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STATION CASINOS
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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 DECEMBER 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____________ to
____________.
Commission file number 000-21640
STATION CASINOS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0136443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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
March 3, 2000, based on the closing price per share as reported on the New York
Stock Exchange was $486,817,981.
As of March 3, 2000, the registrant has 40,345,672 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders to be held May 23, 2000 (which has not been made publicly available
as of the date of this filing) are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
When used in this report and elsewhere by management from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements with respect to the financial
condition, results of operations and the business of Station Casinos, Inc. (the
"Company") and its subsidiaries including the expansion, development and
acquisition projects, legal proceedings and employee matters of the Company and
its subsidiaries. Certain important factors, including but not limited to,
competition from other gaming operations, leverage, construction risks, the
inherent uncertainty and costs associated with litigation, and licensing and
other regulatory risks, could cause the Company's actual results to differ
materially from those expressed in the Company's forward-looking statements.
Further information on potential factors which could affect the financial
condition, results of operations and business of the Company and its
subsidiaries including, without limitation, the expansion, development and
acquisition projects, legal proceedings and employee matters of the Company and
its subsidiaries are included in the filings of the Company with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
any forward-looking statements, which speak only as of the date thereof. The
Company undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof.
GENERAL
Station Casinos, Inc. is an established multi-jurisdictional gaming and
entertainment enterprise that currently owns and operates four major
hotel/casino properties and two smaller casino properties in the Las Vegas
Metropolitan area, and gaming and entertainment complexes in St. Charles and
Kansas City, Missouri. The Company also owns and provides slot route management
services in southern Nevada. 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 acquisition or
development opportunities in Nevada and other gaming markets.
In Las Vegas, the Company owns and operates Palace Station Hotel &
Casino ("Palace Station"), Boulder Station Hotel & Casino ("Boulder
Station"), Texas Station Gambling Hall & Hotel ("Texas Station"), Sunset
Station Hotel & Casino ("Sunset Station") and Tropicana Station, Inc., the
operator of Wild Wild West Gambling Hall & Hotel ("Wild Wild West") and,
together with Palace Station, Boulder Station, Texas Station, and Sunset
Station, the "Las Vegas Casino Properties". The Company also owns a 50%
interest in Town Center Amusements, Inc. d.b.a. Barley's Casino & Brewing
Company ("Barley's"). Palace Station is situated on 39 acres on Sahara Avenue
adjacent to Interstate 15, and is near major attractions on the Las Vegas
Strip and downtown Las Vegas. Boulder Station is situated on 46 acres along
Boulder Highway, immediately adjacent to Interstate 515, and is located
on the opposite side of Las Vegas from Palace Station. Texas Station is
located on 47 acres at the corner of Lake Mead Boulevard and Tonopah Highway
in North Las Vegas. Sunset Station is located on 105 acres on Sunset Road
immediately adjacent to Interstate 515 and features a
Spanish/Mediterranean-themed hotel/casino. Each of the Company's Las Vegas
casinos caters primarily to local Las Vegas residents. The Company markets
the casinos together under the Station Casinos' brand, offering convenience
to residents throughout the Las Vegas Valley with its strategically located
properties.
In Missouri, the Company owns and operates Station Casino Kansas City
and Station Casino St. Charles. Station Casino Kansas City, is situated on 183
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 located on 52 acres 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 employs 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.
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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. The Las Vegas
Casino Properties and 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 out-of-town 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, casinos, and other entertainment amenities.
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 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.
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 "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.
In April 1999, the Company introduced its unified Boarding Pass
player rewards program at the Las Vegas Casino Properties. The Boarding Pass
program allows guests to earn points based on their level of gaming activity.
These points can then be redeemed for food, entertainment and merchandise at
any of the Las Vegas Casino Properties. This "single card", for which the
technology was developed in-house, sets the Company apart from its
competition in the Las Vegas locals market.
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CASINO PROPERTIES
Set forth below is certain information concerning the properties that
are owned and operated by the Company. The properties are more fully described
in the following table.
CASINO PROPERTIES (1)
CASINO
SQUARE HOTEL GAMING PARKING
PROPERTY FOOTAGE ROOMS SLOTS (2) TABLES (3) SPACES (4)
- ----------------------------------- ------- ----- --------- ---------- ----------
Las Vegas Casino Properties
Palace Station ............... 84,000 1,028 2,244 47 3,700
Boulder Station .............. 89,000 300 3,108 47 4,350
Texas Station ................ 95,000 200 2,795 43 5,300
Sunset Station ............... 110,000 467 3,000 56 5,700
Missouri Casino Properties
Station Casino St. Charles ... 45,000 - 1,875 40 5,400
Station Casino Kansas City ... 140,000 200 3,188 144 5,000
Other
Wild Wild West ............... 12,500 260 250 7 500
Barley's ..................... 10,000 - 199 9 -
Southwest Gaming ............. - - 797 - -
(1) The information with respect to each property other than Station Casino St.
Charles is as of December 31, 1999. Information for Station Casino St.
Charles is as of March 30, 2000, after the change from moving all gaming
operations from the riverboat to the barge.
(2) Includes slot and video poker machines and other coin-operated devices.
(3) Generally includes blackjack ("21"), craps, roulette, pai gow poker, mini
baccarat, Caribbean stud poker, let it ride, big six, three card and
double down stud. The Las Vegas Casino Properties also offer a keno lounge,
poker room, bingo parlor and a race and sports book. The Missouri Casino
Properties also offer a poker room. Wild Wild West and Barley's also offer
a sports book.
(4) Includes covered parking spaces of 1,900 for Palace Station, 1,900 for
Boulder Station, 3,500 for Texas Station, 2,000 for Sunset Station and
4,000 for Station Casino St. Charles.
LAS VEGAS CASINO PROPERTIES
PALACE STATION
Palace Station is situated on approximately 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 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 also includes two swimming pools, an approximately 20,000-square
foot banquet and convention center, five full-service restaurants, several
fast-food outlets, a 24-hour gift shop and a non-gaming video arcade.
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 Trax Lounge, which provide music, dancing and entertainment.
