles east of downtown Kansas City. Station Casino Kansas City caters
to local customers within the greater Kansas City area, as well as
tourists from outside the region. Station Casino St. Charles is
situated immediately north of the Interstate 70 bridge in St. Charles,
and is strategically located to attract customers from the St. Charles
and greater St. Louis areas, as well as tourists from outside the
region. Management is employing the same operating strategies that
have been successful at the Company's properties in the competitive
Las Vegas market in order to secure a strong presence in the Missouri
markets. The Company is currently expanding Station Casino St.
Charles through an expansion project. See "Project Under Development
and Expansion of Existing Casino Property - Station Casino St.
Charles."
Management's expansion strategy includes the master-planned
expansion of the Company's existing gaming facilities in Nevada and
Missouri, as well as the evaluation and pursuit of additional
development opportunities in Nevada, Missouri, and other emerging
gaming markets. Management believes that the following factors enable
the Company to capitalize on its expertise in the local and repeat
visitor markets as well as on its reputation as a provider of a
high-quality, affordable gaming and entertainment experience.
EXPANSION STRATEGY
SELECTION CRITERIA
Management believes that a highly visible central location,
convenient access and ample parking are critical factors in attracting
local patronage and repeat visitors. Additionally, sites must be large
enough to support multi-phased master-planned growth. The Company
selects sites that are centrally located within a dense population
base so that the facility cannot be cut-off from its primary market.
These sites generally have been adjacent to high-traffic surface
streets and interstate highways. Management believes that each of its
casino properties' locations has provided the Company with a
significant competitive advantage to attract its targeted customer
base.
2
MASTER-PLANNED DEVELOPMENT
Management's expansion strategy includes the master-planned
expansion of its existing and future gaming locations. In designing
project sites, the Company plans and engineers for multi-phased
facility expansion to accommodate future growth and to allow the
Company to develop dominant properties in each market place. A
project's master-planned design typically allows the option of adding
hotel rooms, casino space and non-gaming entertainment such as movie
theaters, additional restaurants, retail shops, and various other
entertainment venues.
EXPANSION AND DEVELOPMENT OPPORTUNITIES
The Company continually evaluates the timing and scope of its
master-planned developments at each of its properties and may
determine from time to time to expand the scope of, improve on or
suspend the implementation of its master plans. These decisions
are dependent upon the availability of financing, competition and
future economic and gaming regulatory environments, many of which are
beyond the Company's control.
The Company also evaluates other development opportunities in
current and emerging gaming markets, including land-based, dockside,
riverboat and Indian gaming opportunities. The Company's decision
whether to proceed with any new gaming development opportunity is
dependent upon future economic and regulatory factors, the
availability of financing and competitive and strategic considerations,
many of which are beyond the Company's control.
PROJECT UNDER DEVELOPMENT AND EXPANSION OF EXISTING CASINO PROPERTY
SUNSET STATION
The Company commenced construction of Sunset Station in late
calendar year 1995 in order to capitalize on its reputation as a
provider of a high-quality gaming experience oriented to the Las Vegas
local and repeat visitor markets. Sunset Station is positioned in the
Las Vegas market as a locals-oriented hotel and casino, strategically
located on the southeast side of Las Vegas in the rapidly growing
Henderson/Green Valley area. While Sunset Station will be
distinguished from the Company's other properties by its
interior and exterior Spanish/Mediterranean-style architecture,
management intends to employ operating strategies consistent with
those employed at its existing casino properties to attract and retain
customers from both the local and repeat visitor markets.
The Sunset Station facility will feature approximately 350,000
square feet of main facility area, plus a 20-story, 467-room hotel
tower and approximately 4,200 parking spaces. The complex will
include an approximately 80,000-square foot casino, with an
anticipated 2,700 slot and video poker machines, 40 gaming tables, a
keno lounge, a 10-table poker room and a 300-seat race and sports book.
The complex will also include five full-service restaurants, themed
to capitalize on the restaurants at the Company's other properties,
an entertainment lounge, additional bars, a tenant buildout for a
microbrewery, a gift shop, a non-gaming video arcade, tenant lease
space for additional restaurants, a high-quality 13-screen movie
theater complex (which opened in May 1996), a child-care facility,
an outdoor swimming pool and an amphitheater, as well as several
fast-food outlets and franchises. The Company entered into a 25-year
lease agreement with Act III Theaters ("Act III"), a premier
national theater operator, whereby Act III has provided all
interior theater construction, operates the theaters and pays the
Company a percentage of the monthly gross sales. The lease prohibits
Act III from operating or developing theaters at gaming facilities
in Las Vegas other than the Company's facilities and provides the
Company the right to participate in future Act III theater developments
at non-gaming facilities in Las Vegas on similar terms. Sunset
Station is expected to open in June 1997.
Patrons will enjoy convenient access to Sunset Station, which is
located on a nearly 100-acre parcel at the intersection of Interstate
515 and Sunset Road. Multiple access points will provide customers
convenient access to the gaming complex and parking areas. Situated in
the path of development along Interstate 515, the major thoroughfare
into Las Vegas from Boulder City and Arizona, the project will have
prominent visibility from the freeway and the Sunset commercial
corridor. In February 1996, a 1.2 million-square foot retail
shopping development opened directly north of the Sunset Station
property. Management believes that this shopping development is the
largest retail mall in Nevada. In addition, several retail "power
centers" are under various stages of development in the vicinity of
Sunset Station which include nationally recognized anchor tenants.
Sunset Station is located approximately nine miles east of McCarran
International Airport and eight miles southeast of Boulder Station.
3
The Company anticipates that the total cost of the Sunset Station
project will be approximately $198 million (excluding net construction
period interest and preopening expenses). The cost of the project has
increased $38 million from the previous estimate of $160 million. The
increased cost is primarily attributable to the Company's decision to
expand the project to include an increase in the number of slot and
video poker machines from 2,300 to 2,700 machines, a tenant buildout
for a microbrewery, enhancements to the streetscape facades, sky
ceilings, stained glass, landscaping and other general interior
upgrades, an increased number of hotel suites, an enhanced outdoor
pool and an amphitheater. In addition, the Company experienced
increased construction costs due in part to the high level of overall
construction activity in Las Vegas. Management believes that the
enhanced project will position the Company as the premier entrant in
the Henderson/Green Valley area and allow the Company to market the
property more effectively and offer its guests a more complete
entertainment experience. The construction of Sunset Station is being
financed through $110 million of non-recourse debt and a $40 million
operating lease provided by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Description of Certain Indebtedness and Capital Stock." At March 31,
1997, the Company had contributed $54 million of equity to the project
and plans to fund all of the remaining construction costs primarily
through additional equity contributions of approximately $33 million.
All such amounts were contributed subsequent to March 31, 1997.
The Company believes that growth in the Henderson/Green Valley
area of Las Vegas will fuel significant growth and expansion
opportunities at Sunset Station that can be implemented on an
incremental basis. The Sunset Station master plan includes a total
of approximately 2,000 hotel rooms, additional restaurants, meeting
space, a parking structure, additional casino space and other
entertainment amenities. The development of the additional facilities
is subject to numerous uncertainties, including future market
conditions, regulatory approvals and ultimate financial viability.
As with any major construction effort, the development of Sunset
Station involves many risks, including shortages of materials or
skilled labor, unforeseen engineering, environmental or geological
problems, work stoppages, labor disputes, weather interferences,
floods and unanticipated cost increases, any of which could give rise
to delays or cost overruns. Construction, equipment or staffing
problems or difficulties in obtaining any of the requisite licenses,
permits, allocations and authorizations from regulatory authorities
could also increase the cost or delay or prohibit the construction of
Sunset Station or otherwise affect the design and features of the
project.
STATION CASINO ST. CHARLES
The Company has commenced construction on certain elements of the
Station Casino St. Charles master plan. In May 1996, the Company
completed construction of an elevated roadway and a 4,000-space
parking garage. In Fall 1996, the Company commenced construction of
the next phase of development at Station Casino St. Charles consisting
of two new gaming vessels which will be located in a newly-formed
backwater protective basin as well as a uniquely designed retail and
entertainment complex (the "St. Charles Expansion Project").
Management estimates that the St. Charles Expansion Project will be
completed by mid-summer of 1998.
Upon completion, the new gaming facility at Station Casino St.
Charles will feature two new gaming vessels which will be located in
the newly-formed backwater basin adjacent to the Missouri River and
the 4,000-space parking garage. Both of the new gaming vessels will be
132 feet wide by 350 feet long and offer gaming on each of two levels,
similar to the Station Casino Kansas City vessels. Combined, the new
vessels will have approximately 3,000 slot and video poker machines
and 190 gaming tables and will comprise over 140,000 square feet of
casino space (compared to 47,000 square feet at the existing vessels).
The new gaming facilities are designed to offer guests a more complete
entertainment experience.
The Company has entered into a non-binding letter of intent with
Gordon Group Holdings, Ltd. (the "Gordon Group") pursuant to which the
Gordon Group will lease from the Company a substantial portion of the
new retail and entertainment complex. The Company selected the Gordon
Group for this project based upon its experience in developing unique
shopping and entertainment destinations, including experience as the
developer of the successful Forum Shops at Caesars Palace. The
Company anticipates that between $50 million and $70 million of
financing will be required by the Gordon Group for the development of
a uniquely styled shopping and entertainment area, including a variety
of specialty retail stores, restaurants and entertainment attractions.
The Company will retain certain space in the entertainment facility
for selected restaurant concepts, a high-quality movie theater, a gift
shop and other customer services as well as passenger ticketing and
back of the house facilities. The gaming facilities and retail and
entertainment space will be accessible from the adjacent 4,000-space
parking structure and elevated roadway. The
4
Company believes that the St. Charles Expansion Project will enable the
Company to leverage the success of its current operations at Station
Casino St. Charles and position itself as the premier facility in the
St. Louis marketplace.
