-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WRYbIgzMRiOXYaSfU4FQCa1LrzANVHQhlX8iEqeTsIk41y3jLobhhwkzYYhfQG6i OtfpmOBe0oXz/C4yfuVh2Q== 0001047469-97-007978.txt : 19971217 0001047469-97-007978.hdr.sgml : 19971217 ACCESSION NUMBER: 0001047469-97-007978 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19971216 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATION CASINOS INC CENTRAL INDEX KEY: 0000898660 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880136443 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: PRE 14A SEC ACT: SEC FILE NUMBER: 001-12037 FILM NUMBER: 97739375 BUSINESS ADDRESS: STREET 1: 2411 W. SAHARA AVE CITY: LAS VEGAS STATE: NV ZIP: 89102 BUSINESS PHONE: 7023672411 MAIL ADDRESS: STREET 1: P.O. BOX 295000 CITY: LAS VEGAS STATE: NV ZIP: 89126 PRE 14A 1 SCHED 14A PRELIMINARY COPY THESE MATERIALS CONSTITUTE PRELIMINARY PROXY MATERIALS FILED WITH RESPECT TO THE FORTHCOMING SPECIAL MEETING OF STOCKHOLDERS. CERTAIN INFORMATION IS PRESENTED AS IT IS EXPECTED TO EXIST WHEN (AND IF) DEFINITIVE PROXY MATERIALS ARE MAILED TO STOCKHOLDERS, AND WILL BE REVISED TO REFLECT ACTUAL FACTS AT THAT TIME. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997. -------------------------- -------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: /X/ Preliminary Proxy Statement / / Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2)) / / Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 STATION CASINOS, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) APPROXIMATE DATE OF DISTRIBUTION OF THE DEFINITIVE PROXY MATERIAL TO THE REGISTRANT'S STOCKHOLDERS: , 1998 - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) Payment of Filing Fee (check appropriate box): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: ----------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ----------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ----------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ----------------------------------------------------------------------- (5) Total fee paid: ----------------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ----------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ----------------------------------------------------------------------- (3) Filing Party: ----------------------------------------------------------------------- (4) Date Filed: ----------------------------------------------------------------------- , 1998 Dear Fellow Stockholder: You are cordially invited to attend a Special Meeting of Station Casinos, Inc. (the "Company") to be held beginning at , .m. (local time) on , 1998 at Sunset Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada. At the Special Meeting you will be asked to consider amendments (the "Charter Amendments") to the Company's Amended and Restated Articles of Incorporation to: (a) increase the authorized shares of the Company to 360,000,000 shares consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock; (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock desirable for the Company to protect its status as a real estate investment trust ("REIT") for federal income tax purposes; and (c) change the name of the Company to "Station Entertainment Properties, Inc." The Charter Amendments are being sought in connection with the Company's plans to convert to a REIT for federal income tax purposes. As a REIT, the Company will continue to own (or lease) the land, buildings and other improvements and related assets of its six casino entertainment properties. The Company expects that its conversion to a REIT will be completed in March 1998. In order to comply with certain tax rules which generally will prohibit the Company, as a REIT, from operating its properties, the Company intends to spin-off to its common stockholders the stock of a newly formed subsidiary ("OpCo") which will lease (or sublease) the properties from the Company and manage them. OpCo will assume the name "Station Casinos, Inc." The spin-off is expected to be effective at or prior to the time the Company converts to a REIT. The Company also intends to sell approximately 29 million newly issued shares of common stock (plus over-allotment option) in an underwritten public offering. The Company is seeking to raise approximately $350 million in proceeds from the offering prior to underwriters' discount and costs associated with the offering. The spin-off of OpCo is expected to be completed upon consummation of the stock offering. In addition, certain stockholders intend to sell approximately two million shares in the offering, primarily to pay taxes associated with the spin-off. Management believes that the spin-off will not create a taxable event for a substantial majority of the Company's other stockholders. The proposed election of REIT status by the Company, spin-off of Opco and related financing transactions (the "Reorganization Transactions") are more fully described in the accompanying Proxy Statement. The consummation of the Reorganization Transactions is not conditioned upon the adoption of the proposed Charter Amendments. The Company intends to consummate the Reorganization Transactions regardless of whether the Charter Amendments are approved at the Special Meeting. If the Charter Amendments are approved at the Special Meeting, they will not become effective unless and until the Reorganization Transactions are consummated. In addition, no commitments are currently in place with respect to any of the financing transactions anticipated in connection with the Reorganization Transactions, and the Company expects that the precise nature and composition of such financing transactions may not be fully determined by the time of the Special Meeting. There can be no assurance that the terms of the Reorganization Transactions will not change significantly after the Special Meeting. In addition, the consummation of the Reorganization Transactions is conditioned upon a number of factors, including approval of Nevada and Missouri gaming authorities. Consequently, regardless of whether the Charter Amendments are approved at the Special Meeting, there can be no assurance that the Reorganization Transactions will occur as scheduled or at all. The Board of Directors of the Company believes the Charter Amendments are in the best interests of stockholders and unanimously recommends that you vote FOR the Charter Amendments. The executive officers and directors of the Company hold approximately 42.8% of the outstanding Common Stock and are expected to vote in favor of the Charter Amendments. Also enclosed is a form of proxy solicited by the Board of Directors in connection with the Special Meeting. Please carefully review and consider all of the enclosed information. Whether or not you expect to attend the Special Meeting, it is very important that your shares be represented, and it would therefore be helpful if you would return your signed and dated proxy promptly; please use the enclosed postage prepaid envelope to return the executed proxy card. If you attend the Special Meeting, you may revoke the proxy at that time by voting in person. If you have any questions regarding the Charter Amendments, please call D.F. King & Co., Inc. toll free at (800) 549-6864. Sincerely, Frank J. Fertitta III CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER STATION CASINOS, INC. 2411 WEST SAHARA AVENUE LAS VEGAS, NEVADA 89102 ------------------------ NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD: , 1998 TO BE HELD AT: SUNSET STATION HOTEL & CASINO ------------------------ To the Stockholders: NOTICE is hereby given that a Special Meeting of Stockholders (the "Meeting") of Station Casinos, Inc. (the "Company") will be held at Sunset Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada on , 1998, beginning at .m. local time, for the following purposes: 1. To amend the Company's Amended and Restated Articles of Incorporation (the "Charter Amendments") to: (a) increase the authorized shares of the Company to 360,000,000 shares, consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock; (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock desirable for the Company to protect its status as a real estate investment trust for federal income tax purposes; (c) change the name of the Company to "Station Entertainment Properties, Inc.;" and 2. To consider and transact such other business as may properly come before the Meeting or any adjournment thereof; all as more fully described in the accompanying Proxy Statement. Holders of the Common Stock at the close of business on , 1998, the record date fixed by the Company's board of directors (the "Board of Directors"), are entitled to notice of and to vote at the Meeting. No business other than the proposals described in this notice is expected to be considered at the Meeting or any adjournment. The Board of Directors urges all stockholders of record to exercise their right to vote at the meeting personally or by proxy FOR the Charter Amendments. Accordingly, we are sending you the following Proxy Statement and the enclosed proxy card. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SPECIFY YOUR VOTE ON THE ACCOMPANYING PROXY CARD AND SIGN, DATE AND RETURN IT AS PROMPTLY AS POSSIBLE IN THE ENCLOSED PRE-ADDRESSED, POSTAGE-PAID ENVELOPE. Your prompt response will be appreciated. By Order of the Board of Directors Scott M. Nielson SECRETARY Las Vegas, Nevada , 1998 STATION CASINOS, INC. 2411 WEST SAHARA AVENUE LAS VEGAS, NEVADA 89102 ------------------------ PROXY STATEMENT --------------------- The accompanying proxy is solicited by the board of directors (the "Board of Directors") of Station Casinos, Inc. (the "Company") to be used at the Special Meeting of Stockholders on , 1998 (the "Meeting"), to be held at Sunset Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada beginning at .m. local time. This Proxy Statement and the enclosed form of proxy are being sent to stockholders on or about , 1998. At the Meeting, stockholders will be asked to consider and vote upon amendments (the "Charter Amendments") of the Company's Amended and Restated Articles of Incorporation to: (a) increase the authorized shares of the Company to 360,000,000 shares consisting of 300,000,000 shares of the Company's common stock, par value $.01 per share ("Common Stock"), and 60,000,000 shares of the Company's preferred stock, par value $.01 per share ("Preferred Stock"); (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock desirable for the Company to protect its status as a real estate investment trust for federal income tax purposes; and (c) change the name of the Company to "Station Entertainment Properties, Inc." The Board of Directors recommends that each stockholder vote FOR the Charter Amendments. The Company's shares are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "STN." Any questions or request for assistance may be directed to the Information Agent at the telephone numbers set forth below. Requests for additional proxy cards or copies of this Proxy Statement may be directed to the Information Agent and such additional materials will be provided promptly at the Company's expense. Stockholders may also contact their local broker, dealer, commercial bank or trust company for assistance concerning the matters set forth herein. The Information Agent is: D.F. King & Co., Inc 77 Water Street New York, New York 10005 (800) 549-6864 (Toll Free) ------------------------ For questions addressed to the Company, please contact: Station Casinos, Inc. 2411 West Sahara Avenue Las Vegas, Nevada 89102 (702) 367-2411 Attention: Investor Relations TABLE OF CONTENTS
PAGE --------- SUMMARY........................................ 1 The Special Meeting.......................... 1 Vote Required................................ 1 Recommendation of the Board of Directors..... 1 Dissenter's Rights........................... 2 Background and Purpose of the Vote........... 2 The Reorganization Transactions.............. 3 Relationship Between Station REIT and OpCo... 6 Business Strategy............................ 6 Growth Strategy.............................. 7 Continued Master Planned Development......... 7 Acquisition and Development Within the Las Vegas Market............................... 7 Acquisition and Development Outside the Las Vegas Market............................... 8 Distribution and Dividend Policy............. 9 Sources and Uses............................. 10 Summary Consolidated Financial Data of Station REIT............................... 11 Summary Combined Financial Data of OpCo...... 13 Summary Unaudited Pro Forma Financial Data of Station REIT............................... 15 Summary Unaudited Pro Forma Financial Data of OpCo....................................... 16 THE SPECIAL MEETING AND VOTING................. 17 DISSENTERS' RIGHTS OF APPRAISAL................ 18 CERTAIN CONSIDERATIONS......................... 19 New Business Strategy; Newly Organized Entity; No Operating History............... 19 Dependence of Station REIT on OpCo........... 19 Lack of Control by Station REIT Over Hotel/Casino Properties.................... 20 Conflicts of Interest........................ 20 Risks of Leverage............................ 20 Ability to Maintain Distributions............ 22 Hotel/Casino Industry Risks.................. 22 Competition for Investment Opportunities..... 25 PAGE --------- Uninsured and Underinsured Losses............ 25 Acquisition and Development Risks............ 25 Failure to Qualify as a REIT................. 25 Adverse Effects of REIT Minimum Distribution Requirements............................... 26 Limitations on Acquisitions and Changes in Control.................................... 27 Effect of Market Interest Rates on Price of Common Stock and Cost of Funds............. 28 Risk of Future Revisions in Policies and Strategies by Board of Directors........... 28 Limited Relevance of Financial Information... 28 Potential Liabilities Due to Fraudulent Transfer Considerations and Legal Dividend Requirements............................... 28 Dilution..................................... 29 Payment of Dividends......................... 30 Certain Anti-Takeover Effects................ 30 DISTRIBUTION AND DIVIDEND POLICY............... 32 STATION REIT PRO FORMA CAPITALIZATION.......... 34 OPCO PRO FORMA CAPITALIZATION.................. 35 SOURCES AND USES............................... 36 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY...................................... 37 MANAGEMENT'S DISCUSSION AN ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY............................... 39 SELECTED COMBINED FINANCIAL DATA OF OPCO....... 48 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OPCO...................................... 50
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PAGE --------- BUSINESS STRATEGY.............................. 59 Historical Overview.......................... 59 Growth Strategy.............................. 59 Operating Strategy........................... 63 Capital Strategy............................. 63 Distribution and Dividend Policy............. 64 REGULATION AND LICENSING....................... 65 THE DISTRIBUTION............................... 72 RELATIONSHIP BETWEEN STATION REIT AND OPCO..... 74 PRINCIPAL STOCKHOLDERS......................... 81 MANAGEMENT AFTER THE REORGANIZATION............ 82 DESCRIPTION OF CERTAIN NEW INDEBTEDNESS........ 84 DESCRIPTION OF CAPITAL STOCK................... 85 POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................................... 91 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...... 94 OTHER MATTERS.................................. 107 STOCKHOLDER PROPOSALS.......................... 107 ADDITIONAL INFORMATION......................... 107 GLOSSARY....................................... 108 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..... F-1 EXHIBITS A. Certain Provisions of the Nevada Revised Statutes................................... A-1 B. Form of Amended and Restated Articles of Incorporation*............................. B-1