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BOULDER STATION
Boulder Station, which opened in August 1994, is situated on
approximately 46 acres strategically located on the opposite side of Las
Vegas from Palace Station. Patrons enjoy convenient access to this facility
which is located on Boulder Highway and immediately adjacent to the
Interstate 515 interchange. Management believes that its highly visible
location at this well-traveled intersection offers a competitive advantage
relative to existing hotels and casinos located on 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 also includes 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
Kid's Quest child-care facility, a swimming pool, a non-gaming video arcade
and a gift shop.
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 various fast-food outlets. Boulder Station's
restaurants and bars are located in open settings that are designed to
intermingle the dining and gaming experience.
TEXAS STATION
Texas Station, which opened in July 1995, is situated on
approximately 47 acres 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 its distinctive early-Texas
architecture. In February 1999, the Company completed a $55 million
master-planned expansion of Texas Station. Upon completing this expansion,
Texas Station has approximately 390,000 square feet of main facility area
which also includes five full-service restaurants, several fast-food outlets,
a 10,000-square foot Kid's Quest child-care facility, a 132-seat
entertainment lounge, seven additional bars, a high-quality 18-screen movie
theater complex, a swimming pool, a non-gaming video arcade and a gift shop.
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 (see "Expansion Strategy" in this Item 1
for discussion of an additional master-planned expansion of Texas Station).
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 Guadalajara Bar & Grille (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 Martini Ranch, the Whiskey Bar with a seven-foot high bronco
rider, which 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 a variety of fast-food outlets to enhance the customers' dining
selection. 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.
SUNSET STATION
Sunset Station, which opened in June 1997, is located on an
approximately 105-acre parcel at the intersection of Interstate 515 and
Sunset Road. Multiple access points provide customers convenient access to
the gaming complex and parking areas. Situated in a highly concentrated
commercial corridor along Interstate 515, Sunset Station has prominent
visibility from the freeway and the Sunset commercial corridor. Sunset
Station is located approximately nine miles east of McCarran International
Airport and eight miles southeast of Boulder Station. In November 1998, the
Company completed a $34 million master-planned expansion of Sunset Station.
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Sunset Station is distinguished from the Company's other properties by
its interior and exterior Spanish/Mediterranean-style architecture. The facility
features approximately 428,000 square feet of main facility area, plus seven
full-service restaurants, themed to capitalize on the restaurants at the
Company's other properties, an entertainment lounge, additional bars, a
microbrewery, a gift shop, a non-gaming video arcade, tenant lease space for
additional restaurants, a high-quality 13-screen movie theater complex, a Kid's
Quest child-care facility, an outdoor swimming pool and an amphitheater, as well
as several fast-food outlets and franchises.
Sunset Station's seven full-service restaurants have a total of over
2,100 seats featuring "live-action" cooking and simulated patio dining. These
restaurant facilities offer a variety of high-quality food at reasonable prices,
including the 24-hour Sunset Cafe (a 24-hour coffee shop), the Sonoma Cellar (a
steakhouse), the Casa Del Sol (a seafood restaurant), the Capri (an Italian
restaurant), Guadalajara Bar & Grille (a Mexican restaurant), Sunset Brewing
Company (a microbrewery) and The Feast Around the World, a live action buffet
featuring Mexican, Italian, barbecue, American and Chinese cuisine. Guests may
also take advantage of the Gaudi Bar, a centerpiece of the casino featuring over
8,000 square feet of stained-glass and a water light display. The facility also
offers fast-food outlets to enhance the customers' dining selection.
Sunset Station is located on approximately 105 acres, approximately 70
acres of which have been developed. The Company is currently evaluating
potential development plans for the undeveloped property. Uses for the land
could include a lifestyle entertainment retail center, as well as the
development of several pads for various build-to-suit retail, restaurant and
entertainment concepts. Timing and definitive plans have not yet been determined
for such a development.
MISSOURI CASINO PROPERTIES
STATION CASINO KANSAS CITY
Station Casino Kansas City opened 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 an approximately 183-acre site
immediately east of the heavily traveled Interstate 435 bridge, seven miles
east of downtown Kansas City. 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 capture the strong visitor and
overnight markets. Management believes that Station Casino Kansas City has
specific advantages relative to other 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 90,000 cars per day. Interstate 435 is a six-lane, north-south
expressway offering quick and easy accessibility and direct visibility of the
site.
The Station Casino Kansas City facility features two continuously
docked gaming vessels situated in a man-made protective basin. The Company
believes the Station Casino Kansas City 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 six 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
high-quality 18-screen movie theater complex, a 5,700-square foot non-gaming
video arcade and midway operated by Sega GameWorks and a gift shop.
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, the Orleans Seafood Co.
and Oyster Bar, featuring fresh Louisiana style seafood, 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 a well-known Kansas City favorite,
Arthur Bryant's Barbeque.
STATION CASINO ST. CHARLES
Station Casino St. Charles opened in May 1994. 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
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complex is strategically located to attract customers from the St. Charles and
greater St. Louis area, as well as tourists from outside 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.
In March 2000, the Company completed a reconfiguration of the two
gaming vessels at Station Casino St. Charles. In response to the new "open
boarding" rules that went into effect in the St. Louis market in September 1999,
the Company has moved all of the gaming operations to the existing barge which
contains 45,000 square feet of gaming and entertainment space. 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 three bars, an entertainment
lounge, a lobby, a ticketing facility and a gift shop.
In May 1996, the Company completed construction of an elevated
roadway and a 4,000-space five-story parking structure. The parking facility
is constructed above the existing flood plain. The elevated roadway and
parking structure provide improved access to the gaming facilities and
significantly diminish Station Casino St. Charles' susceptibility to closure
during the spring flooding season.
In the fall of 1996, the Company commenced an expansion project at
Station Casino St. Charles which included the building of a backwater basin
containing two new gaming vessels and a new retail and entertainment complex.
Since December 31, 1997, construction on the Station Casino St. Charles
expansion project has been halted.
The Company currently believes the Station Casino St. Charles expansion
project as originally contemplated fulfills a strategic need in the St. Louis,
Missouri market. While the Company desires to complete and operate these new
facilities, circumstances may arise in the future, including the lack of
available financing, a downturn in the demand for gaming facilities or increased
regulatory requirements unique to the state of Missouri and more attractive uses
of available capital, which may prevent the expansion project from being
completed as originally designed, if at all. As a result of the uncertainty
surrounding the expansion project, the Company evaluated the carrying values of
the assets in St. Charles as of December 31, 1999 and concluded that a
write-down of the assets was appropriate.