The Company anticipates that the Company's cost for the St.
Charles Expansion Project will be approximately $190 million (excluding
net construction period interest and preopening expenses). Upon
completion of the St. Charles Expansion Project, the new facilities
will replace the existing riverboat, gaming barge and restaurant
facilities. More than one-half of the associated construction costs
are anticipated to be incurred by June 1997. The scope and timing of
this expansion project depend upon several factors, including, but not
limited to, the Company's ability to draw amounts under the reducing
revolving loan agreement, the execution of a definitive development
agreement with the Gordon Group, the Gordon Group's ability to secure
financing, the cash flow generated by the Company's operations
including Station Casino Kansas City, regulatory requirements unique
to the state of Missouri and gaming in general and construction risks.
Additionally, the letter of intent is subject to a 90-day due
diligence period, which expires June 19, 1997, with various
termination provisions. If the Gordon Group fails to proceed with
development of the retail and entertainment complex, the Company plans
to complete a smaller-scale build-out of the retail and entertainment
complex for an estimated cost of $16 million (net of construction
period interest and preopening expenses). No assurances can be given
that the Company and the Gordon Group will enter into a definitive
development agreement with respect to the project, that the Gordon
Group will be able to obtain the necessary financing, that the Gordon
Group will complete the build-out of the complex within the Company's
estimated completion time of mid-summer 1998 or that the Gordon Group
will be able to develop and operate the project successfully.
OPERATING STRATEGY
Management believes that the following key principles have been
integral to its success as a gaming operator and intends to continue
to employ these strategies at each of its various operations.
TARGETED CUSTOMER BASE
The Company's operating strategy emphasizes attracting and
retaining customers primarily from the local and repeat visitor
markets. Palace Station, Boulder Station, Texas Station, Station
Casino Kansas City and Station Casino St. Charles (collectively
the "Casino Properties") attract customers from their local markets
through innovative, frequent and high-profile promotional programs,
focused marketing efforts and convenient locations, and from the
repeat visitor market through aggressive marketing and the development
of strong relationships with specifically targeted travel wholesalers.
Although perceived value initially attracts a customer to the Casino
Properties, actual value generates customer satisfaction and loyalty.
Management believes that actual value becomes apparent during the
customer's visit through an enjoyable, affordable and high-quality
entertainment experience. Las Vegas, which is and has been one of the
fastest growing cities in the United States, is characterized by a
strong economy and demographics which include an increasing number of
retirees and other active gaming customers. This strategy applies as
well to the Missouri markets. The Company believes that its visitor
patrons are also discerning customers who enjoy the Company's value-
oriented, high-quality approach. This is particularly true in Las
Vegas where patrons view the Company's hotel and casino product as a
preferable alternative to attractions located on the Las Vegas Strip
and downtown Las Vegas.
PROVIDE A HIGH-VALUE EXPERIENCE
Because the Company targets the repeat customer, management is
committed to providing a high-value entertainment experience for its
customers in its restaurants, hotels and casinos. Management believes
that the value offered by restaurants at each of the Casino Properties
is a major factor in attracting its local gaming customers, as dining
is a primary motivation for casino visits by many locals. Through
their restaurants, each of which has a distinct theme and
style of cuisine, the Company's Casino Properties offer generous
portions of high-quality food at reasonable prices. In addition, the
Company's operating strategy focuses on slot and video poker machine
play. The Company's target market consists of frequent gaming patrons
who seek not only a friendly atmosphere and convenience, but also
higher than average payout rates. Because locals and repeat visitors
demand variety and quality in their slot and video poker machine play,
the Casino Properties offer the latest in slot and video poker
technology, including several games designed exclusively for the
Company.
As part of its commitment to providing a quality entertainment
experience for its patrons, the Company is dedicated to ensuring a
high level of customer satisfaction and loyalty by providing attentive
customer service in a friendly, casual atmosphere. Management
recognizes that consistent quality and a comfortable atmosphere stem
from
5
the collective care and friendliness of each employee. The
Company, which began as a family-run business, has maintained close-
knit relationships among its management and endeavors to instill among
its employees this same sense of loyalty. Toward this end, management
takes a hands-on approach through active and direct involvement with
employees at all levels. An indication of the value of this approach
is seen by the number of Las Vegas residents seeking employment with
the Company.
MARKETING AND PROMOTION
The Company employs an innovative marketing strategy that utilizes
frequent, high-profile promotional programs in order to attract
customers and establish a high level of name recognition. In addition
to aggressive marketing through television, radio and newspaper
advertising, the Company has created and sponsored such promotions as
the annual Car-A-Day in MayTM, "Paycheck Bonanza" and the "Great
Giveaway," a popular football season contest. These promotions have
become a tradition in the locals market and have had a positive impact
upon the Company's patronage during their respective promotion
periods.
LAS VEGAS CASINO PROPERTIES
PALACE STATION
Palace Station is situated on 39 acres strategically located at
the intersection of Sahara Avenue and Interstate 15, one of Las Vegas'
most heavily traveled areas, and a short distance from the McCarran
International Airport and from major attractions on the Las Vegas Strip
and downtown Las Vegas. With Palace Station's ample parking and its
convenient location, customers are assured easy access to the hotel
and casino, a factor that management believes is particularly
important in attracting and retaining its customers. The Palace
Station complex has approximately 287,000 square feet of main
facility area and features a turn-of-the-century railroad station
theme. The complex includes a 1,028-room hotel, an approximately
84,000-square foot casino, two swimming pools, 3,700 parking spaces
(including 1,900 spaces in two multi-level parking structures), an
approximately 20,000-square foot banquet and convention center, five
full-service restaurants, two fast-food outlets, a 24-hour gift shop
and a non-gaming video arcade. The casino offers approximately 2,220
slot and video poker machines, 53 gaming tables, two keno lounges,
a poker room, a bingo parlor, and a race and sports book.
The hotel features 587 rooms in a modern 21-story tower. Guests in
the tower enjoy a view of the Las Vegas Strip, downtown Las Vegas and
the surrounding mountains. The remaining 441 hotel rooms are located
in low-rise buildings adjoining the tower and casino. Palace Station's
hotel rooms are spacious and well-appointed. Standard tower rooms
average approximately 377 square feet and include a king or queen-size
bed, a vanity and a sitting area. These amenities are offered to
visitors at rates that compare favorably to those at other Las Vegas
hotels. Each of the hotel's two landscaped courtyard areas includes a
swimming pool and a jacuzzi.
Palace Station's five full-service restaurants have a total of over
1,225 seats. These restaurants offer a variety of high-quality food at
reasonable prices, including the 24-hour Iron Horse Cafe (featuring a
Chinese menu in addition to American fare), an all-you-can-eat buffet
known as "The Feast," the Broiler (a steak and seafood restaurant),
the Pasta Palace (an Italian restaurant) and the Guadalajara Bar &
Grille (a Mexican restaurant). Palace Station guests also may take
advantage of the Palace Saloon Piano Bar and the Loading Dock Lounge
which provide music, dancing and entertainment. Quick service meals
and snacks are offered at the Pizza Palace, Samueli's Deli, and Burger
King.
In planning the 1991 addition of the hotel tower, management
created a master plan that provides for the addition of 1,500 new
tower rooms and improved recreational facilities, replacing 441
existing low rise rooms. This, added to the existing 587 tower rooms,
would result in approximately 2,100 hotel rooms at Palace Station.
With this master plan in mind, management reconfigured the facility
and developed a significant portion of the overall infrastructure in
conjunction with the 1991 expansion in order to achieve economies of
scale, reduce costs and minimize disruptions that might be experienced
with future expansion.
The Company has received approvals from the City of Las Vegas for
an expansion of an additional 1,200 hotel rooms and up to 195,000 square
feet of additional public space at Palace Station. With the assistance
of its architectural design consultant, the Company will develop
detailed construction plans and budgets for the Palace Station
expansion project. The Company anticipates that it will engage one or
more general contractors to perform the required construction in
accordance with the Company's plans and budgets. To date, there are
neither definitive construction plans nor budgets
6
for the project, nor has any general contractor been engaged, and the
scope of the project may vary significantly from that which is currently
anticipated. While a significant portion of the requisite infrastructure
is already in place, and the Palace Station site has the capacity for
significant expansion, the Company's decision to complete this expansion
and the master plan is subject to future market and strategic
considerations and the availability of capital.
BOULDER STATION
Boulder Station, which opened in August 1994, is situated on 40
acres strategically located on the opposite side of Las Vegas from
Palace Station. Patrons enjoy convenient access to this facility which
is located on the Boulder Highway and immediately adjacent to the
Interstate 515 interchange. Interstate 515 and the Boulder Highway are
the major thoroughfares into Las Vegas for visitors from Arizona.
Management believes that its highly visible location at this well-
traveled intersection offers a competitive advantage relative to
existing hotels and casinos located on the Boulder Highway. Boulder
Station is located approximately four miles east of the Las Vegas
Strip and approximately four miles southeast of downtown Las Vegas.
The Boulder Station complex has approximately 337,000 square feet of
main facility area and, like Palace Station, features a turn-of-the-
century railroad station theme. The complex includes a 300-room
hotel, an approximately 86,000-square foot casino, 4,350 parking
spaces (including a 1,900-space multi-level parking structure), five
full-service restaurants, several fast-food outlets, a 280-seat
entertainment lounge, eight additional bars, a high-quality 11-screen
movie theater complex, a child-care facility, a swimming pool, a non-
gaming video arcade and a gift shop. The casino offers approximately
2,950 slot and video poker machines, 38 gaming tables, a keno lounge,
a poker room, a bingo parlor and a race and sports book.