- ------------------------ *To be filed by Amendment. ii SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND IN THE ATTACHED EXHIBITS. STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE ATTACHED EXHIBITS, AND IN PARTICULAR THE SECTION ENTITLED "CERTAIN CONSIDERATIONS," CAREFULLY AND IN THEIR ENTIRETY. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROXY STATEMENT TO THE "COMPANY" SHALL BE DEEMED TO REFER TO STATION CASINOS, INC. AS IT EXISTS PRIOR TO CONSUMMATION OF THE REORGANIZATION TRANSACTIONS (AS DEFINED HEREIN), AND REFERENCES TO "STATION REIT" SHALL BE DEEMED TO REFER TO STATION CASINOS, INC. AS IT EXISTS IMMEDIATELY AFTER THE REORGANIZATION TRANSACTIONS (AT WHICH TIME STATION CASINOS, INC. WILL BE RENAMED "STATION ENTERTAINMENT PROPERTIES, INC."). UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) REFERENCES IN THIS PROXY STATEMENT TO CORPORATE ENTITIES SHALL BE DEEMED TO REFER TO SUCH ENTITIES AND THEIR DIRECT AND INDIRECT SUBSIDIARIES AND (II) THE INFORMATION IN THIS PROXY STATEMENT IS BASED ON THE ASSUMPTION THAT NO DISSENTERS' RIGHTS WILL BE EXERCISED AND THE CHARTER AMENDMENTS WILL BE APPROVED AT THE MEETING (AS DEFINED HEREIN). TERMS USED IN THIS PROXY STATEMENT WITHOUT DEFINITION HAVE THE MEANINGS SET FORTH IN THE ATTACHED GLOSSARY. THE SPECIAL MEETING A special meeting of stockholders (the "Meeting") of Station Casinos, Inc. (the "Company") will be held at Palace Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada on , 1998, beginning at .m. local time. Holders of record of shares of the Company's common stock, par value $.01 per share (the "Common Stock"), at the close of business on , 1998, the record date (the "Record Date") fixed by the Company's board of directors (the "Board of Directors"), are entitled to notice of and to vote at the Meeting. At the Meeting, stockholders will be asked to consider and vote upon amendments (the "Charter Amendments") of the Company's Amended and Restated Articles of Incorporation (the "Articles") to: (a) increase the authorized shares of the Company to 360,000,000 shares consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of the Company's preferred stock, par value $.01 per share (the "Preferred Stock"); (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock desirable for the Company to protect its status as a real estate investment trust ("REIT") for federal income tax purposes pursuant to the Internal Revenue Code of 1986, as amended (the "Code"); and (c) change the name of the Company to "Station Entertainment Properties, Inc." See "Description of Capital Stock--Terms of Stock as Modified by the Charter Amendments." VOTE REQUIRED Article IX of the Articles requires the affirmative vote of not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all outstanding shares of the Common Stock to adopt the Charter Amendments. Shares as to which a stockholder abstains or withholds from voting on the Charter Amendments will have the effect of a vote against the Charter Amendments. The executive officers and directors of the Company hold approximately 42.8% of the outstanding Common Stock and are expected to vote in favor of the Charter Amendments. See "Principal Stockholders." RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors believes the Charter Amendments are in the best interests of the Company and its stockholders and unanimously recommends that stockholders vote FOR the Charter Amendments. Approval of the adoption of the Charter Amendments will permit the consummation of the transactions described in the Proxy Statement. There can be no assurance, however, that such transactions will occur, and if such transactions do not occur, the Charter Amendments will not become effective. 1 DISSENTERS' RIGHTS If the Charter Amendments are approved at the Meeting and become effective, owners of Common Stock not voting in favor of the Charter Amendments will be entitled to assert dissenters' rights under Nevada Revised Statutes ("NRS") Sections 92A.300 through 92A.500. A copy of these sections is attached hereto as Exhibit A. BACKGROUND AND PURPOSE OF THE VOTE The Company has operated as a multi-jurisdictional gaming company prior to the Reorganization Transactions (as defined herein). Subject to approval and the adoption of the Charter Amendments and certain other conditions, Station REIT will function as a self-administered REIT. Station REIT initially will hold the land, buildings and other improvements, and certain related assets, comprising the six casino entertainment properties owned and operated by the Company prior to the Reorganization Transactions (collectively, the "Initial Properties"): Palace Station Hotel & Casino, Boulder Station Hotel & Casino, Texas Station Gambling Hall & Hotel and Sunset Station Hotel & Casino, in Las Vegas, and Station Casino Kansas City and Station Casino St. Charles, in Kansas City and St. Charles, Missouri respectively. Station REIT will be required to comply with certain tax rules that generally will prohibit Station REIT from operating its properties. Accordingly, the Initial Properties will be leased or subleased (the "Leases") to a corporation which was recently formed as a wholly-owned subsidiary of the Company ("OpCo") to manage and operate and lease or sublease the Initial Properties and other casino properties. OpCo will also hold certain assets intrinsic to the operation of the Company's historical business. As part of the Reorganization Transactions, stock of OpCo will be distributed to holders of record of the Common Stock as a dividend (the "Distribution"), Station REIT will change its name to "Station Entertainment Properties, Inc." and OpCo will assume the name "Station Casinos, Inc." The Board of Directors and management believe that by permitting the Company to function as a REIT and by transferring operations of the Company and related assets to OpCo through the Reorganization Transactions described in this Proxy Statement, certain benefits will accrue to holders of the Common Stock. Although there can be no assurance that the Reorganization Transactions will occur or that they will have the intended results, the Board of Directors and management believe that if the Reorganization Transactions occur, the value of the Common Stock will increase because of the tax advantages that apply to REITs and because of the value placed on REIT stock by the securities markets generally. The Board of Directors and management also believe that as a REIT, Station REIT would be able more readily to access capital and that its improved balance sheet would better allow Station REIT to implement its strategy of master-planned development and acquisitions outlined below. See "--Business Strategy." The Board of Directors and management believe continuation of the Company's master-planned development would allow Station REIT and OpCo to take advantage of significant value in the real estate it currently holds. In addition, Station REIT's common stockholders would receive quarterly dividends as required to be paid pursuant to the provisions governing qualification of REITs. See "Certain Federal Income Tax Considerations--Annual Distribution Requirements." 2 THE REORGANIZATION TRANSACTIONS The Company currently expects that, subject to approval of the Charter Amendments and the satisfaction of certain other conditions, the Company and OpCo would make the following transfers in connection with the Reorganization Transactions:
TRANSFERS BY THE COMPANY TO OPCO(1) CONSIDERATION TO THE COMPANY FROM OPCO - -------------------------------------------------------- -------------------------------------------------------- - All working capital and inventory at the - Intermediate Notes (2) Initial Properties - OpCo Preferred Stock (3) - Furniture, fixtures and equipment - OpCo Common Stock (4) - Gaming vessels - Substantially all other personal property, including intellectual property - Certain liabilities - The capital stock of certain subsidiaries
- ------------------------ (1) Such assets, together with liabilities assumed by OpCo, are referred to herein as the "Transferred Assets." (2) Promissory notes to be issued by OpCo in an aggregate principal amount of $105 million (the "Intermediate Notes"). The Intermediate Notes will be repaid by OpCo upon consummation of the Reorganization Transactions. (3) 20,000,000 shares of Series A Cumulative Non-Voting Preferred Stock of OpCo (the "OpCo Preferred Stock"). The Company will include 10,000,000 shares of OpCo Preferred Stock in the Distribution and will sell the remaining OpCo Preferred Stock to unaffiliated third parties upon consummation of the Reorganization Transactions. (4) The common stock, no par value, of OpCo (the "OpCo Common Stock"). All of the shares of OpCo Common Stock will be included in the Distribution. 3 The Reorganization Transactions consist principally of the transactions summarized below: FIGURE 1: [GRAPH] - The Company will form OpCo and its subsidiaries - The Company will cause the transfer of the Transferred Assets to limited liability companies that are subsidiaries of OpCo. - In exchange for the Transferred Assets, OpCo will issue the (i) Intermediate Notes, (ii) OpCo Common Stock and (iii) OpCo Preferred Stock to the Company. - The Company will receive stockholder approval of adoption of the Charter Amendments. - ------------------------------------------------------------- FIGURE 2: [GRAPH] - The Company and certain selling stockholders (the "Selling Stockholders") will offer shares of Common Stock pursuant to a registered public offering, subject to increase by up to 15% to permit customary over-allotment options to be granted to the underwriters (the "Offerings"). - The Company will distribute (i) all of the OpCo Common Stock and (ii) a portion of the OpCo Preferred Stock to the Company's common stockholders as of the Distribution record date as a dividend. - The Company will sell the remaining portion of the OpCo Preferred Stock (together with that received by certain of the Selling Stockholders in the Distribution) to unaffiliated third parties. - Upon closing of the OpCo bank facility, OpCo will pay the Company $105 million to repay the Intermediate Notes (See Figure 3). 