As of December 31, 1999, the existing operating assets and $169.0
million the Company had invested in the expansion project were written down by
approximately $125.2 million. The Company does not anticipate that any major
construction activity on the expansion project will resume in the near term.
THE SOUTHWEST COMPANIES
The Company provides slot route management services to numerous food
and beverage establishments and commercial businesses in Southern Nevada through
its subsidiary, Southwest Gaming Services, Inc. ("SGSI"). SGSI commenced its
slot route business in southern Nevada in December 1990. Management combined its
gaming experience with its route management abilities to capitalize on the
rapidly expanding slot route business.
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.
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
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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.
The Company has commenced another phase of master-planned
construction at Texas Station. Construction has begun on the $55 million
project, which is expected to be completed in the first quarter of 2001. The
next phase of the master plan is designed to further position Texas Station
as an all-inclusive entertainment destination for Las Vegas residents. The
project will include the addition of 350 gaming devices, a 60-lane bowling
alley and approximately 40,000 square feet of meeting and banquet space.
EXPANSION, DEVELOPMENT AND ACQUISITION 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 and acquisition
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 or acquisition 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.
GREEN VALLEY PROJECT
A 50/50 joint venture between the Company and GCR Gaming, LLC (a
subsidiary of American Nevada Corporation) has proposed to build a new
resort/casino on the south side of Interstate 215 at Green Valley Parkway in
Henderson, Nevada. The 40-acre resort site is part of a 170-acre mixed-use
commercial, retail and office project. The resort site has been designated a
gaming enterprise district under Nevada Senate Bill 208 and local ordinances
since 1996. Construction is expected to commence during the third quarter of
2000 and is expected to be completed in the fourth quarter of 2001. The
estimated construction cost of this project is $270 to $280 million. The
yet-to-be named project will be managed by a subsidiary of the Company. The
Company and American Nevada Corporation have co-owned Barley's since January
1996.
The new project is planned to complement the Green Valley Ranch
master-planned community. The plans for the project include over 330,000
square feet of public space and 200 hotel rooms. Planned entertainment
amenities include a state-of-the-art spa with outdoor pools; a 10-screen
movie theater; six full-service restaurants; a fast-food court with six
quick-serve outlets and a non-gaming arcade. It is anticipated that the
casino will have 95,000 square feet of gaming with over 2,400 slot machines
and 40 table games. The planned facility also includes a race and sports
book, a poker room and parking for approximately 3,200 vehicles in a low-rise
garage and on surface parking.
UNITED AUBURN INDIAN COMMUNITY
On October 12, 1999, the Company announced that it has entered into
a Development Services Agreement and a Management Agreement with the United
Auburn Indian Community (the "UAIC"). Subject to the receipt of certain
governmental approvals, as well as voter approval of a proposed amendment to
the California constitution, the Company and the UAIC intends to develop a
gaming and entertainment facility on 49 acres, approximately seven miles
north of Interstate 80, in Placer County, California, near Sacramento. The
scope and the timing of this project has yet to be determined.
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. Indian gaming in California, as it currently exists, has had little,
if any impact on the Company's operations to date, although there are no
assurances as to future impact. Proposition 5, a California ballot initiative
passed by voters in California on November 3, 1998, would have permitted Indian
tribes who enter into agreements with the State of California to conduct certain
gaming activities including horse race wagering, gaming devices (including slot
machines), banked card games and lotteries. In August 1999 Proposition 5 was
ruled unconstitutional by the California Supreme Court on the basis that the
initiative would permit the operation of Nevada and New Jersey type casinos,
which is prohibited by the California Constitution. Proposition 1A is an
amendment to the California Constitution, passed by the voters of California
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on March 7, 2000, designed to modify the Constitution to authorize the Governor
to negotiate compacts with federally recognized Indian tribes, subject to
Legislative ratification, for the operation of slot machines, lottery games, and
banking and percentage games on Indian lands. In September 1999 the Governor
negotiated, and the Legislature ratified, compacts with 57 Indian tribes that
became effective with the passage of Proposition 1A. It is not certain how
Proposition 1A will affect the Company; however, because visitors from
California make up Nevada's largest visitors market, with Proposition 1A,
increased competition from Indian gaming may result in a decline in the
Company's revenues and may have a material adverse effect on the Company's
business.
The Las Vegas Casino Properties face competition from all other
casinos and hotels in the Las Vegas area, including to some degree, from each
other. Such competition includes at least 11 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. 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. Currently,
there are approximately 30 major gaming properties located on or near the Las
Vegas Strip, 12 located in the downtown area and several located in other
areas of Las Vegas. In addition, two new hotel/casinos are under construction
which will add approximately 2,800 rooms to the Las Vegas area. One of the
new hotel/casinos is located on the Las Vegas Strip and is expected to draw
significant numbers of visitors. This new facility could have a positive
effect on the Las Vegas Casino Properties through increased local employment
and increased visitor traffic to Las Vegas. However, major additions,
expansions or enhancements of existing properties or the construction of new
properties by competitors, could also have a material adverse effect on the
businesses of the Las Vegas Casino Properties. The additional capacity has
had little, if any, impact on the Las Vegas Casino Properties' 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 Las Vegas Casino Properties face more direct competition from 11
hotel/casinos primarily targeted to the local and the repeat visitor markets.
Some of these competitors have completed expansions and existing competitors
and new entrants into these markets are in the planning stages or under
construction on other projects. Other gaming operators own undeveloped
properties on which they could develop gaming facilities in the immediate
vicinity of Texas Station. In July 1999, The Regent Las Vegas Hotel and
Casino ("the Regent") opened in northwest Las Vegas approximately five miles
from Texas Station. The Regent competes indirectly with Texas Station because
of its close proximity to Texas Station. Another new hotel/casino will be
opening near the Regent in the second half of 2000 and will compete directly
with Palace Station and Texas Station. Also, a smaller competitor on Boulder
Highway is anticipated to open in the first half of 2000. Although the
Company has competed strongly in these marketplaces, there can be no
assurance that additional capacity will not have a negative impact on the
Company.