Boulder Station's five full-service restaurants have a total of
over 1,400 seats. These restaurants offer a variety of high-quality
food at reasonable prices. Restaurant themes and menus are similar to
Palace Station's, allowing Boulder Station to benefit from the
market acceptance and awareness of this product. Restaurants include
the 24-hour Iron Horse Cafe (featuring a Chinese menu in addition to
American fare), an all-you-can-eat buffet known as "The Feast," the
Broiler (a steak and seafood restaurant), the Pasta Palace (an
Italian restaurant), and the Guadalajara Bar & Grille (a Mexican
restaurant). In addition to these restaurants which are similar to the
offerings at Palace Station, Boulder Station offers fast-food outlets,
including Pizza Palace, Viva Salsa, and China Express. Additionally,
the Company leases space to the operators of such restaurants as
Burger King and Starbuck's Coffee to enhance the customers' dining
selection. Boulder Station's restaurants and bars are located in open
settings that are designed to intermingle the dining and gaming
experience. Boulder Station also is master-planned for expansion,
but the Company's decision to complete this expansion and the master
plan is subject to future market and strategic considerations and the
availability of capital. The Company has delayed commencement of
construction on a 507-room hotel project at Boulder Station.
Management is currently evaluating the timing of this project which
depends significantly on the operating results of the Company,
including Station Casino Kansas City, as well as the Las Vegas
market's ability to absorb significantly increased hotel capacity.
TEXAS STATION
Texas Station, which commenced operations in July 1995, is situated
on 47 acres strategically located at the corner of Lake Mead Boulevard
and Tonopah Highway in North Las Vegas. The facility features a
friendly, "down-home" Texas atmosphere, highlighted by the distinctive
early Texas architecture. Texas Station has approximately 258,000
square feet of main facility area in a low rise complex plus a six
story, 200-room hotel tower and approximately 4,000 parking spaces
(including a recently opened 1,500-space covered parking structure).
The complex includes an approximately 75,000-square foot casino, five
full-service restaurants, several fast-food outlets, a 132-seat
entertainment lounge, seven additional bars, a high-quality 12-screen
movie theater complex, a swimming pool, a non-gaming video arcade and
a gift shop. The casino offers approximately 1,985 slot and video
poker machines, 36 gaming tables, a keno lounge, a poker room, a bingo
parlor which opened in May 1996, and a race and sports book.
Management believes that the theater complex provides a competitive
advantage for the property and is an additional attraction that draws
a significant number of patrons to the facility. Texas Station has
entered into a 25-year lease agreement with Act III with terms
substantially the same as the Sunset Station agreement noted above.
Texas Station's five full-service restaurants have a total of over
1,300 seats. These restaurant facilities offer a variety of high-
quality food at reasonable prices, including the 24-hour Yellow Rose
Cafe (a 24-hour coffee shop), the Stockyard Steakhouse, the Laredo
Cantina and Cafe (a Mexican restaurant), the San Lorenzo (an Italian
restaurant) and the Market Street Buffet (featuring seven different
food stations). In addition to the Texas Station themed restaurants,
guests may also take advantage of the unique features of the Whiskey
Bar with a seven-foot high bronco rider, which
7
rotates on a pedestal and may be viewed by patrons on all sides,
the Garage Bar which features a 1976 fire-engine red Cadillac
Eldorado with seven-foot Texas long-horns on the hood, or the
Armadillo Honky Tonk where a 3,000 piece cut glass armadillo is
the centerpiece of a dance hall. The facility also offers fast-food
outlets, including a pizza kitchen and deli. Management believes
that the quality and variety of the restaurants offered at the
facility are a major draw in the rapidly growing North Las Vegas
and Summerlin markets.
In December 1996, the Company completed construction of an
approximately $7 million multi-level parking structure which added
approximately 1,500 parking spaces. This addition was designed to
alleviate parking constraints during peak periods and has resulted in
improved customer traffic at the facility. To accommodate future
expansion, Texas Station has been master-planned for additional hotel
rooms, casino space and entertainment facilities.
MISSOURI CASINO PROPERTIES
STATION CASINO KANSAS CITY
Station Casino Kansas City commenced operations in January 1997.
This facility is a master-planned gaming and entertainment destination
facility featuring a historic Missouri riverboat theme and is
strategically located to attract customers from the greater Kansas
City area as well as tourists from outside the region. The facility
is located on a 171-acre site immediately east of the heavily traveled
Interstate 435 bridge, seven miles east of downtown Kansas City, one
mile south of Worlds of Fun and Oceans of Fun Amusement Parks, six
miles north of the Truman Sports Complex, which includes Arrowhead
Stadium and Kauffman Stadium, and 12 miles from the Kansas City
International Airport. Station Casino Kansas City's marketing
programs are specifically designed to effectively target and capture
repeat customer demand from the local customer base and also emphasize
the strong visitor and overnight markets. Management believes that
Station Casino Kansas City has specific advantages relative to both
existing and future riverboat facilities in the region and that it is
the premier facility in the Kansas City market. The site is adjacent
to the Interstate 435 bridge, which supports traffic flow of
approximately 71,000 cars per day. Interstate 435 is a six-lane, north-
south expressway offering quick and easy accessibility to the site,
and also provides direct visibility of the site. The high visibility
and easy access to the Station Casino Kansas City site helps attract
auto travelers who are visiting the theme parks and sports facilities
along this entertainment corridor.
The Station Casino Kansas City facility features two continuously
docked gaming vessels situated in a man-made protective basin. The
two gaming facilities feature approximately 140,000 square feet of
gaming space that offers approximately 3,300 slot and video poker
machines and 190 gaming tables and a poker room. Station Casino
Kansas City is the fourth largest casino in the United States in terms
of casino square footage and the Company believes the facility offers
the first Las Vegas-style gaming experience in the Midwest. The
gaming facilities are docked adjacent to a land-based entertainment
facility with approximately 526,000 square feet of main facility area
which includes a 200-room hotel, seven full-service restaurants,
several fast-food outlets, 11 bars and lounges, a 1,400-seat Grand
Pavillion featuring headline entertainment, a Kid's Quest child-care
facility, a gift shop and parking for 5,000 vehicles. Act III is
currently constructing a high-quality 18-screen movie theater complex
adjacent to the facility pursuant to a long-term ground lease and the
Company is completing a 5,700-square foot non-gaming video arcade and
midway operated by Sega Game Works both of which are scheduled to open
in July 1997.
Station Casino Kansas City's restaurants offer a variety of high-
quality food at reasonable prices. Restaurants include an all-you-can-
eat live action buffet "Feast Around the World," featuring Italian,
Mexican, Chinese, barbecue, and traditional American fare, Bugatti's
Little Italy Cafe, featuring fine Italian cuisine and a wine bar with
an extensive selection, Pancho Villa's Cantina, featuring southwestern
foods guided by culinary sensation Mark Miller of Sante Fe, the
Orleans Seafood Co. and Oyster Bar, featuring fresh Louisiana style
seafood, managed by renowned Chef Paul Prudhomme and the Hafbrauhaus
Brewery & Biergarten featuring a wide selection of micro-brewed
lagers, an assortment of American and Bavarian cuisine and live
entertainment. In addition, Station Casino Kansas City leases space
to two well-known Kansas City favorites, Arthur Bryant's Barbeque and
The Phoenix Piano Bar & Grill, known as one of the best jazz clubs in
the city. Additionally, the complex offers the Morning Glory Coffee
Cafe and Bakery featuring Starbuck's Coffee and fresh-baked goods and
the Royal Chieftan Cigar Co., offering a wide variety of fine cigars
and cigar accessories.
The Company believes that Station Casino Kansas City offers
significant growth and expansion opportunities that can be implemented
on an incremental basis. The project is master-planned for multi-
phased growth including additional
8
hotel rooms, restaurants and other entertainment facilities. The
development of the additional facilities is subject to numerous
uncertainties, including future market conditions, regulatory
approvals and ultimate financial viability.
STATION CASINO ST. CHARLES
Station Casino St. Charles commenced operations in May 1994. Station
Casino St. Charles is a master-planned gaming and entertainment
complex featuring a historic riverboat theme. Station Casino St.
Charles is situated immediately north of the Interstate 70 bridge in
St. Charles on approximately 52 acres owned by the Company. The
Station Casino St. Charles complex is strategically located to attract
customers from the St. Charles and greater St. Louis area, as well as
tourists from outside the region. Management believes that this
location offers the Company certain competitive advantages relative to
both existing and future riverboat facilities in the region. The site
is adjacent to the Interstate 70 bridge. Interstate 70 is a 10-lane,
east-west expressway offering quick and easy accessibility to and
direct visibility of the Station Casino St. Charles site. Furthermore,
the Station Casino St. Charles location is approximately seven miles
from St. Louis' airport, offering convenience to the air traveler and
access to the large number of hotel rooms in the area, approximately
4,750 of which surround the airport.
Station Casino St. Charles currently features two gaming vessels - a
292-foot long by 74-feet wide gaming riverboat known as "The Station
Casino Belle" and a floating two-story, 105,000-square foot gaming and
entertainment facility. The two current gaming vessels have 47,000
square feet of gaming space with capacity for 4,000 gaming customers,
as well as food and beverage and other related facilities. Station
Casino St. Charles offers approximately 1,810 slot and video poker
machines, 85 gaming tables and a poker room. Station Casino St.