4 FIGURE 3: [GRAPH] - To obtain certain tax treatment for Station REIT, certain affiliated stockholders of OpCo will exchange the OpCo Common Stock owned by them for a series of non-voting common stock of OpCo ("OpCo B Stock"). See "Principal Stockholders." - Subsidiaries of the Company will enter into the Leases with subsidiaries of OpCo. - The Company and the Selling Stockholders will consummate the Offerings - The Company will utilize the proceeds from (i) the retirement of the Intermediate Notes, (ii) the sale of the undistributed portion of OpCo Preferred Stock, (iii) the Offerings and (iv) the Bank Facility (as defined herein) to retire debt and repay certain other obligations. See "Sources and Uses." - The Company will change its name to "Station Entertainment Properties, Inc." and OpCo will change its name to "Station Casinos, Inc." - The Company will change its fiscal and taxable year to a calendar year. - The Company will elect REIT status on or prior to March 31, 1998. -------------------------------------------------------------------------- The consummation of the Reorganization Transactions (the "Closing") is not conditioned upon the adoption of the proposed Charter Amendments. The Company intends to consummate the Reorganization Transactions regardless of whether the Charter Amendments are approved at the Meeting. If the Charter Amendments are approved at the Meeting, they will not become effective unless and until the Reorganization Transactions are consummated. In addition, no commitments are currently in place with respect to any of the financing transactions anticipated in connection with the Reorganization Transactions, and the Company expects that the precise nature and composition of such financing transactions may not be fully determined by the time of the Meeting. There can be no assurance that the terms of the Reorganization Transactions will not change significantly after the Meeting. In addition, the consummation of the Reorganization Transactions is conditioned upon a number of factors, including approval of Nevada and Missouri gaming authorities. Consequently, regardless of whether the Charter Amendments are approved at the Meeting, there can be no assurance that the Reorganization Transactions will occur as scheduled or at all. 5 RELATIONSHIP BETWEEN STATION REIT AND OPCO OpCo's management team initially will consist primarily of the management team that currently operates the Initial Properties. Such individuals will not be employed by Station REIT after the Closing, except that Mr. Frank J. Fertitta III will be employed by both Station REIT and OpCo. Certain of the initial directors of the companies will be the same, although it is expected that a majority of the directors of Station REIT will be independent directors and will not participate on the OpCo board of directors. Station REIT will give OpCo a right of first offer to manage any hotel/casino properties that Station REIT acquires or develops in the Las Vegas locals market (unless Station REIT elects to retain current management at an acquired property), and OpCo will give Station REIT a right of first offer to acquire or finance certain real estate and related assets in connection with opportunities or transactions OpCo may pursue. Station REIT initially will share executive office space and facilities, as well as certain corporate services personnel, with OpCo and will bear its allocable share of the expenses thereof pursuant to the Transition Services Agreement (as defined herein). See "Certain Considerations--Conflicts of Interest," "Relationship Between Station REIT and OpCo after the Distribution," "Management After the Reorganization," and OpCo's historical and pro forma combined financial statements included in this Proxy Statement. Station REIT will lease all of the Initial Properties to OpCo, which will operate the Initial Properties. Each Lease is a long-term, triple net lease that requires OpCo to pay substantially all expenses associated with the operation of such Initial Property, including taxes and other governmental charges, insurance, utilities, service, maintenance and any ground lease payments. Each Lease will provide for (x) base rent (with certain annual escalations) and (y) percentage rent (based on gross receipts in excess of specified threshold amounts) and will have initial terms ranging from 13 to 15 years, which, at the option of OpCo, generally may be extended for six additional five year periods. The Leases for the Initial Properties have an initial aggregate base rent of $126 million and such Leases provide for incremental base rent at an 11% lease rate based on the incremental amount invested in the related property. The Leases generally grant Station REIT certain approval rights with respect to any eligible Capital Project (as defined herein) that OpCo may be considering. Further, such Leases require OpCo to give Station REIT the opportunity to finance, and receive such incremental base rent from, such Capital Projects OpCo may be considering. Management intends to seek leases with respect to additional properties it may develop or acquire generally on terms that are similar to the Leases on the Initial Properties. BUSINESS STRATEGY HISTORICAL OVERVIEW The Company has been a leading Las Vegas hotel/casino operator, catering primarily to local residents and repeat visitors. The Initial Properties have over 10,000 slot and video poker machines in Las Vegas, more than any other owner/operator in the entire Las Vegas market. The Company targets the full- service locals and repeat visitors segment of the Las Vegas gaming market. Slot and video poker machines at the Company's Las Vegas properties account for approximately 38% of the installed base of machines within the Las Vegas locals market. Consequently, management believes the Initial Properties in Las Vegas are well-positioned to continue to benefit from the business and population growth in Las Vegas and its surrounding areas. The Company has implemented its long-term Las Vegas business strategy by developing four fully-integrated entertainment destinations in key population centers in each quadrant of the Las Vegas market. Each of these Initial Properties has been master-planned for future expansion in order to capitalize on Las Vegas' expected population growth. In applying a similar philosophy of identifying projects with long-term potential in the locals' market niche, the Company has diversified into two major markets in Missouri. Management believes that its track record of sustained growth in its target market is attributable to its philosophy of developing long-term competitive assets. Specifically, management believes that its ability to secure properties in high traffic areas having ease of access and high visibility has provided the Initial Properties with a long-term competitive advantage. 