The Missouri Gaming Commission has been empowered to determine the
number of gaming licenses supportable by the region's economic situation. As
of December 31, 1999, 41 applications for gaming licenses had been filed with
the State of Missouri, including ten applications to operate in the St. Louis
marketplace. Ten licensees are currently licensed in Missouri, 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 competitors operating in the St. Louis market. In particular,
Station Casino St. Charles directly competes with a facility located in
Maryland Heights which opened in 1997. Such direct competition is due to the
Maryland Heights facility's size, quality and close proximity. The Company
has experienced a decline in revenues at Station Casino St. Charles since the
opening of the Maryland Heights facility. The Company has taken steps that
management believes will mitigate the effects of such competition and the
decline in revenues has stabilized. However, in light of ever increasing
competition, there can be no assurance as to the future performance of
Station Casino St. Charles. Additionally, two of the four competitors
operating in the St. Louis market are located in Illinois, which does not
impose the $500 loss limit imposed in Missouri. 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. The Missouri Gaming Commission is currently considering
applicants for a gaming license in the St. Louis area. It is not known at
this time if a new license will be granted, or, if granted, when the licensee
could open a new facility. 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.
On March 21, 1997, Davis Gaming was selected for investigation for
licensure for a riverboat gaming operation which it intends to develop in
Boonville, Missouri, a city in central Missouri near Jefferson City and
Columbia. Davis Gaming recently sold its rights to build and operate the Isle of
Capri which has until March 31, 2000, to obtain approval
9
from the Boonville City Council. In addition, Mark Twain Casino L.L.C. was
selected for investigation for licensure for a riverboat 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. The Isle of
Capri Project has proceeded and has received preliminary site and development
approval from the Missouri Gaming Commission. On February 23, 2000, the Mark
Twain Casino Project received approval from the Missouri Gaming Commission to
operate its proposed riverboat gaming operation in a continuously docked manner.
Station Casino Kansas City competes primarily with other gaming
operations in and around Kansas City, Missouri. In addition to Station Casino
Kansas City, there are three other gaming facilities currently operating in
the Kansas City market. Gaming has been approved by local voters in
jurisdictions near Kansas City, including St. Joseph (which currently has one
riverboat gaming operation), Jefferson City and other cities and counties
along the Missouri River. Since the opening of Station Casino Kansas City,
Sam's Town, the closest gaming development to Station Casino Kansas City,
closed and Boyd Gaming, the owner of Sam's Town, sold most of Sam's Town's
assets to Harrah's, the operator of Harrah's-North Kansas City, the next
closest gaming operator in the area. The Kansas state senate is currently
considering a bill to allow games of chance at the Woodlands race track which
is approximately 15 miles from Station Casino Kansas City. Although this has
been proposed in the past and failed, there are no assurances it will fail
again. 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 December 31, 1999,
Illinois had approved a total of ten licenses; however, only nine licensees are
operating riverboat gaming facilities. 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. Gaming laws in these
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.
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
10
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 Hotel & Casino, Inc. ("PSHC"), Boulder
Station, Inc. ("BSI"), Texas Station, Inc. ("TSI"), Sunset Station, Inc.
("SSI"), and Tropicana Station, Inc. ("TRSI") 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 ("Barley's Casino"), 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 PSHC, BSI, TSI, SSI, TRSI, GVSI, and SGSI. The
Company is also licensed as a manufacturer and distributor. PSHC, BSI, TSI, SSI,
TRSI, 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
(individually, a "Gaming License" and 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 hold 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.
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 and the Gaming Subsidiaries 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 the Company and the Gaming Subsidiaries 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
11
appointed by the Nevada Commission to operate Palace Station, Boulder Station,
Texas Station, Sunset Station, Wild Wild West and Barley's Casino and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for the reasonable rental value of the premises) 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 of a Registered Corporation 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 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.
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.
12
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 May 27, 1999, the Nevada Commission granted the Company prior
approval to make public offerings 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 evidenced by a security
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;
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 serving or selling of food or refreshments or
the selling of any merchandise. 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
13
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 or enter
into associations that are harmful to the state of Nevada or its ability to
collect gaming taxes and fees, or employ, contract with or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the grounds of unsuitability or whom a court in the
state of Nevada has found guilty of cheating. 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 is subject to
licensing, control and regulation by the City of Las Vegas. The sale of
alcoholic beverages at Boulder Station and Wild Wild West is subject to
licensing control and regulation by the Clark County Board. Texas Station is
subject to licensing control and regulation of the City of North Las Vegas.
Sunset Station and Barley's Casino are subject to the 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, by referendum, 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.
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 25, 1994, as a result of a cause of action brought by
anti-gaming interests, the Missouri Supreme Court 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. A statewide election on April 5, 1994, failed to adopt a
constitutional amendment that would have exempted excursion boats and floating
facilities from such constitutional prohibition on lotteries. Therefore, in May
1994, the Company commenced operations only with those games which involve some
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 8, 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.
On January 16, 1997, the Missouri Gaming Commission granted Kansas City
Station Corporation two (2) Class A licenses to own and operate the River King
and River Queen floating gaming facilities.
On November 25, 1997, the Supreme Court ruled, in a case brought by
anti-gaming interests involving certain operators who compete with Station
Casino St. Charles in Maryland Heights, Missouri, that gaming may occur only in
artificial spaces that are contiguous to the surface stream of the Missouri and
Mississippi rivers. On November 3, 1998, the citizens of the State of Missouri
approved a Constitutional amendment which was proposed by initiative petition,
that retroactively legalized lotteries, gift enterprises and games of chance
aboard excursion gambling boats and floating
14
facilities located within artificial spaces containing water that are within
1,000 feet of the closest edge of the main channel of the Mississippi or
Missouri Rivers. This amendment to the Constitution was certified on November
23, 1998.