Charles features a 250-seat all-you-can-eat buffet known as "The
Feast," as well as an 80-seat specialty steakhouse known as "The
Broiler." In addition to the casinos and restaurants, the facility
offers seven bars, a fast-food court, an entertainment lounge, a
lobby, a ticketing facility and a gift shop. The Company has
commenced the St. Charles Expansion Project, which is ultimately
intended to replace the existing facilities at Station Casino St.
Charles upon completion of such project.
Capitalizing on its operating experience in Las Vegas, the facility
has emphasized convenience in offering two separate gaming facilities.
In doing so, the Company is able to stagger its two hour cruises to
begin each hour of the day from nine in the morning until two the
following morning, seven days a week. With a 45 minute boarding time,
the longest a customer has to wait is 15 minutes to enter a gaming
facility. Additionally, the Company received approval for continuously
docked gaming on each of the gaming facilities. In Missouri,
continuously docked gaming requires "simulated cruising," which allows
customers to board only at certain specified times, however, the
customer may leave at any time, which is significantly more convenient
for the customer.
In furtherance of the Station Casino St. Charles master plan, the
Company completed construction of a new elevated roadway and a 4,000-
space five-story parking structure in May 1996. This project includes
a turn-around deck and porte-cochere. The parking facility is
constructed above the existing flood plain and provides the
infrastructure for the current facilities as well as the St. Charles
Expansion Project. The elevated roadway and parking structure provide
improved access to the current and new gaming facilities and
significantly diminish Station Casino St. Charles' susceptibility to
closure during the spring flooding season. This was evidenced in May
1996 when flooding on the Missouri River occurred and the parking
garage and elevated roadway served one of its intended purposes in
minimizing business disruption caused by the flood.
In addition, Station Casino St. Charles has been chosen by the City of
St. Charles, Missouri as the redeveloper of a designated Redevelopment
Project Area (the "TIF District") totaling approximately 107 acres
adjacent to Station Casino St. Charles. In connection with this
redevelopment, Station Casino St. Charles has entered into an
agreement for property acquisition with the City of St. Charles that
allows for the acquisition by Station Casino St. Charles of the
property within the TIF District. This agreement designated Station
Casino St. Charles as the city's agent to acquire property using the
city's power of eminent domain, and required, subject to certain
limitations, Station Casino St. Charles to initiate eminent domain
proceedings on all property in the TIF District by March 22, 1997.
Station Casino St. Charles has initiated, completed or, with the
consent of the City of St. Charles, dismissed eminent domain
proceedings on all land in the designated Phase I of the TIF District
(approximately 40 acres). This land has been or may be acquired for
the construction of a mixed-use development, which may include retail
space, a hotel, office space, convention space, or restaurants.
Eminent domain proceedings on all land in the designated Phase II and
III of the TIF District have been postponed or suspended in light of
the condemnation awards in the Phase I proceedings. The property
acquisition agreement provides Station Casino St. Charles with the
right to terminate this agreement in the event the cost to purchase
the property, relocate existing tenants and demolish existing
structures exceeds $13.7 million.
9
THE SOUTHWEST COMPANIES
The Company provides slot route management services to numerous food
and beverage establishments and commercial businesses in southern
Nevada and Louisiana through its subsidiary, Southwest Gaming
Services, Inc. (''SGSI''). (SGSI, together with Southwest Services,
Inc. (''SWSI") and their respective subsidiaries, the ''Southwest
Companies'').
SGSI commenced its slot route business in southern Nevada in December
1990. Management combined its gaming experience with its route
management abilities from SWSI to capitalize on the rapidly expanding
slot route business. SGSI has approximately 720 machines in service
throughout southern Nevada. In July 1992, SGSI entered into a
joint venture with a corporation owned by certain Louisiana residents
to form Southwest Gaming of Louisiana (''SGLA''), in which SGSI owns a
49% equity interest. SGLA operates approximately 90 video poker machines
at Louisiana Downs Race Track (''Louisiana Downs'') and over 210 machines
at other locations in Louisiana. The Company's contract with Louisiana
Downs expires in June 1997 and will not be renewed. Due to the addition
of three riverboat gaming facilities in Shreveport Louisiana, revenues
and operating cash flows from the Company's Louisiana joint venture have
significantly declined.
COMPETITION
The gaming industry includes land-based casinos, dockside casinos,
riverboat casinos, casinos located on Indian reservations and other
forms of legalized gaming. There is intense competition among
companies in the gaming industry, many of which have significantly
greater resources than the Company. Certain states have recently
legalized, and several other states are currently considering
legalizing, casino gaming in designated areas. Legalized casino
gaming in such states and on Indian reservations will provide strong
competition to the Company and could adversely affect the Company's
operations, particularly to the extent that such gaming is conducted
in areas close to the Company's operations.
Palace Station, Boulder Station and Texas Station face competition
from all other casinos and hotels in the Las Vegas area, including to
some degree, from each other. Sunset Station will face similar
competition. Such competition includes at least eight hotel-casinos
targeted primarily towards local residents and repeat visitors, as
well as numerous non-hotel gaming facilities targeted towards local
residents. The Company competes with other locals oriented hotel-
casinos by focusing on repeat customers and attracting these customers
through innovative marketing programs, which include the annual Car-A-
Day in MayTM promotion. The Company's value-oriented, high-quality
approach is designed to generate repeat business. Additionally, the
casino properties are strategically located and designed to permit
convenient access and ample parking, which are critical factors in
attracting local visitors and repeat patrons. In recent months,
several of the Company's direct competitors who cater to the "locals"
market have completed major expansion projects, and other expansions
are in progress or are planned. Currently, there are approximately 27
major gaming properties located on or near the Las Vegas Strip, 14
located in the downtown area and several located in other areas of Las
Vegas. In the past year, four large hotel-casinos have opened on or
near the Las Vegas Strip. In addition, nine new hotel-casinos and
three hotel-casino expansions are under construction or have been
announced, which will add approximately 21,000 rooms to the Las Vegas
area over approximately the next two years. Five of the new hotel-
casinos are major resorts with a theme and an attraction which are
expected to draw significant numbers of visitors. These new
facilities could have a positive effect on Palace Station, Boulder
Station, Texas Station and Sunset Station if more visitors are drawn
to Las Vegas. Any other major additions, expansions or enhancements
of existing properties or the construction of new properties by
competitors, could have a material adverse effect on the businesses of
Palace Station, Boulder Station, Texas Station and Sunset Station.
The additional capacity has had little, if any, impact on Palace
Station's, Boulder Station's or Texas Station's hotel occupancy or
casino volume to date, although there can be no assurance that hotel
occupancy or casino volume will not be adversely affected in the
future.
The Company's Las Vegas casino properties face more direct competition
from eight hotel-casinos primarily targeted to the local and the
repeat visitor markets. Many of these competitors have completed
major expansions and existing competitors and new entrants into these
markets are in the planning stages or well under construction.
Although the Company has competed strongly in these marketplaces,
there can be no assurance that this additional capacity will not have
a negative impact on the Company.
10
The Missouri Gaming Commission has been empowered to determine the
number of gaming licenses supportable by the region's economic
situation. As of March 31, 1997, 38 applications for gaming licenses
had been filed with the State of Missouri, including 12 applications
to operate in the St. Louis marketplace. 16 of these 38 applicants
have been granted a license, permitting gaming operations in St.
Louis, Kansas City, St. Joseph and Caruthersville, Missouri. Station
Casino St. Charles competes primarily with other gaming operations in
and around St. Louis, Missouri. Currently, in addition to Station
Casino St. Charles, there are four facilities operating in the St.
Louis market, including a facility in Maryland Heights which opened in
March 1997. In particular, the Company expects that Station Casino
St. Charles will be directly impacted by competition from the facility
located in Maryland Heights due to its size, quality and close
proximity. While the Company has experienced a decline in revenues at
Station Casinos St. Charles since the opening of the Maryland Heights
facility, the Company is taking steps to mitigate the effects of such
competition, including undertaking the St. Charles Expansion Project.
Additionally, two of the four competitors operating in the St. Louis
market are located in Illinois, which does not impose a $500 loss
limit. Gaming also has been approved by local voters in jurisdictions
near St. Louis, including St. Charles, Jefferson City and other cities
and counties along the Mississippi and Missouri Rivers. Any new
gaming operations developed near St. Louis would likely provide
significant competition to Station Casino St. Charles. Gaming laws in
surrounding states and in other areas may be amended in ways that
would increase the competition to Station Casino St. Charles. This
increasing competition could have a material adverse effect on the
Company's business.
Recently, Davis Gaming was selected for investigation for
licensure for a gaming operation which it intends to develop in
Boonville, Missouri, a city in central Missouri near Jefferson City
and Columbia, and Mark Twain Casino L.L.C. was selected for
investigation for licensure for a gaming operation which it intends to
develop in LaGrange, Missouri, a city in northeastern Missouri.
Neither area is currently served by a Missouri gaming facility.
Station Casino Kansas City competes primarily with other gaming
operations in and around Kansas City, Missouri. Currently there are
five gaming facilities operating in the Kansas City market. Earlier
entrants to the Kansas City market may have an advantage over the
Company due to their ability to establish early market share. Gaming
has been approved by local voters in jurisdictions near Kansas City,
including St. Josephs (which currently has one riverboat gaming
operation), Jefferson City and other cities and counties along the
Missouri River. Any new gaming operations developed near Kansas City
would likely provide significant competition to Station Casino Kansas
City.
Several companies are engaging in riverboat gaming in states
neighboring Missouri. Illinois sites, including Alton, East St.
Louis, and Metropolis, enjoy certain competitive advantages over
Station Casino St. Charles because Illinois, unlike Missouri, does not
impose limits on the size of losses and places fewer restrictions on
the extension of credit to customers. In contrast, Missouri gaming
law provides for a maximum loss of $500 per player on each cruise and
prohibits the extension of credit (except credit cards and checks).