6 GROWTH STRATEGY Station REIT's growth strategy is expected to encompass three key elements: (1) continued master-planned development of the Initial Properties; (2) acquisitions and development of casino properties within Las Vegas; and (3) acquisitions and development of casino properties outside of Las Vegas. In addition, Station REIT will benefit from growth at the Initial Properties to the extent it realizes additional Lease revenues. OpCo is expected to initiate master-planned development at the Initial Properties and seek to participate in acquisitions and development by Station REIT when such opportunities fit with OpCo's growth plans and OpCo is not otherwise precluded from such participation. Continued Master-Planned Development Each of the Initial Properties was designed to facilitate staged, master-planned development. The Company has successfully implemented this strategy at several of the Initial Properties. For example, Palace Station was opened in 1976 as a 5,000 square foot facility. Today, Palace Station encompasses 287,000 square feet with 2,250 slot and video poker machines, 1,028 hotel rooms, five full-service restaurants, 3,700 parking spaces and approximately 20,000 square feet of banquet and convention space. Similarly, since their respective openings in 1994 and 1995, operating performance at Boulder Station and Texas Station has benefited from the execution of master-planned development, including Boulder Station's parking structure and movie theater complex additions and Texas Station's parking structure and bingo parlor additions. The emphasis of the master plan at each of the Initial Properties has been the development of diversified entertainment destinations for a targeted customer base. To further this strategy, management has secured exclusive arrangements with certain third-party tenants such as Act III Theaters and Kid's Quest child care facilities. In addition, several of the Initial Properties have sufficient acreage for management to pursue "build-to-suit" retail/entertainment opportunities. Management believes that the establishment of these tenant relationships will generate incremental Lease revenues, diversify the tenant base and drive additional traffic through the Initial Properties, thereby increasing the opportunity for additional percentage rent. The Company has budgeted $80 million for potential investments at the Initial Properties in Las Vegas during calendar 1998. OpCo is expected to initiate this master-planned development at each of the Initial Properties when it determines that economic conditions warrant expansion and will produce revenues sufficiently in excess of those needed to pay for such capital improvements or the increased rents at the Initial Properties if Station REIT elects to finance such development. See "Relationship Between Station--REIT and OpCo--The Leases." Acquisitions and Development Within the Las Vegas Market Management believes that Las Vegas' rapidly growing population creates attractive acquisition and development opportunities for Station REIT and growth and additional management opportunities for OpCo. From 1990 to 1996, the cities of Las Vegas and its suburb Henderson were the sixth and first fastest growing metropolitan areas in the United States. Management has significant expertise in the Las Vegas market, where approximately 82% of the base Lease revenues initially will be generated by OpCo. Management believes that its locals market expertise, leading market position and strong capitalization will afford Station REIT an advantage over many other potential acquirors. Station REIT intends to identify Las Vegas properties with attributes that are compatible with its master-plan development strategy. These characteristics include: (a) a central location, (b) convenient highway access, (c) ample parking and (d) adequate acreage for growth. Management believes that Las Vegas also offers acquisition opportunities for Station REIT outside the locals market. OpCo is expected to exercise its rights to manage properties acquired or developed by Station REIT to the extent they are within the Las Vegas locals market and, with respect to acquired properties, Station REIT does not elect to retain current management. OpCo also may manage properties Station REIT 7 acquires or develops in Las Vegas outside the locals market to the extent, OpCo and Station REIT reach mutually satisfactory terms. OpCo does not have a right of first offer to manage properties held by Station REIT in Las Vegas outside the locals market. Subject to Station REIT's right of first offer, OpCo also is expected to develop and manage properties independently of Station REIT. Acquisitions and Development Outside the Las Vegas Market Gaming outside of the Las Vegas market has experienced substantial growth over the last decade. In addition to the developed markets of Atlantic City, New Jersey and other markets in Nevada, the gaming industry has expanded into several new jurisdictions including Illinois, Missouri, Louisiana and Mississippi. Management believes that many of these gaming markets are largely dependent on attracting customers from local and regional surrounding communities. Consequently, these markets are similar to the Las Vegas locals and repeat visitors market and provide opportunities for Station REIT to employ its investment philosophy. Additionally, management believes that many owner/operators within these markets are relatively undercapitalized and will be required to invest additional capital if their properties are to remain competitive. As a result of Station REIT's improved balance sheet, management believes it will be well-positioned to pursue acquisition and development opportunities in these markets. OpCo also may manage properties Station REIT acquires or develops outside the Las Vegas market to the extent OpCo and Station REIT reach mutually satisfactory terms. OpCo does not have a right of first offer to manage properties held by Station REIT outside the Las Vegas locals market. Subject to Station REIT's right of first offer, OpCo also is expected to develop and manage properties independently of Station REIT. OPERATING STRATEGY Station REIT will enter into triple-net leases with OpCo and, potentially, other third-party lessees for gaming, hotel and entertainment facilities. Management anticipates the long-term lease arrangements with these lessees will require the lessee to maintain the property and provide opportunities for Station REIT to participate in revenue growth. Station REIT also may invest in non-gaming entertainment facilities and enter into leases with third-party lessees to enhance the overall diversification of its real estate portfolio. Station REIT's existing lease arrangements with Act III and Kids Quest are examples of the type of tenant relationship management intends to pursue. OpCo expects to continue the management and operating strategy currently employed by the Company. The operating strategy at the Initial Properties emphasizes attracting and retaining customers primarily from the local and repeat visitor markets. The Initial Casino Properties attract customers from their local markets through innovative, frequent and high-profile promotional programs, focused marketing efforts, convenient locations and from the repeat visitor market through aggressive marketing and the development of strong relationships with specifically targeted travel wholesalers. CAPITAL STRATEGY Upon completion of the Reorganization Transactions, Station REIT's long-term indebtedness will be reduced by over $350 million, and Station REIT expects to have $500 million available for borrowing under a new bank credit facility (the "Bank Facility"). Management believes that these improvements in its capital structure and the anticipated increase in its access to additional capital will improve the competitive position of Station REIT in pursuing its growth strategy. Management intends to utilize moderate leverage to grow its portfolio of real estate assets. Currently, management anticipates a maximum debt to market capitalization ratio of 50%. Station REIT intends that distributions to holders of Common Stock will increase with any growth in Funds From Operations (as defined herein). See "--Distribution and Dividend Policy." Upon completion of the Reorganization Transactions, OpCo expects to have a $150 million new bank credit facility of which $105 million will be drawn in to repay the Intermediate Notes. 8 DISTRIBUTION AND DIVIDEND POLICY Station REIT is expected to make regular quarterly distributions to holders of Common Stock initially equal to $ per share, which, on an annualized basis, would be equal to $ per share. The first distribution, for the period from the Closing to June 30, 1998, is expected to equal the anticipated regular quarterly distribution. Station REIT's Board of Directors will periodically determine the actual distribution rate in its sole discretion. The estimate of anticipated initial quarterly distributions relates only to periods ending on or prior to December 31, 1998, and no assurance can be given as to the amount of distributions, if any, after that date. Station REIT's actual Funds From Operations will be affected by a number of factors, including operations at the Initial Properties. The Company established the initial distribution amount based upon pro forma Funds From Operations for its latest twelve month period, as further adjusted as described in footnote (1) below. "Funds From Operations" as defined by the National Association of Real Estate Investment Trusts is net income (loss) computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring or sales of property, plus depreciation and amortization on real estate assets and after adjustments, if any, for unconsolidated partnerships and joint ventures. Station REIT's "Cash Available for Distribution," which is Funds From Operations adjusted for certain non-cash items, less reserves for capital expenditures, is not expected to be materially different from its Funds From Operations, principally because under the Leases, OpCo will be responsible for substantially all maintenance capital expenditures. See "--Summary Consolidated Financial Data of Station REIT" for information regarding cash flows provided by operating, investing and financing activities. The Company believes that such pro forma financial information, with the enumerated adjustments, provides a reasonable basis for setting the initial distribution rate. The foregoing is being set forth solely to describe the setting of the initial distribution amount, and should not be construed as a forecast of Station REIT's results of operations or liquidity. See "Distribution Policy." The following table sets forth certain unaudited, supplementally adjusted pro forma financial information for the twelve months ended September 30, 1997.