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. 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 amount of gross receipts
from wagering on the gambling games conducted during the preceding twelve
months. No gaming licensee or occupational licensee may pledge, hypothecate or
transfer in any way any license, or any interest in a license, issued by the
Missouri Gaming Commission. An ownership interest in a gaming licensee that is
not a publicly held entity or a holding company that is not a publicly held
entity may not be pledged or hypothecated in any way to, or otherwise be subject
to any type of security interest held by, any entity or person other than a
regulated bank or saving and loan association without prior approval of the
Missouri Gaming Commission. Missouri Gaming Commission regulations prohibit a
licensee from consummating any of the following transactions without at least 60
days' prior notice to the Missouri Gaming Commission, and during such period,
the Missouri Gaming Commission may disapprove the transaction or require the
transaction be delayed pending further investigation; (i) any transfer or
issuance of an ownership interest in a gaming licensee that is not a publicly
held entity or a holding company that is not a publicly held entity; and (ii)
any pledge or hypothecation or grant of any type of security interest in an
ownership interest in a gaming licensee that is not a publicly held entity or a
holding company that is not a publicly held entity to a regulated bank or saving
and loan association; provided that no ownership interest may be transferred in
any way pursuant to any pledge, hypothecation or security interest without
separate notice to the Missouri Gaming Commission at least thirty days prior to
such transfer, which restriction must be specifically included in the grant of
pledge, hypothecation or security interest.
Missouri Gaming Commission regulations require a licensee to notify the
Missouri Gaming Commission of its intention to consummate any of the following
transactions at least fifteen days prior to such consummation, and the Missouri
Gaming Commission may reopen the licensing hearing prior to or following the
consummation date to consider the effect of the transaction on the licensee's
suitability; (i) any issuance of ownership interest in a publicly held gaming
licensee or a publicly held holding company, if such issuance would involve,
directly or indirectly, an amount of ownership interest equaling five percent or
greater of the ownership interest in the gaming licensee or holding company
after the issuance is complete; (ii) any private incurrence of debt equal to or
exceeding one million dollars by a gaming licensee or holding company that is
affiliated with the holder of a license; (iii) any public issuance of debt by a
gaming licensee or holding company that is affiliated with the holder of a
license; and (iv) any significant related party transaction as defined in the
regulations.
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
15
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 disembarking times 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 ten licensees
currently operating riverboat gaming operations 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. 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."
The simulated cruises are required to be a minimum of two hours and a maximum of
four hours. Dockside gaming in Missouri may not be as profitable as dockside
gaming in other states because of the admission fee paid for each patron that
enters the excursion gambling boat.
The Company understands that the Missouri Gaming Commission and
offices of the United States Attorney in Missouri are conducting
investigations regarding the actions of an attorney who worked on certain
Company legal matters in Missouri. The Company believes that the
investigations relate to, among other things, certain bonus payments made by
the Company to such attorney. The Company has received requests for
information and documents from these agencies and is cooperating fully. The
Company is unaware of any improprieties on its part. However, due to the
uncertainty inherent in any investigation, the Company cannot predict the
ultimate outcome of these investigations. If the Company were to be
implicated in any wrongdoing, this could lead to further proceedings against
the Company, and could result in significant fines and/or other penalties
imposed on the Company, which, if imposed, could have a material adverse
effect on the Company's business and gaming licenses.
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
16
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, limited, suspended or not 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.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiaries had
approximately 10,700 employees. From time to time, certain employees of the
Company are contacted by unions and the Company engages in discussions with such
employees regarding establishment of collective bargaining agreements. In 1998,
approximately 12 of the Company's employees have voted to be represented by a
union. While the Company is from time to time faced with such movements by
employees, the Company does not believe that such movements will have any
broad-based impact on its employees; however there can be no assurances to that
effect. Management believes that it has good relationships with its employees.
ITEM 2. PROPERTIES
Palace Station is situated on approximately 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
Amended Bank Facility.
Boulder Station is situated on approximately 46 acres located on the
east side of Las Vegas, Nevada. The Company owns 19 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 National Trust and Savings Association
("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. The lease provides for monthly payments of $135,525
through June 2008. In July 2008, and every ten years thereafter, the rent will
be adjusted by a cost of living factor. In July 2003, 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. In no event will the rent for
any period be less than the immediately preceding 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 did not
exercise its June 1998 option. 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 Amended Bank
Facility.
Texas Station is situated on approximately 47 acres located in North
Las Vegas, Nevada. The Company leases this land from a trust pursuant to a
long-term ground lease. The trustee of this trust is Bank of America NT&SA, the
beneficiary of which is Texas Gambling Hall & Hotel, Inc., an affiliate company
of the Related Lessor. The lease has a maximum term of 65 years, ending in July
2060. The lease provides for monthly rental payments of $150,000 through June
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 annual rate of return being realized for owners of comparable land in
Clark County or (ii) 8% per year. The rent will be further adjusted by a cost of
living factor after the first ten years and every ten years thereafter. In no
event will the rent for any period be less than the immediately preceding
period. Pursuant to the ground lease, the Company has an option, exercisable at
five-year intervals beginning in May 2000, to purchase the land at fair market
value. Pursuant to the ground lease, the lessor will have a right to put the
land to the Company, exercisable
17
no later than one year after the first to occur of (a) a change of control (as
defined in the lease), or (b) delivery of written notice that such a change of
control is anticipated, at a purchase price equal to fair market value as
determined by negotiation. 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 Amended Bank Facility.
Sunset Station is situated on approximately 105 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. In June 2001, the Company has an option
to purchase this land for $23.8 million. Additionally, in June 2001, the lessor
has an option to sell this land to the Company for $21.8 million. Of the
remaining land, approximately 52 acres were purchased by the Company in
September 1995, for approximately $11.0 million.
Station Casino St. Charles is situated on approximately 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 interest in the St. Charles property is subject to liens to secure
borrowings under the Amended Bank Facility.
Station Casino Kansas City is situated on approximately 183 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 171 acres of the site from the joint venture with current monthly
payments of $93,636. Commencing April 1, 1998, and every anniversary
thereafter, the rent shall be adjusted by a cost of living factor of not more
than 5% or less than 2% per annum. The lease expires March 31, 2006, with an
option to extend the lease for up to eight renewal periods of ten years each,
plus one additional seven year period. In connection with the joint venture
agreement, the Company received an option providing for the right to acquire
the joint venture partner's interest in this joint venture. The Company has
the option to acquire this interest at any time after April 1, 2002 through
April 1, 2011, for $11.7 million, however, commencing April 1, 1998, the
purchase price will be adjusted by a cost of living factor of not more than
5% or less than 2% per annum. 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 Amended Bank Facility, and under certain
circumstances the Amended Bank Facility permits the lenders to force the
exercise of such option.