Unlike Illinois gaming law, the Missouri gaming law places no limits
on the number of gaming positions allowed at each site. As of March
31, 1997, Illinois had approved a total of ten licenses. While
riverboats currently are the only licensed form of casino-style gaming
in Illinois and the number of licenses is restricted to ten, possible
future competition may arise if gaming is legalized in or around
Chicago, which was specifically excluded from the legislation
permitting gaming in Illinois.
The Company's Missouri gaming operations also compete to a lesser
extent with the riverboat and floating gaming facilities in
Mississippi, Louisiana, Iowa and Indiana. Like Illinois, neither
Mississippi nor Louisiana gaming legislation imposes limits on wagers
or losses. Mississippi had 33 licensed riverboats and three pending
applications as of March 31, 1997. In addition, Mississippi has one
land-based casino located on Indian lands. In Louisiana, 15 licenses
for gaming vessels have been granted, which is the maximum number of
licenses currently authorized in the state, and 12 vessels have
commenced operations. The opening of three riverboat gaming
facilities in Shreveport, Louisiana, has had a negative impact on the
revenues and cash flows of the Company's Louisiana joint venture.
Gaming laws in these surrounding states and in other areas may be
amended in ways that would increase the competition to the Company's
Missouri gaming operations.
To a lesser extent, the Company's operations compete with gaming
operations in other parts of the state of Nevada, such as Reno,
Laughlin and Lake Tahoe, with facilities in Atlantic City, New Jersey
and other parts of the world and with state-sponsored lotteries, on-
and-off-track pari-mutuel wagering, card parlors and other forms of
legalized gambling.
11
REGULATION AND LICENSING
NEVADA GAMING REGULATIONS
The ownership and operation of casino gaming facilities, the operation
of gaming device routes and the manufacture and distribution of gaming
devices in Nevada are subject to: (i) the Nevada Gaming Control Act
and the rules and regulations promulgated thereunder (collectively,
the ''Nevada Act''); and (ii) various local ordinances and
regulations. The Company's gaming operations are subject to the
licensing and regulatory control of the Nevada Gaming Commission
(''Nevada Commission''), the Nevada State Gaming Control Board
(''Nevada Board''), the City of Las Vegas, the Clark County Liquor and
Gaming Licensing Board (the ''Clark County Board''), the City of North
Las Vegas, the City of Henderson and certain other local regulatory
agencies. The Nevada Commission, the Nevada Board, the City of Las
Vegas, the Clark County Board, the City of North Las Vegas, the City
of Henderson, and certain other local regulatory agencies are
collectively referred to as the ''Nevada Gaming Authorities.''
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are
concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with
gaming at any time or in any capacity; (ii) the establishment and
maintenance of responsible accounting practices and procedures; (iii)
the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal controls and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state
and local revenues through taxation and licensing fees. Change in
such laws, regulations and procedures could have an adverse effect on
the Company's gaming operations.
The Company's direct and indirect subsidiaries that conduct gaming
operations in Nevada are required to be licensed by the Nevada Gaming
Authorities. The gaming licenses require the periodic payment of fees
and taxes and are not transferable. SGSI is licensed as a distributor
and as an operator of a slot machine route. Palace Station, Boulder
Station, Texas Station, and Sunset Station have received licenses to
conduct nonrestricted gaming operations. Town Center Amusements, Inc.
("TCAI") has been licensed to conduct nonrestricted gaming operations
at Barley's Casino & Brewing Company, a micro brewery and casino
located in Southeast Las Vegas. The Company's ownership in TCAI is
held through an intermediary company known as Green Valley Station,
Inc. ("GVSI") which is licensed as a member and Manager of TCAI. The
Company is registered by the Nevada Commission as a publicly traded
corporation (a ''Registered Corporation'') and has been found suitable
to own the stock of Palace Station, Boulder Station, Texas Station,
Sunset Station, GVSI, and SGSI. The Company is also licensed as a
manufacturer and distributor. Palace Station, Boulder Station, Texas
Station, Sunset Station, GVSI and SGSI are each a corporate gaming
licensee and TCAI is a limited liability company licensee
(individually a ''Gaming Subsidiary'' and collectively the ''Gaming
Subsidiaries'') under the terms of the Nevada Act. As a Registered
Corporation, the Company is required periodically to submit detailed
financial and operating reports to the Nevada Commission and the
Nevada Board and furnish any other information which the Nevada
Commission or the Nevada Board may require. No person may become a
stockholder or holder of an interest of, or receive any percentage of
profits from the Gaming Subsidiaries without first obtaining licenses
and approvals from the Nevada Gaming Authorities. The Company and the
Gaming Subsidiaries have obtained from the Nevada Gaming Authorities
the various registrations, findings of suitability, approvals, permits
and licenses (collectively, the "Gaming Licenses") required in order
to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered
Corporation, such as the Company or the Gaming Subsidiaries, which
holds a license, in order to determine whether such individual is
suitable or should be licensed as a business associate of a Registered
Corporation or a gaming licensee. Officers, directors and certain key
employees of the Gaming Subsidiaries must file applications with the
Nevada Gaming Authorities and may be required to be licensed or found
suitable by the Nevada Gaming Authorities. Officers, directors and
key employees of the Company who are actively and directly involved in
gaming activities of the Gaming Subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for
any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed
personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in
licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a
finding of suitability or licensure, the Nevada Gaming Authorities
have jurisdiction to disapprove a change in corporate position.
12
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue to
have a relationship with the Company or the Gaming Subsidiaries, the
companies involved would have to sever all relationships with such
person. In addition, the Nevada Commission may require the Company or
the Gaming Subsidiaries to terminate the employment of any person who
refuses to file the appropriate applications. Determinations of
suitability or questions pertaining to licensing are not subject to
judicial review in Nevada.
The Company, Palace Station, Boulder Station, Texas Station, Sunset
Station, TCAI and SGSI are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing
transactions by Palace Station, Boulder Station, Texas Station, Sunset
Station, TCAI and SGSI must be reported to or approved by the Nevada
Commission and/or the Nevada Board.
If it were determined that the Nevada Act was violated by a Gaming
Subsidiary, the gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company, the
Gaming Subsidiaries and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate Palace Station, Boulder
Station, Texas Station, Sunset Station, and Barley's Casino and, under
certain circumstances, earnings generated during the supervisor's
appointment (except for reasonable rental value of the casino) could
be forfeited to the State of Nevada. Limitation, conditioning or
suspension of the gaming licenses of the Gaming Subsidiaries or the
appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect the Company's gaming
operations.
Any beneficial owner of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have their suitability as a beneficial owner of the
Company's voting securities determined if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent
with the declared policies of the state of Nevada. The applicant must
pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act provides that persons who acquire beneficial ownership
of more than 5% of the voting securities of a Registered Corporation
must report the acquisition to the Nevada Commission. The Nevada Act
also requires that beneficial owners of more than 10% of the voting
securities of a Registered Corporation must apply to the Nevada
Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such
filing. An ''institutional investor,'' as defined in the Nevada
Commission's regulations, which acquires beneficial ownership of more
than 10%, but not more than 15% of the Company's voting securities
may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities
for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of
business as an institutional investor and not for the purpose of
causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management policies or operations
of the Company, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the
Company's voting securities for investment purposes only. Activities
which are not deemed to be inconsistent with holding voting securities
for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management,
policies or operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found
suitable is a corporation, partnership or trust, it must submit
detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the
Nevada Commission or the Chairman of the Nevada Board, may be found
unsuitable. The same restrictions apply to a record owner if the
record owner, after request, fails to identify the beneficial owner.
Any stockholder who is found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the common stock beyond such
period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary
action if, after it receives notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or
the Gaming Subsidiaries, the Company (i) pays that person any dividend
or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pay remuneration in any
form to that person for services rendered or otherwise, or (iv) fails
to pursue all lawful efforts to require such unsuitable person
to relinquish his voting
13
securities including, if necessary, the immediate purchase of said
voting securities for cash at fair market value. Additionally, the Clark
County Board has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
If the Nevada Commission determines that a person is unsuitable to own
such security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its approvals, if
without the prior approval of the Nevada Commission, it: (i) pays to
the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person
in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
The Nevada Commission may, in its discretion, require the holder of
any debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a
Registered Corporation if the Nevada Commission has reason to believe
that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. If the Nevada Commission determines
that a person is unsuitable to own such security, then pursuant to the
Nevada Act, the Registered Corporation can be sanctioned, including
the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time.