SUPPLEMENTAL ADJUSTED PRO FORMA TWELVE MONTHS ENDED SEPTEMBER 30, 1997(1) ------------------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Gross revenues...................................................... $ 131,820 -------- Expenses(2)......................................................... 63,920 Depreciation........................................................ 13,320 -------- Funds From Operations(3)............................................ 67,900 -------- -------- Initial Funds From Operations per share(3)(4)....................... $ 1.06 -------- --------
- ------------------------ (1) Represents the pro forma results of operations for the period presented, determined on the basis set forth in Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations and as adjusted to reflect (a) annualized Lease revenues, and associated expenses, as if each of the Initial Properties had been in operation from October 1, 1996, and (b) the redemption by Station REIT of all of its 9 5/8% Senior Subordinated Notes due 2003 with borrowings under the Bank Facility, as if the same had occurred on October 1, 1996. Although Station REIT is expected to redeem or repurchase such notes (see footnote (1) of Notes to Station REIT Pro Forma Capitalization), no assurance may be given that such event will in fact occur on the assumed terms or at all. (2) Consists of interest expense and preferred stock dividends, rental expense and general and administrative expense. (3) Industry analysts generally consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered an alternative to net income as an indicator of Station REIT's operating performance or to cash flow as a measure of liquidity. (4) Based on approximately 64.3 million shares of Common Stock outstanding upon completion of the Offerings. Excludes shares of Common Stock issuable upon (a) conversion of outstanding convertible securities and (b) the underwriters' exercise, if any, of the over-allotment options. See "Station REIT Pro Forma Capitalization" and "Description of Capital Stock." 9 OpCo does not intend to pay dividends on the OpCo Common Stock in the foreseeable future so that it may reinvest its earnings in the development of its business. The payment of dividends on the OpCo Common Stock in the future will be at the discretion of the OpCo board of directors. Restrictions imposed by OpCo's debt obligations and the OpCo Preferred Stock are also expected to limit the payment of dividends by OpCo to common stockholders. SOURCES AND USES The following table sets forth the combined proposed sources and uses of the proceeds to the Company and OpCo, respectively of the Reorganization Transactions. No commitments are currently in place with respect to any of the financing anticipated to be required by the Company or OpCo, respectively, in connection with the Reorganization Transactions, and the Company expects that the precise nature and composition of such financing may not be fully determined by the time of the Meeting. See "Station REIT Pro Forma Capitalization," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet," "OpCo Pro Forma Capitalization," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations" and "Station Operating Company, Inc. Unaudited Pro Forma Combined Balance Sheet." THE COMPANY (AMOUNTS IN THOUSANDS)
SOURCES Gross proceeds to the Company from the Offerings(1).................... $ 350,000 Proceeds from repayment of Intermediate Notes.................. 105,000 Gross Proceeds from the resale of the OpCo Preferred Stock................ 10,000 --------------- Total Sources...................... $ 465,000 --------------- --------------- USES Sunset Loan Agreement(2)............. $ 104,892 Sunset Operating Lease(3)............ 35,700 Current Bank Facility(4)............. 216,372 Repayment of certain obligations(5)...................... 52,014 Transaction Costs and Available Cash(6)(7).......................... 56,022 --------------- Total Uses......................... $ 465,000 --------------- ---------------
- ------------------------------ (1) The Company will receive no proceeds from the sale of Common Stock by the Selling Stockholders. (2) Construction/Term Loan Agreement dated as of September 25, 1996, among Sunset Station, Inc. ("SSI") and Bank of America National Trust and Savings Association, Bank of Scotland, Societe Generale (collectively, the "Banks") and each of the other lenders party thereto (the "Sunset Loan Agreement"). Represents the balance at September 30, 1997 (including accrued interest), although actual amounts may vary upon consummation of the Offerings and the Reorganization Transactions. (3) Operating lease dated as of September 25, 1996, among the Company and First Security Trust Company of Nevada used for the purchase of FF&E at Sunset Station. (4) Amended and Restated Reducing Revolving Loan Agreement dated as of March 19, 1996, as amended, among Palace Station Hotel & Casino, Inc. ("PSHC"), Boulder Station, Inc. ("BSI"), Texas Station, Inc. ("TSI"), Kansas City Station Corporation and St. Charles Riverfront Station, Inc., the Banks and the other lenders party thereto (the "Current Bank Facility"). Represents the balance at September 30, 1997, (including accrued interest), although actual amounts may vary upon consummation of the Offerings and the Reorganization Transactions. (5) The Company will repay certain obligations associated with certain assets that are not assumed by OpCo. (6) Excludes the effect of any decision by holders of Common Stock to assert dissenters' rights relating to the Charter Amendments. (7) The Company also expects to incur approximately $3 million of financing costs in connection with the $500 million Bank Facility it expects to obtain upon consummation of the Offerings and the Reorganization Transactions. See "Station REIT Pro Forma Capitalization." OPCO (AMOUNTS IN THOUSANDS)
SOURCES OpCo bank facility(1)...................... $ 105,000 --------- Total Sources............................ $ 105,000 --------- --------- USES Repayment of Intermediate Notes............ $ 105,000 --------- Total Uses............................... $ 105,000 --------- ---------
- ------------------------------ (1) It is anticipated that OpCo will obtain a bank facility of $150 million. See "OpCo Pro Forma Capitalization" and "Station Operating Company Unaudited Pro Forma Combined Balance Sheet." 10 SUMMARY CONSOLIDATED FINANCIAL DATA OF STATION REIT The summary consolidated financial data presented below as of and for the Company's fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from consolidated financial statements which, except for 1993 and 1994, are contained elsewhere in this Proxy Statement. The summary consolidated financial data presented below as of and for the years ended March 31, 1993 and 1994 and the six months ended September 30, 1997 and 1996 are derived from unaudited consolidated financial statements; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for such period have been included. The summary consolidated financial data set forth below are qualified in their entirety by, and should be read in conjunction with the "Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations," "Management's Discussion and Analysis of Financial Condition and Results of Operations of Station REIT" and the consolidated financial statements, the notes thereto and other financial and statistical information included elsewhere in this Proxy Statement.