The Company has acquired or leased several parcels of land in
various jurisdictions as part of the Company's development activities.
Included in land for held development at December 31, 1999 is approximately
$18.8 million related to land which had been acquired for potential gaming
projects in jurisdictions where gaming has been approved. Subsequent to
December 31, 1999, the Company acquired additional parcels of land for
potential gaming projects. The cost of these new parcels was approximately
$30.2 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various lawsuits
relating to routine matters incidental to their business. As with all
litigation, no assurance can be provided as to the outcome of the following
matters and litigation inherently involves significant costs.
SETTLEMENT OF CRESCENT LITIGATION
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger, as amended (the "Merger") with Crescent Real Estate Equities Company, a
Texas real estate investment trust ("Crescent"). The Company wrote off $2.9
million of costs incurred related to the Merger. The Merger became subject to
litigation between the two companies. On April 14, 1999, the Company announced
that it had settled its lawsuits with Crescent arising out of the failed Merger.
Under the terms of the settlement agreement, Crescent paid the Company $15
million, and the parties have released each other from all claims.
18
LOW WATER LEVEL AT STATION CASINO ST. CHARLES; EPA INVESTIGATION
During December 1998 and January 1999, the water level of the Missouri
River was well below normal. In addition, over time silt and debris flowing
downstream have built up under the gaming barges and other ancillary barges at
Station Casino St. Charles. These circumstances have caused a portion of these
barges, at times, to touch the river bottom. Because these barges have touched
the river bottom, the American Bureau of Shipping ("ABS") decertified the barges
on January 8, 1999. As a result of the decertification, the Missouri Gaming
Commission expressed concern regarding the effect of the low water level on the
barges. However, based upon improvement in the water level and the Company's
agreement to work with ABS to re-certify all of the barges at a time when the
river levels permit, the Missouri Gaming Commission allowed the gaming facility
to remain open. On November 11, 1999, ABS recertified the barges. The Company
continues to monitor the situation very carefully and believes that the facility
should remain in operation. However, there can be no assurance that the
Company's assessment will not change or that the relevant authorities will
continue to permit the operation of the facility. A prolonged closure of the
facility as a result of the low water level would have a material adverse effect
on the Company's business, financial position and results of operations.
The Company has taken steps and intends to take further steps to remedy
the problems caused by the low water level. These further steps include dredging
material from under the barges. The Company does not expect the cost of these
remedial activities to be material, although there can be no assurance that such
costs will not exceed the Company's expectations. Dredging and construction
activities generally require permits from the United States Army Corps of
Engineers (the "Corps of Engineers"). The Company has received certain permits
to continue dredging activities. The Company is in the process of applying for
additional permits which will allow it to dredge more efficiently than the
current permit. There can be no assurance that the Corps of Engineers will grant
such permits or that they will be granted on a timely basis. In the event that
low water levels return, the Company could be forced to close the facility. The
Company's ability to receive the required permits could be adversely affected by
the investigation described below.
On February 3, 1999, the Company received a subpoena issued by the
EPA requesting that documentation relating to the Company's dredging
activities at the facility be furnished to the Grand Jury in the United
States District Court for the Eastern District of Missouri. Several employees
and persons who contracted to work for the Company received similar
subpoenas. The Company believes that the EPA is investigating allegations
that the Company or the Company's contractors dredged and disposed of silt
and debris from the area of the facility either without proper permits or
without complying with such permits. The Company has completed the
investigation of the substance of the allegations and continues to cooperate
fully with the EPA. The investigation could lead to further proceedings
against the Company which could result in significant fines and other
penalties imposed on the Company. On December 9, 1999, the Company and the
United States, on behalf of the Corps of Engineers, tentatively entered into
a "Consent Decree" regarding the alleged dredging activities. On February 15,
2000, the United States District Court for the Eastern District of Missouri,
after public notice and passage of the comment period, approved the Consent
Decree. Subsequently, the Consent Decree was published in the National
Register without comment or objection. As a result, the approval of the
Consent Decree and the expiration of the notice period now brings resolution
to this matter.
POULOS/AHEARN CASE
On April 26, 1994, a suit seeking status as a class action lawsuit was
filed by plaintiff, William H. Poulos, et al., as class representative, in the
United States District Court, Middle District of Florida, naming 41
manufacturers, distributors and casino operators of video poker and electronic
slot machines, including the Company. On May 10, 1994, a lawsuit alleging
substantially identical claims was filed by another plaintiff, William Ahearn,
et al., as class representative, in the United States District Court, Middle
District of Florida, against 48 manufacturers, distributors and casino operators
of video poker and electronic slot machines, including the Company and most of
the other major hotel/casino companies. The lawsuits allege that the defendants
have engaged in a course of fraudulent and misleading conduct intended to induce
persons to play such games based on a false belief concerning how the gaming
machines operate, as well as the extent to which there is an opportunity to win.
The two lawsuits have been consolidated into a single action, and have been
transferred to the United States District Court for the District of Nevada. On
September 26, 1995, a lawsuit alleging substantially identical claims was filed
by plaintiff, Larry Schreier, et. al, as class representative, in the United
States District Court for the District of Nevada, naming 45 manufacturers,
distributors, and casino operators of video poker and electronic slot machines,
including the Company. Motions to dismiss the Poulos/Ahearn and Schreier cases
were filed by defendants. On April 17, 1996, the Poulos/Ahearn lawsuits were
dismissed, but plaintiffs were given leave to file Amended Complaints on or
before May 31, 1996. On May 31, 1996, an Amended Complaint was filed, naming
William H. Poulos, et. al, as plaintiff. Defendants filed a motion to dismiss.
On August 15, 1996, the Schreier lawsuit was dismissed with leave to amend. On
September 27, 1996, Schreier filed an Amended Complaint. Defendants filed
motions to dismiss the Amended
19
Complaint. In December 1996, the Court consolidated the Poulos/Ahearn, the
Schreier, and a third case not involving the Company and ordered all pending
motions be deemed withdrawn without prejudice, including Defendants' Motions to
Dismiss the Amended Complaints. The plaintiffs filed a Consolidated Amended
Complaint on February 13, 1997. On or about December 19, 1997, the Court issued
formal opinions granting in part and denying in part the defendants' motion to
dismiss. In so doing, the Court ordered plaintiffs to file an amended complaint
in accordance with the Court's orders in January of 1998. Accordingly,
plaintiffs amended their complaint and filed it with the United Stated District
Court for the District of Nevada in February 1998. The Company and all other
defendants continue to deny the allegations contained in the amended complaint
filed on behalf of plaintiffs. The plaintiffs are seeking compensatory, special,
consequential, incidental, and punitive damages in unspecified amounts. The
defendants have committed to vigorously defend all claims and allegations
contained in the consolidated action. The parties have fully briefed the issues
regarding class certification, which are currently pending before the court. The
Company does not expect that the lawsuits will have a material adverse effect on
the Company's financial position or results of operations.