If any securities are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make
such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance
in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates
to bear a legend indicating that the securities are subject to the
Nevada Act. However, to date, the Nevada Commission has not imposed
such a requirement on the Company.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. On March 20, 1997, the Nevada
Commission granted the Company prior approval to make offerings under
a Shelf Registration for a period of two years, subject to certain
conditions (''Shelf Approval''). However, the Shelf Approval may be
rescinded for good cause without prior notice upon the issuance of an
interlocutory stop order by the Chairman of the Nevada Board and must
be renewed at the end of the two year approval period. The Shelf
Approval also applies to any affiliated company wholly-owned by the
Company (an ''Affiliate'') which is a publicly traded corporation or
would thereby become a publicly traded corporation pursuant to a
public offering. The Shelf Approval also includes approval for the
Gaming Subsidiaries to guarantee any security issued by, or to
hypothecate their assets to secure the payment or performance of any
obligations issued by, the Company or an Affiliate in a public
offering under the Shelf Approval. The Shelf Approval does not
constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act
or conduct by a person whereby such person obtains control, may not
occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy
the Nevada Board and the Nevada Commission that they meet a variety of
stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate
defense tactics affecting Nevada corporate gaming licensees, and
Registered Corporations that are affiliated with those operations, may
be injurious to stable and productive corporate gaming. The Nevada
Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Nevada's
gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form;
14
and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before a
Registered Corporation can make exceptional repurchases of voting
securities above the current market price thereof and before a
corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization
proposed by the Registered Corporation's Board of Directors in response
to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the state of Nevada and
to the counties and cities in which the Nevada licensee's respective
operations are conducted. Depending upon the particular fee or tax
involved, these fees and taxes are payable either monthly, quarterly
or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or
(iii) the number of table games operated. A casino entertainment tax
is also paid by casino operations where entertainment is furnished in
connection with the selling of food or refreshments. Nevada licensees
that hold a license as an operator of a slot route, or manufacturer's
or distributor's license also pay certain fees and taxes to the state
of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively, ''Licensees''), and who proposes to become
involved in a gaming venture outside of Nevada, is required to deposit
with the Nevada Board, and thereafter maintain, a revolving fund in
the amount of $10,000 to pay the expenses of investigation by the
Nevada Board of their participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of
the Nevada Commission. Thereafter, licensees are required to comply
with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada
Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards
of honesty and integrity required of Nevada gaming operations, engage
in activities that are harmful to the state of Nevada or its ability
to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in
Nevada on the grounds of personal unsuitability. The loss or
restriction of the Company's gaming licenses in Nevada would have a
material adverse effect on its business and could require the Company
to cease gaming operations in Nevada.
NEVADA LIQUOR REGULATIONS
The sale of alcoholic beverages at Palace Station and Boulder Station
are subject to licensing, control and regulation by the City of Las
Vegas and the Clark County Board, respectively. Texas Station is
subject to licensing control and regulation of the City of North Las
Vegas. Sunset Station is subject to the licensing, control and
regulation of the City of Henderson. Barley's Casino is subject to
licensing control and regulation of the City of Henderson and the
Department of Treasury, Bureau of Alcohol, Tobacco and Firearms. All
licenses are revocable and are not transferable. The agencies
involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation
would) have a material adverse effect on the operations of the Gaming
Subsidiaries.
MISSOURI GAMING REGULATIONS
Gaming was originally authorized in the State of Missouri and the City
of St. Charles on November 3, 1992, although no governmental action
was taken to enforce or implement the original law. On April 29, 1993,
Missouri enacted the Missouri Gaming Law which replaced the original
law and established the Missouri Gaming Commission, which is
responsible for the licensing and regulation of riverboat gaming in
Missouri. The Missouri Gaming Commission has discretion to approve
gaming license applications for both permanently moored ("dockside")
riverboat casinos and powered ("excursion") riverboat casinos. On
September 20, 1993, the Company filed its initial application with the
Missouri Gaming Commission for either a dockside or a cruising gaming
license in St. Charles, Missouri, which license was issued on May 27,
1994, thereby making the Company one of the first two entrants in the
Missouri riverboat gaming market.
However, due to both a January 25, 1994, ruling by the Missouri Supreme
Court which held that games of chance, including certain games
authorized under the Missouri Gaming Law such as bingo and keno,
constitute "lotteries" and were therefore prohibited under the
Missouri Constitution and the failure of a state wide election on
April 5, 1994, to adopt a constitutional amendment that would have
exempted excursion boats and floating facilities from such
constitutional prohibition on lotteries, the Company commenced
operations only with those games which involve some
15
element of skill ("limited gaming"), such as poker and blackjack,
that would be constitutionally permissible. The authorization of both
games of skill and games of chance ("full-scale gaming") occurred on
November 9, 1994, with passage by Missouri voters of a constitutional
amendment virtually identical to the measure which was defeated on
April 5, 1994. Full-scale gaming became effective on December 9, 1994,
and by the end of December 1994, the Company was conducting full scale
gaming on both its excursion and dockside casinos in St. Charles, Missouri.
Opponents of gaming in Missouri have brought several legal challenges
to gaming in the past and may possibly bring similar challenges in the
future. There can be no assurances that any future challenges, if
brought, would not further interfere with full-scale gaming operations
in Missouri, including the operations of the Company and its
subsidiaries.
On January 16, 1997, the Missouri Gaming Commission granted Station
Casino Kansas City a Class A and Class B Excursion Gambling Boat
license to own and operate the River King and River Queen floating
gaming facilities.
Under the Missouri Gaming Law, the ownership and operation of
riverboat gaming facilities in Missouri are subject to extensive state
and local regulation. By virtue of its gaming license in Missouri,
the Company, any subsidiaries it has or it may form and certain of its
officers and employees are subject to the Missouri Gaming Law and the
regulations of the Missouri Gaming Commission.
As part of the application and licensing process for a gaming license,
the applicant must submit detailed financial, operating and other
reports to the Missouri Gaming Commission. Each applicant has an
ongoing duty to update the information provided to the Missouri Gaming
Commission in the application. In addition to the information
required of the applicant, directors, officers and other key persons
must submit Personal Disclosure Forms which include detailed personal
financial information and are subject to thorough investigations. All
gaming employees must obtain an occupational license issued by the
Missouri Gaming Commission. The operators' licenses are issued
through application to the Missouri Gaming Commission, which requires,
among other things, (a) investigations into an applicant's character,
financial responsibility and experience qualifications and (b) that
applicants furnish (i) an affirmative action plan for the hiring and
training of minorities and women and (ii) an economic development or
impact report. License fees are a minimum of $50,000 for the initial
application and $25,000 annually thereafter.
The Missouri Gaming Commission may revoke or suspend gaming licenses
and impose other penalties for violation of the Missouri Gaming Law
and the rules and regulations which may be promulgated thereunder,
including, without limitation, forfeiture of all gaming equipment used
for improper gaming and fines of up to three times an operator's
highest daily gross adjusted receipts during the preceding twelve
months. The gaming licenses may not be transferred nor pledged as
collateral, and the Missouri Gaming Law regulations bar a licensee
from taking any of the following actions without 15 days' prior notice
to, and approval by, the Missouri Gaming Commission: any issuance of
an ownership interest of five percent or more of the issued and
outstanding ownership interest, any private incurrence of debt by the
licensee or any holding company of $1,000,000 or more, and any public
issuance of debt by a licensee or its holding company. The Missouri
Gaming Commission may reopen the licensing hearing of the applicable
gaming licensee prior to or following the consummation date to
consider the effect of the transaction on the gaming licensee's
suitability. In addition, the licensee must notify the Missouri
Gaming Commission of other transactions, including the transfer of
five percent or more of an ownership interest in the licensee or
holding company, the pledge of five percent or more of the ownership
interest in a license or holding company, and any transaction of at
least $1,000,000. The restrictions on transfer of ownership apply to
the Company and its subsidiaries.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer that
licensees must pay to the Missouri Gaming Commission, certain minimum
payout requirements, a 20% tax on adjusted gross receipts,
prohibitions against providing credit to gaming customers (except for
the use of credit cards and cashing checks) and a requirement that
each licensee reimburse the Missouri Gaming Commission for all costs
of any Missouri Gaming Commission staff necessary to protect the
public on the licensee's riverboat. Licensees must also submit
audited quarterly financial reports to the Commission and pay the
associated auditing fees. Other areas of operation which are subject
to regulation under Missouri rules are the size, denomination and
handling of chips and tokens; the surveillance methods and computer
monitoring of electronic games; accounting and audit methods and
procedures; and approval of an extensive internal control system. The
Missouri rules also require that all of an operator's purchases of
chips, tokens, dice, playing cards and electronic gaming devices must
be acquired from suppliers licensed by the Missouri Gaming Commission.
The Missouri Gaming Law provides for a loss limit of $500 per person
per excursion and requires licensees to maintain scheduled excursions
with boarding and debarking times
16
regardless of whether the riverboat cruises. Although the Missouri
Gaming Law provides no limit on the amount of riverboat space that
may be used for gaming, the Missouri Gaming Commission is empowered
to impose such space limitations through the adoption of rules and
regulations. Additionally, United States Coast Guard safety regulations
could affect the amount of riverboat space that may be devoted to gaming.
The Missouri Gaming Law also includes requirements as to the form of
riverboats, which must resemble Missouri's riverboat history to the extent
practicable and include certain non-gaming amenities. All eleven
licensees in Missouri are authorized to conduct all or a portion
of their operations on a dockside basis.
With respect to the availability of dockside gaming, which may be more
profitable than excursion gaming, the Missouri Gaming Commission is
empowered to determine on a site-by-site basis where such gaming is
appropriate and shall be permitted. All other riverboats will be
required to cruise. On December 27, 1994, Station Casino St.
Charles was granted a dockside gaming license for its floating gaming
facility by the Missouri Gaming Commission. On April 16, 1996,
Station Casino St. Charles, subsequently received approval from the
Missouri Gaming Commission to conduct its operations on its excursion
gaming riverboat on a continuously docked basis. The U.S. Coast Guard
has recommended to the Missouri Gaming Commission that all gaming
vessels on the Missouri River be required to remain dockside because
certain characteristics of the Missouri River, including turbulence,
lack of emergency response infrastructure and potential congestion,
create substantially elevated risks for the operation of large
capacity passenger vessels. Dockside gaming in Missouri may differ
from dockside gaming in other states, such as Mississippi, because the
Missouri Gaming Commission has the ability to require ''simulated
cruising.'' This requirement permits customers to board dockside
riverboats only at specific times and prohibits boarding during a
certain portion of each simulated cruise, which is presently two
hours in length. Dockside gaming in Missouri may not be as profitable
as dockside gaming in other states, that allow for continuous customer
ingress and egress.