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net revenues............................... $ 149,895 $ 169,543 $ 290,278 $ 466,857 $ 583,515 $ 273,474 $ 367,613 Depreciation and amortization.............. 10,935 12,976 22,220 35,039 44,589 20,092 33,169 Preopening expenses........................ -- -- 19,378 2,436 31,820 -- 10,866 Operating income........................... 26,857 25,696 6,388 69,464 58,123 46,622 31,518 Interest expense, net...................... (8,949) (9,179) (19,967) (30,563) (36,698) (16,260) (35,713) Income (loss) before income taxes.......... 17,940 20,445 (11,419) 40,051 21,378 30,428 (9,191) Net income (loss).......................... -- 9,417 (7,942) 25,472 13,763 19,577 (5,933) Preferred stock dividends.................. -- -- -- (53) (7,245) (3,622) (3,622) Net income (loss) applicable to common stock.................................... -- 9,417 (7,942) 25,419 6,518 15,955 (9,555) Pro forma net income (unaudited)(1)........ 11,840 12,309 -- -- -- -- -- Earnings per share: Earnings (loss) per common share........... $ -- $ -- $ (0.26) $ 0.75 $ 0.18 $ 0.45 $ (0.27) Pro forma earnings per share (unaudited)(1)........................... $ 0.44 $ 0.42 $ -- $ -- $ -- $ -- $ -- OTHER DATA(2): Number of hotel rooms...................... 1,028 1,028 1,328 1,528 1,708 1,528 2,106 Average daily occupancy rate:.............. Palace Station........................... 94% 97% 95% 94% 95% 97% 96% Boulder Station.......................... -- 92% 93% 94% 98% 98% 98% Sunset Station........................... -- -- -- -- -- -- 92% Texas Station............................ -- -- -- 86% 95% 96% 91% Station Casino Kansas City............... -- -- -- -- 95% -- 91% Casino square footage...................... 84,000 84,000 206,000 278,000 432,000 278,000 512,000 Number of slot machines.................... 3,202 3,323 7,020 9,555 13,008 9,449 15,345 Capital expenditures(3).................... $ 15,504 $ 102,687 $ 163,884 $ 307,745 $ 506,096 $ 218,797 $ 103,561 EBITDA(4).................................. 37,792 41,743 47,986 106,939 136,548 66,714 75,553 EBITDAR(5) 37,792 41,983 50,563 113,476 139,906 69,178 80,656 Cash flows provided by (used in): Operating activities..................... $ 29,658 $ 23,685 $ 48,494 $ 77,953 $ 111,803 $ 52,177 $ 54,644 Investing activities..................... (14,867) (111,072) (157,585) (266,935) (479,008) (195,853) (182,958) Financing activities..................... (10,309) 92,073 109,893 286,889 294,859 59,432 129,715
11
AS OF MARCH 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- AS OF SEPTEMBER 30, 1997 ------------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Cash and cash equivalents.................... $ 11,473 $ 16,159 $ 16,961 $ 114,868 $ 42,522 $ 43,923 Total assets................................. 185,110 301,486 436,538 827,314 1,234,118 1,308,675 Long-term debt............................... 133,215 159,460 299,814 464,998 760,963 899,994 Stockholders' equity......................... 37,153 95,791 87,886 278,470 298,848 289,501
- ------------------------------ (1) Reflects provisions for federal income taxes (assuming a 34% effective tax rate for both periods) as if the Company had not been treated as an S corporation during the year ended March 31, 1993. (2) Other Data relating to the number of hotel rooms, the casino square footage and the number of slot machines represent end of period data. (3) Capital expenditures for the fiscal year ended March 31, 1994 included $52.8 million related to the development of Station Casino St. Charles and $31.9 million related to the development of Boulder Station. Capital expenditures for the fiscal year ended March 31, 1995 include $52.9 million related to the development of Station Casino St. Charles and $90.7 million related to the development of Boulder Station. Capital expenditures for the fiscal year ended March 31, 1996 include $84.9 million related to the acquisition and completion of Texas Station, $25.0 million related to the parking garage and entertainment complex at Boulder Station, $62.8 million related to the development and construction of Station Casino Kansas City, $29.7 million related to the development and construction of Sunset Station and $39.4 million related to the St. Charles Expansion Project (as defined herein). Capital expenditures for the fiscal year ended March 31, 1997 included $211.1 million related to the development and construction of Station Casino Kansas City, $112.8 million related to the development and construction of Sunset Station and $99.6 million related to the development and construction of the St. Charles Expansion Project. Capital expenditures for the six months ended September 30, 1997 include $40.7 million related to the development and construction of Sunset Station, and $23.9 million related to the development and construction of the St. Charles Expansion Project. (4) "EBITDA" consists of operating income and, in the case of Station Casino St. Charles, lease income of $3.1 million relating to the Station Casino St. Charles riverboat in fiscal year 1994, plus depreciation and amortization, including preopening expenses and a restructuring charge in 1997. EBITDA should not be construed as an alternative to operating income as an indicator of the Company's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization. (5) "EBITDAR" consists of EBITDA plus lease expenses. EBITDAR should not be construed as an alternative to operating income as an indicator of the Company's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. The Company has presented EBITDAR solely as supplemental disclosure because the Company believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation, amortization and lease expenses. 12 SUMMARY COMBINED FINANCIAL DATA OF OPCO The summary combined financial data presented below as of and for OpCo's fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from combined financial statements which, except for 1993 and 1994, are contained elsewhere in this Proxy Statement. The summary combined financial data presented below as of and for the years ended March 31, 1993 and 1994 and the six months ended September 30, 1997 and 1996 are derived from unaudited combined financial statements; however, in the opinion of OpCo, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of OpCo's financial position and results of operations for such period have been included. The summary combined 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 of OpCo" and the combined financial statements, the notes thereto and other financial and statistical information included elsewhere in this Proxy Statement. The following summary combined financial data of OpCo relates to the business of OpCo as it was operated as a part of the Company and may not reflect the results of operations or financial position that would have been obtained had OpCo been a separate, publicly held company during such periods. In particular, the effect of Lease payments that would have been incurred by OpCo are not reflected. Also, OpCo will incur interest expense on its bank credit facility and will be required to pay dividends on the OpCo Preferred Stock, neither of which is reflected. In addition, the combined historical financial statements of OpCo include certain expenses that, upon completion of the Reorganization Transactions, will not be included in future OpCo financial statements. Such expenses include (i) an intercompany expense for depreciation on real estate assets held by Station REIT which OpCo will lease or sublease and (ii) interest expense on certain obligations of Station REIT which OpCo will not assume. See "Summary Unaudited Pro Forma Financial Data of OpCo."