NICOLE ANDERSON CASE
A suit seeking status as a class action lawsuit was filed by plaintiff
Nicole Anderson, et. al., as class representative, on September 24, 1997, in the
United States District Court for the Eastern District of Missouri, Eastern
Division. The lawsuit alleges certain racially based discriminatory action at
Station Casino St. Charles and seeks injunctive relief and compensatory,
special, consequential, incidental and punitive damages in unspecified amounts.
On or about October 24, 1997, plaintiff filed her first amended complaint. On
November 24, 1997, the Company filed its answer to plaintiff's first amended
complaint which denied the allegations contained therein.
On August 25, 1998, a hearing was held to determine whether this
lawsuit could be certified as a class action. The Court conditionally certified
a subclass of dealers in the table game department; the other plaintiffs may
proceed individually with their claims. The parties have entered into a
settlement agreement which has been submitted to the United States District
Court for the Eastern District of Missouri, Eastern Division, to determine the
fairness, reasonableness and adequacy of the terms of settlement and whether an
order and final judgment should be entered approving the proposed settlement
agreement. On October 18, 1999, the order and final judgment was issued by the
United States District Court for the Eastern District of Missouri.
STEPHEN B. SMALL CASE
A class action lawsuit was filed by plaintiff Stephen B. Small, et al.,
as class representative, on November 28, 1997, in the United States District
Court for the Western District of Missouri, naming four gaming operators in
Kansas City, Missouri, including Kansas City Station Corporation. The lawsuit
alleged that the defendants are conducting gaming operations that are not
located on the Missouri River in violation of certain state and federal
statutes. The plaintiff also sought compensatory, special, consequential, and
incidental damages in unspecified amounts. On September 1, 1998, the United
States District Court granted Kansas City Station Corporation's motion to
dismiss the lawsuit. On February 16, 1999, the plaintiff served the defendants
with a notice of appeal of the federal court dismissal. On October 30, 1998, the
plaintiff filed a similar lawsuit in the Circuit Court of Cole County, Missouri.
The lawsuit alleged that the operators were conducting illegal games of chance
prior to December 3, 1998, the effective date of a Constitutional amendment
passed by Missouri voters on November 3, 1998, legalizing gaming facilities
within 1,000 feet of the main channel of the Mississippi and Missouri Rivers. On
February 9, 1999, the Cole County Circuit Court granted Kansas City Station
Corporation's motion to dismiss the lawsuit. On February 19, 1999, the plaintiff
served the defendants with a notice of appeal of the state court dismissal.
Management believes that the plaintiff's claims are without merit and does not
expect that the lawsuit will have a material adverse effect on the Company's
financial position or results of operations.
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 1999.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on the 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 sale price per share of the Common Stock as reported
on the New York Stock Exchange.
HIGH LOW
---- ---
FISCAL YEAR ENDING DECEMBER 31, 1999
------------------------------------
First Quarter $ 14.88 $ 7.94
Second Quarter 20.38 12.25
Third Quarter 24.63 17.00
Fourth Quarter 27.38 16.50
TRANSITION PERIOD ENDING DECEMBER 31, 1998
------------------------------------------
First Quarter $ 15.88 $ 13.19
Second Quarter 15.31 5.06
Third Quarter 8.50 4.00
As of March 3, 2000, there were 653 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
On November 6, 1998 the Company filed a Form 8-K announcing its change
in fiscal year end from March 31 of each year to December 31 of each year.
This change is effective for the nine month period ended December 31, 1998
(the "Transition Period 1998").
The selected consolidated financial data presented below as of and for the
Company's fiscal years ended March 31, 1996, 1997 and 1998, for the Transition
Period 1998, and for the fiscal year ended December 31, 1999 have been derived
from consolidated financial statements which, except for 1996 and 1997, 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 YEAR
ENDED TRANSITION
DECEMBER 31, PERIOD FOR THE YEARS ENDED MARCH 31,
---------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------ ------------ ------------
(amounts in thousands, except per share amounts)
OPERATING RESULTS:
Net revenues ............................................... $ 942,469 $ 642,214 $ 769,610 $ 583,515 $ 466,857
Operating income ........................................... 28,871 64,696 84,186 58,123 69,464
Income (loss) before income taxes and extraordinary item .. (47,223) (9,864) (4,120) 21,378 40,051
Extraordinary item-loss on early retirement of debt,
net of applicable income tax benefit ................... (10,653) (3,104) (2,042) - -
Net income (loss) applicable to common stock ............... (44,758) (17,531) (12,441) 6,518 25,419
Basic and diluted earnings (loss) per common share ......... $ (1.14) $ (0.50) $ (0.35) $ 0.18 $ 0.75
BALANCE SHEET DATA:
Total assets ............................................... $ 1,276,273 $ 1,531,925 $ 1,300,216 $ 1,234,118 $ 827,314
Long-term debt ............................................. 942,480 1,147,266 900,226 760,963 464,998
Stockholders' equity ....................................... 216,801 269,406 286,887 298,848 278,470
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table highlights the results of operations for the Company
(dollars in thousands):
Fiscal Twelve Nine Fiscal
Year Months Months Year
Ended Ended Transition Ended Ended
December 31, December 31, Period December 31, March 31,
1999 1998 1998 1997 1998
------------ ------------ ---------- ------------ ---------
(unaudited) (unaudited)
NET REVENUES - TOTAL $ 942,469 $ 847,015 $ 642,214 $ 564,809 $ 769,610
Nevada Operations (a) 584,852 526,854 397,908 341,447 470,393
Missouri Operations (a) 313,439 290,160 219,734 203,374 273,800
Other (a) 44,178 30,001 24,572 19,988 25,417
OPERATING INCOME (LOSS) - TOTAL $ 28,871 $ 92,380 $ 64,696 $ 56,502 $ 84,186
Nevada Operations (a) 147,217 111,902 83,669 60,028 88,261
Missouri Operations (a) (85,269) (1,528) (5,056) 6,358 9,886
Other (a) (33,077) (17,994) (13,917) (9,884) (13,961)
CASH FLOWS FROM:
Operating activities $ 173,058 $ 108,321 $ 76,692 $ 73,326 $ 104,955
EBITDA, AS ADJUSTED (b) - TOTAL $ 236,970 $ 192,384 $ 147,682 $ 117,764 $ 162,466
Nevada Operations (a) 186,677 150,413 113,284 96,029 133,158
Missouri Operations (a) 69,223 54,314 43,163 29,640 40,791
Other (a) (18,930) (12,343) (8,765) (7,905) (11,483)
EBITDA, AS ADJUSTED (b),
ADJUSTED FOR THE SUNSET
EQUIPMENT LEASE - TOTAL $ 242,890 $ 200,952 $ 154,186 $ 121,942 $ 168,708
Nevada Operations (a) 192,597 158,981 119,788 100,207 139,400
(a) The Nevada Operations include the accounts of: Palace Station, Boulder
Station, Texas Station and Sunset Station. The Missouri Operations include
the accounts of: Station Casino St. Charles and Station Casino Kansas City.