The Company may not make a public issuance of debt or ownership
interests without first notifying the Missouri Gaming Commission at
least 15 days prior to such issuance. The Missouri Gaming Commission
may reopen the licensing hearing of the gaming licensee prior to or
following the consummation date to consider the effect of the
transaction on the gaming licensee's suitability.
LOUISIANA GAMING REGULATIONS
The Company, through SGSI and other subsidiaries, provides slot route
management services to numerous food and beverage establishments,
commercial businesses and major hotels and casinos in southern Nevada
and Louisiana. In July 1992, SGSI entered into a joint venture with a
corporation owned by certain Louisiana residents to form Southwest
Gaming Services of Louisiana ("SGLA"), in which SGSI owns a 49% equity
interest.
The manufacture and distribution of video draw poker devices in
Louisiana and the ownership of video poker terminals ("Terminals") in
Louisiana, are subject to the Louisiana Draw Poker Control Law and the
Rules and Regulations promulgated thereunder (the "Louisiana Act") and
to licensing and regulatory control by the Louisiana Gaming Control
Board and the Video Gaming Division of the Gaming Enforcement Section
of the Office of State Police within the Louisiana Department of
Public Safety and Corrections (the "Louisiana Gaming Authorities").
The laws and regulations of the Louisiana Gaming Authorities are based
upon declarations of policy which are concerned with protecting the
video gaming industry from elements of organized crime, illegal
gambling activities and other harmful elements, and protection of the
public from illegal and unscrupulous gaming to ensure the fair play of
devices.
SGLA has been granted a license as a Terminal owner by the Louisiana
Gaming Authorities. SGSI owns a 49% equity interest in SGLA, with the
remaining 51% interest owned by River Cities Gaming Corporation, a
Louisiana corporation not otherwise affiliated with the Company. The
license held by SGLA is not transferable and must be renewed annually
through payment of fees.
The Louisiana Gaming Authorities may, upon compliance with certain
regulatory procedures, limit, condition, suspend or revoke the license
of SGLA for any cause deemed reasonable by such licensing agency.
Fines for violations of gaming laws or regulations may be levied
against the licensees and the persons involved. In addition, SGLA
could be subject to fines for each violation of the gaming laws.
Suspension or revocation of any of the licenses of SGLA could have a
material adverse effect upon the business of the Company.
17
Every person who has or controls more than a 5% ownership, income or
profit interest in an entity which has or applies for a license in
accordance with the provisions of the Louisiana Gaming Authorities, to
exercise a significant influence over the activities of a licensee
must meet all suitability requirements and qualifications for
licensees. Thus, any holder of more than 10% of the equity securities
of the Company will be required to meet such suitability requirements
and qualifications. Frank J. Fertitta III, Blake L. and Delise F.
Sartini, and Lorenzo J. Fertitta have already obtained such requisite
licenses. The Louisiana Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. The Louisiana
Gaming Authorities require the submission of detailed personal and
financial information followed by a thorough investigation. The
applicant for licensing must pay a filing fee which also covers the
cost of investigation. Determinations of suitability or of questions
pertaining to licensing are subject to review under the provisions of
Louisiana's Administrative Procedures Act.
In order for an entity such as a joint venture to be licensed by the
Louisiana Gaming Authorities, it must be demonstrated that a majority
of the interest in the joint venture is owned by persons who have been
domiciled in Louisiana for a period of a least two years prior to the
date of the application.
Terminals must meet strict specifications established by the Louisiana
Gaming Authorities. There are also restrictions on the number of
Terminals that can be operated at certain locations. Fees are paid to the
Louisiana Gaming Authorities based upon a percentage of net revenues
from the operation of such Terminals, together with license renewal
fees payable quarterly and annually.
GENERAL GAMING REGULATIONS IN OTHER JURISDICTIONS
If the Company becomes involved in gaming operations in any other
jurisdictions, such gaming operations will subject the Company and
certain of its officers, directors, key employees, stockholders and
other affiliates ("Regulated Persons") to strict legal and regulatory
requirements, including mandatory licensing and approval requirements,
suitability requirements, and ongoing regulatory oversight with
respect to such gaming operations. Such legal and regulatory
requirements and oversight will be administered and exercised by the
relevant regulatory agency or agencies in each jurisdiction (the
"Regulatory Authorities"). The Company and the Regulated Persons will
need to satisfy the licensing, approval and suitability requirements
of each jurisdiction in which the Company seeks to become involved in
gaming operations. These requirements vary from jurisdiction to
jurisdiction, but generally concern the responsibility, financial
stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in
gaming operations. In general, the procedures for gaming licensing,
approval and finding of suitability require the Company and each
Regulated Person to submit detailed personal history information and
financial information to demonstrate that the proposed gaming
operation has adequate financial resources generated from suitable
sources and adequate procedures to comply with the operating controls
and requirements imposed by law and regulation in each jurisdiction,
followed by a thorough investigation by such Regulatory Authorities.
In general, the Company and each Regulated Person must pay the costs
of such investigation. An application for any gaming license, approval
or finding of suitability may be denied for any cause that the
Regulatory Authorities deem reasonable. Once obtained, licenses and
approvals may be subject to periodic renewal and generally are not
transferable. The Regulatory Authorities may at any time revoke,
suspend, condition, limit or restrict a license, approval or finding
of suitability for any cause they deem reasonable. Fines for
violations may be levied against the holder of a license or approval
and in certain jurisdictions, gaming operation revenues can be
forfeited to the state under certain circumstances. There can be no
assurance that the Company will obtain all of the necessary licenses,
approvals and findings of suitability or that its officers, directors,
key employees, other affiliates and certain other stockholders will
satisfy the suitability requirements in one or more jurisdictions, or
that such licenses, approvals and findings of suitability, if
obtained, will not be revoked or renewed in the future.
Failure by the Company to obtain, or the loss or suspension of, any
necessary licenses, approval or findings of suitability would prevent
the Company from conducting gaming operations in such jurisdiction and
possibly in other jurisdictions. The Company may be required to submit
detailed financial and operating reports to Regulatory Authorities.
The laws, regulations and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be
amended. Any changes in such laws, regulations, or their
interpretations could have a material adverse effect on the Company.
18
EMPLOYEES
As of May 31, 1997, the Company and its subsidiaries had approximately
10,000 employees. Management believes that it has good relationships
with its employees.
FORWARD-LOOKING STATEMENTS
When used in this report and elsewhere by management from time to
time, the words "believes," "anticipates," and "expects" and similar
expressions are intended to identify forward-looking statements with
respect to the financial condition, results of operations and
expansion projects of the Company and its subsidiaries. Certain
important factors, including but not limited to, competition from
other gaming operations, construction risks, licensing and other
regulatory risks, could cause the Company's actual results to differ
materially from those expressed in the Company's forward-looking
statements. Further information on potential factors which could
affect the financial condition, results of operations and expansion
projects of the Company and its subsidiaries are included in the
filings of the Company with the Securities and Exchange Commission,
including, but not limited to, the Company's Registration Statement on
Form S-3 (File No. 333-1102). Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as
of the date thereof. The Company undertakes no obligation to publicly
release any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof.
ITEM 2. PROPERTIES
Palace Station is situated on 39 acres located on the west side of Las
Vegas, Nevada. The Company owns 26 acres and leases the remaining 13
acres pursuant to five long-term ground leases with unaffiliated third
parties. The property is subject to a lien to secure borrowings under
the Company's reducing revolving bank credit facility.
Boulder Station is situated on 40 acres located on the east side of
Las Vegas, Nevada. The Company owns 13 acres and leases the remaining
27 acres from a trust pursuant to a long-term ground lease. The
trustee of such trust is Bank of America NT&SA and the beneficiary of
which is KB Enterprises, an affiliated company owned by Frank J.
Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the
parents of Frank J. Fertitta III, Chairman of the Board and Chief
Executive Officer of the Company. The lease has a maximum term of 65
years, ending in June 2058. Currently, the lease provides for monthly
payments of $125,000 until June 1998. In June 1998 and every ten years
thereafter the rent will be adjusted to the product of the fair market
value of the land and the greater of (i) the then prevailing annual
rate of return for comparably situated property or (ii) 8% per year.
The rent will be further adjusted in June 2003 and every ten years
thereafter by a cost of living factor. In no event will the rent for
any period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year
intervals beginning in June 1998, to purchase the land at fair market
value. The Company believes that the terms of the ground lease are as
fair to the Company as could be obtained from an independent third
party. The Company's leasehold interest in the property and the
acreage it owns directly are subject to a lien to secure borrowings
under the Company's reducing revolving bank credit facility.
Texas Station is situated on 47 acres located in North Las Vegas,
Nevada. The Company leases the property from a trust pursuant to a
long-term ground lease. The trustee of such trust is Bank of America
NT&SA and the beneficiary of which is Texas Gambling Hall & Hotel,
Inc. an affiliate company of the Related Lessor. The lease has a
maximum term of 65 years, ending in May 2060. The lease provides for
monthly rental payments of $150,000 until July 2000. In July 2000,
and every ten years thereafter, the rent will be adjusted to the
product of the fair market value of the land and the greater of (i)
the then prevailing rate of return being realized for owners of
comparable land in Clark County or (ii) 8% per year. The rent will be
further adjusted by a cost of living factor after the first ten years
and every ten years thereafter. In no event will the rent for any
period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year
intervals, to purchase the land at fair market value. The Company
believes that the terms of the ground lease are as fair to the Company
as could be obtained from an independent third party. The Company's
leasehold interest in the property is subject to a lien to secure
borrowings under the Company's reducing revolving bank credit
facility.
Station Casino St. Charles is situated on 52 acres located immediately
north of Interstate 70 on the edge of the Missouri River in St.
Charles, Missouri. The Company owns the entire 52 acres. The
Company's ownership interests in the St. Charles property is subject
to liens to secure borrowings under the Company's reducing revolving
bank credit facility.
19
Station Casino Kansas City is situated on 171 acres in Kansas City,
Missouri. The Company entered into a joint venture with an
unaffiliated third party to acquire the property. Station Casino
Kansas City leases the site from the joint venture with monthly
payments of $100,000. The Company amended the lease and will make monthly
payments of $85,000 through March 31, 1997, and $90,000 through the
remainder of the lease term. The lease term was extended to March
31, 2006, with the option to extend the lease for up to eight renewal
periods of ten years each plus one additional period of seven years.
Commencing April 1, 1998, and every anniversary thereafter the rent shall
be adjusted by a cost of living factor. In connection with the joint
venture agreement, the Company received an option that provided for the
right to acquire the joint venture partners interest in this joint
venture. The Company has the option to purchase this interest at any
time after April 1, 2002 through April 1, 2011 for $11.7 million,
however, commencing April 1, 1998, the purchase price will be adjusted
by a cost of living factor of not more than 5% or less than 2% per annum.
The Company paid $2.6 million for this option. The Company's leasehold
interest in the property is subject to a lien to secure borrowings
under the Company's reducing revolving bank credit facility, and under
certain circumstances the Bank Facility permits the lenders to force
the exercise of such option.
The Company is developing Sunset Station on approximately 100 acres
located in the Green Valley/Henderson area of Las Vegas, Nevada. The
Company leases approximately 48 acres pursuant to a long-term ground
lease with an unaffiliated third party. The lease was entered into in
June 1994, and has a term of 65 years with monthly rental payments of
$120,000, adjusted on each subsequent five-year anniversary by a cost
of living factor. On the seventh anniversary date of the lease, the
Company has the option to purchase the land for $23.8 million. The
lessor also has an option to sell the land to the Company for $21.8
million on the seventh anniversary of the lease. The remaining
approximate 52 acres were purchased by the Company in September 1995,
for approximately $11 million.
The Company has acquired several parcels of land in various
jurisdictions as part of the Company's development activities. At
March 31, 1997, $22.6 million of land had been acquired for potential
gaming projects in jurisdictions where gaming has been approved. In
addition, $3.7 million of land had been acquired in certain
jurisdictions where gaming has not yet been approved. No assurances
can be made that these jurisdictions will approve gaming in the
future.
The Company has entered into various purchase agreements whereby the
Company has the option to acquire or lease land for developing
existing and potential new gaming projects with purchase prices
totaling $31.3 million at March 31, 1997. In consideration for these
options, the Company has paid or placed in escrow $6.0 million at
March 31, 1997, all of which would be forfeited should the Company not
exercise its options to acquire or lease the land.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various lawsuits
relating to routine matters incidental to their business. Management
does not believe that the outcome of such litigation, in the
aggregate, will have a material adverse effect on the Company.
A suit seeking status as a class action lawsuit was filed by
plaintiff, William H. Poulos, et. al, as class representative, on
April 26, 1994, in the United States District Court, Middle District
of Florida, naming 41 manufacturers, distributors and casino operators
of video poker and electronic slot machines, including the Company.
On May 10, 1994, a lawsuit alleging substantially identical claims was
filed by another plaintiff, William Ahearn, et. al, as class
representative, in the United States District Court, Middle District
of Florida, against 48 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including the
Company and most of the other major hotel-casino companies. The
lawsuits allege that the defendants have engaged in a course of
fraudulent and misleading conduct intended to induce persons to play
such games based on a false belief concerning how the gaming machines
operate, as well as the extent to which there is an opportunity to
win. The two lawsuits have been consolidated into a single action,
and have been transferred to the United States District Court, for the
State of Nevada. On September 26, 1995, a lawsuit alleging
substantially identical claims was filed by plaintiff, Larry Schreier,
et. al, as class representative, in the United States District Court
for the District of Nevada, naming 45 manufacturers, distributors, and
casino operators of video poker and electronic slot machines,
including the Company. Motions to dismiss the Poulos/Ahearn and
Schreier cases were filed by Defendants. On April 17, 1996, the
Poulos/Ahearn lawsuits were dismissed, but plaintiffs were given leave
to file Amended Complaints on or before May 31, 1996. On May 31,
1996, an Amended Compliant was filed, naming William H. Poulos,
et. al, as plaintiff. Defendants filed a motion to dismiss. On
August 15, 1996, the Schreier lawsuit was dismissed with leave to amend.
On September 27, 1996, Schreier filed an Amended Complaint. Defendants
filed motions to dismiss the Amended Complaint. In December 1996,
the Court consolidated the
20
Poulos/Ahearn, the Schreier, and a third case not involving the Company
and ordered all pending motions be deemed withdrawn without prejudice,
including Defendants' Motions to Dismiss the Amended Complaints. The
plaintiffs filed a Consolidated Amended Complaint on February 13, 1997.
The Defendants have filed motions to dismiss, substantially identical
to those filed in the earlier separate actions. The motions to
dismiss remain pending before the Court. Management believes that
the claims are wholly without merit and does not expect that the
lawsuits will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The registrant's common stock trades on New York Stock Exchange under
the symbol "STN" . Prior to September 5, 1996, the common stock
traded on the Nasdaq Stock Market under the symbol ''STCI.'' The
following table sets forth, for the periods indicated, the high and
low closing sale price per share of the common stock as reported on
the New York Stock Exchange or the Nasdaq National Market as
applicable.
High Low
---- ---
Fiscal Year Ending March 31, 1996
---------------------------------
First Quarter 17.50 10.38
Second Quarter 20.00 14.88
Third Quarter 16.00 12.50
Fourth Quarter 15.13 9.75
Fiscal Year Ending March 31, 1997
---------------------------------
First Quarter 16.13 11.63
Second Quarter 14.38 11.00
Third Quarter 12.75 9.50
Fourth Quarter 10.63 8.13
As of May 31, 1997, there were 1,069 holders of record of the
Company's common stock.
The Company has never paid cash dividends on any shares of common
stock. The Company does not intend to pay cash dividends in the
foreseeable future so that it may reinvest its earnings in the
development of its business. The payment of dividends in the future
will be at the discretion of the Board of Directors of the Company.
Restrictions imposed by the Company's debt instruments and other
agreements limit the payment of dividends by the Company. See
''Management's Discussion and Analysis of Financial Condition and
Results of Operations-Description of Certain Indebtedness and Capital
Stock''.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of
and for the Company's fiscal years ended March 31, 1993, 1994, 1995,
1996 and 1997 have been derived from consolidated financial statements
which, except for 1993 and 1994, are contained elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial data set forth
below are qualified in their entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements, the
notes thereto and other financial and statistical information included
elsewhere in this Annual Report on Form 10-K.
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Casino..................................................... $ 450,013 $ 358,495 $ 210,534 $ 109,090 $ 100,426
Food and beverage.......................................... 92,220 73,057 43,208 26,078 25,157
Room....................................................... 27,420 23,614 17,690 14,360 12,373
Other...................................................... 48,957 39,099 36,561 31,226 20,743
---------- ---------- ---------- ---------- ----------
Gross revenues.......................................... 618,610 494,265 307,993 180,754 158,699
Less promotional allowances................................ (35,095) (27,408) (17,715) (11,211) (8,804)
---------- ---------- ---------- ---------- ----------
Net revenues............................................ 583,515 466,857 290,278 169,543 149,895
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Casino..................................................... 203,857 150,805 92,812 47,492 42,185
Food and beverage.......................................... 68,994 57,659 34,045 19,528 20,184
Room....................................................... 10,318 9,147 7,014 5,439 5,398
Other...................................................... 23,927 24,902 27,270 22,432 15,822
Selling, general and administrative........................ 120,285 97,466 60,810 26,269 28,514
Corporate expenses......................................... 18,284 15,979 13,141 7,920 -
Restructuring charge....................................... 2,016 - - - -
Development expenses....................................... 1,302 3,960 7,200 1,791 -
Depreciation and amortization.............................. 44,589 35,039 22,220 12,976 10,935
Preopening expenses........................................ 31,820 2,436 19,378 - -
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses...................... 525,392 397,393 283,890 143,847 123,038
---------- ---------- ---------- ---------- ----------
Operating income............................................. 58,123 69,464 6,388 25,696 26,857
Interest expense, net........................................ (36,698) (30,563) (19,967) (9,179) (8,949)
Other income (expense)....................................... (47) 1,150 2,160 2,192 32
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............................ 21,378 40,051 (11,419) 18,709 17,940
Income tax (provision) benefit............................... (7,615) (14,579) 3,477 (4,806) -
Reinstatement of deferred taxes.............................. - - - (4,486) -
Pro forma income taxes (unaudited) (1)....................... - - - - (6,100)
---------- ---------- ---------- ---------- ----------
Net Income (loss)............................................ 13,763 25,472 (7,942) 9,417 -
Preferred stock dividends.................................... (7,245) (53) - - -
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock................. $ 6,518 $ 25,419 $ (7,942) $ 9,417 $ -
========== ========== ========== ========== ==========
Proforma net income after income taxes (unaudited)(1)........ $ - $ - $ - $ 12,309 $ 11,840
========== ========== ========== ========== ==========
Earnings per share:
Earnings (loss) per common share............................. $ 0.18 $ 0.75 $ (0.26) - -
Pro forma earnings per share (unaudited) (1)...........