Other includes the operations of Wild Wild West, which opened in July 1998,
the Company's investment in Barley's, Southwest Gaming and Corporate
expense.
(b) "EBITDA, As Adjusted" consists of operating income plus depreciation,
amortization, preopening expenses and impairment loss. The Company believes
that in addition to cash flows and net income, EBITDA, As Adjusted is a
useful financial performance measurement for assessing the operating
performance of the Company. Together with net income and cash flows,
EBITDA, As Adjusted provides investors with an additional basis to evaluate
the ability of the Company to incur and service debt and incur capital
expenditures. To evaluate EBITDA, As Adjusted and the trends it depicts,
the components should be considered. The impact of interest, taxes,
depreciation and amortization, preopening expenses and impairment loss,
each of which can significantly affect the Company's results of operations
and liquidity and should be considered in evaluating the Company's
operating performance, cannot be determined from EBITDA, As Adjusted.
Further, EBITDA, As Adjusted does not represent net income or cash flows
from operating, financing and investing activities as defined by generally
accepted accounting principles ("GAAP") and does not necessarily indicate
cash flows will be sufficient to fund cash needs. It should not be
considered as an alternative to net income, as an indicator of the
Company's operating performance or to cash flows as a measure of liquidity.
In addition, it should be noted that not all gaming companies that report
EBITDA or adjustments to such measures may calculate EBITDA, or such
adjustments in the same manner as the Company, and therefore, the Company's
measure of EBITDA, As Adjusted may not be comparable to similarly titled
measures used by other gaming companies.
23
Consolidated net revenues, cash flows from operating activities, and
EBITDA, As Adjusted for the fiscal year ended December 31, 1999 increased as
compared to the Transition Period 1998. These increases are due to the
Transition Period 1998 consisting of nine months as compared to the fiscal year
ended December 31, 1999, which is twelve months. The above table presents
certain results of operations from the unaudited twelve month period ended
December 31, 1998 for comparison purposes.
Consolidated net revenues, operating income, cash flows from operating
activities and EBITDA, As Adjusted for the Transition Period 1998 decreased as
compared to the fiscal year ended March 31, 1998. These decreases are due to the
Transition Period 1998 consisting of nine months as compared to the fiscal year
ended March 31, 1998, which is twelve months. The above table presents certain
results of operations from the unaudited nine month period ended December 31,
1997 for comparison purposes.
CONSOLIDATED NET REVENUES
The increase in consolidated net revenues for the fiscal year ended
December 31, 1999 as compared to the twelve months ended December 31, 1998 is
due to increased revenues at all of the Company's properties. Increased revenues
at the Nevada Operations are partially a result of the completed master-planned
expansions at Texas Station and Sunset Station, which were completed in February
1999 and November 1998, respectively. In addition, revenues at the Nevada
Operations increased due to the introduction of the Boarding Pass player rewards
program in April 1999, which makes it more convenient for customers to redeem
points earned from gaming activity at any of the Nevada properties. Net revenues
at the Missouri Operations increased 8% primarily due to Station Casino Kansas
City which generated a 13% increase in net revenues.
Consolidated net revenues increased for the Transition Period 1998 as
compared to the nine months ended December 31, 1997 due to increased revenues
from the Nevada properties generally, and results from Sunset Station, which
opened in June 1997, are included for only seven months in the nine months ended
December 31, 1997. Also, revenues from the Station Casino Kansas City facility
continued to steadily improve. Net revenues at Station Casino St. Charles
declined 5% as a result of significant competition in the St. Louis market.
OPERATING INCOME/OPERATING MARGIN
The Company's operating income was impacted by certain charges in each
of the above periods that affect the ability to analyze year to year
comparisons. The following table identifies these charges (dollars in
thousands):
Fiscal Twelve Nine Fiscal
Year Months Months Year
Ended Ended Transition Ended Ended
December 31, December 31, Period December 31, March 31,
1999 1998 1998 1997 1998
------------ ----------- ---------- ------------ -----------
(unaudited) (unaudited)
Operating income ...................................... $ 28,871 $ 92,380 $ 64,696 $ 56,502 $ 84,186
OPERATING MARGIN .............................. 3.1% 10.9% 10.1% 10.0% 10.9%
Certain charges:
Impairment loss ............................... $137,435 $ 30,011 $ 30,011 ---- ----
Preopening expenses ........................... ---- ---- ---- $ 10,866 $ 10,866
Operating income, excluding certain charges ........... $166,306 $122,391 $ 94,707 $ 67,368 $ 95,052
OPERATING MARGIN, EXCLUDING CERTAIN CHARGES .... 17.6% 14.4% 14.7% 11.9% 12.4%
Consolidated operating income, excluding certain charges, improved by
$43.9 million in the fiscal year ended December 31, 1999 as compared to the
twelve months ended December 31, 1998 with operating income at all of the
Company's properties increasing.