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net revenues............................... 149,895 169,543 290,278 466,857 583,515 273,474 367,613 Depreciation and amortization.............. 8,865 11,047 18,887 29,837 36,619 16,437 26,927 Preopening expenses........................ -- -- 19,378 2,436 31,820 -- 10,866 --------- --------- --------- --------- --------- --------- --------- Operating income........................... 26,857 25,696 6,388 69,464 58,123 46,622 31,518 Interest expense, net...................... (8,949) (7,443) (6,980) (10,546) (7,413) (3,479) (6,172) Income before income taxes................. 17,940 20,445 1,568 60,068 50,663 43,210 20,350 Net income................................. $ -- $ 13,065 $ 756 $ 38,472 $ 33,542 $ 28,058 $ 13,520 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income after income taxes (unaudited)(1)........................... $ 11,680 $ 13,494 $ -- $ -- $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) OTHER DATA(2): Number of hotel rooms...................... 1,028 1,028 1,328 1,528 1,708 1,528 2,106 Average daily occupancy rate: Palace Station........................... 94% 97% 95% 94% 95% 97% 96% Boulder Station.......................... -- 92% 93% 94% 98% 98% 98% Sunset Station........................... -- -- -- -- -- -- 92% Texas Station............................ -- -- -- 86% 95% 96% 91% Station Casino Kansas City............... -- -- -- -- 95% -- 91% Casino square footage...................... 84,000 84,000 206,000 278,000 432,000 278,000 512,000 Number of slot machines.................... 3,202 3,323 7,020 9,555 13,008 9,449 15,345 Capital expenditures....................... $ 6,311 $ 24,485 $ 144,624 $ 85,780 $ 251,386 $ 35,252 $ 43,707 EBITDA(3).................................. 37,792 41,743 47,986 106,939 136,548 66,714 75,553 EBITDAR(4) 37,792 41,983 50,563 113,476 139,906 69,178 80,656 Cash flows provided by (used in): Operating activities..................... $ 28,822 $ 30,910 $ 58,257 $ 88,479 $ 127,813 $ 55,288 $ 62,033 Investing activities..................... (7,158) (44,728) (132,373) (74,633) (285,108) (37,225) (48,787) Financing activities..................... (17,173) 18,495 74,918 84,061 84,949 (102,307) (11,845)
13
AS OF MARCH 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- AS OF SEPTEMBER 30, 1997 ------------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................... $ 11,482 $ 16,159 $ 16,961 $ 114,868 $ 42,522 $ 43,923 Total assets................................. 86,084 135,098 249,530 398,091 557,313 580,857 Long-term debt............................... 126,642 48,561 114,923 76,580 377,897 368,564 Investment by Station Casinos, Inc........... (65,809) 47,990 83,694 269,452 95,616 112,349
- ------------------------------ (1) Reflects provisions for federal income taxes (assuming a 34% effective tax rate for both periods) as if OpCo had not been treated as an S corporation during the year ended March 31, 1993. (2) Other Data relating to the number of hotel rooms, the casino square footage and the number of slot machines represent end of period data. (3) "EBITDA" consists of operating income and, in the case of Station Casino St. Charles, lease income of $3.1 million relating to the Station Casino St. Charles riverboat in fiscal year 1994, plus depreciation and amortization, including preopening expenses, intercompany expense related to depreciation on real estate assets to be held by Station REIT and a restructuring charge in 1997. EBITDA should not be construed as an alternative to operating income as an indicator of OpCo's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. OpCo has presented EBITDA solely as supplemental disclosure because OpCo believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization. (4) "EBITDAR" consists of EBITDA plus lease expenses. EBITDAR should not be construed as an alternative to operating income as an indicator of OpCo's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. OpCo has presented EBITDAR solely as supplemental disclosure because OpCo believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation, amortization and lease expenses. 14 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA OF STATION REIT The following summary unaudited pro forma financial data make adjustments to the Company's historical statements of operations as if the Reorganization Transactions had occurred on April 1, 1996 and make adjustments to the Company's historical balance sheet as if the Reorganization Transactions had occurred on September 30, 1997. See "Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet" and "Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations" for a description of the pro forma adjustments made in the preparation of the pro forma financial data. The pro forma financial statements of Station REIT do not purport to be indicative of the future results of operations or financial position of Station REIT or what the results of operations would have been if the Reorganization Transactions had occurred on the dates indicated.
SIX MONTHS YEAR ENDED ENDED MARCH 31, 1997 SEPTEMBER 30, 1997 ---------------- ------------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Rental revenues: Palace Station.......................................................... $ 24,000 $ 12,000 Boulder Station......................................................... 35,000 17,500 Texas Station........................................................... 14,000 7,000 Sunset Station.......................................................... -- (1) 7,875(1) Station Casino St. Charles.............................................. 13,000 6,500 Station Casino Kansas City.............................................. 2,708(1) 6,500 -------- -------- Total lease revenues.................................................... 88,708 57,375 Pass-through revenue(2)................................................... 3,525 2,610 -------- -------- Gross revenue(2).......................................................... 92,233 59,985 Corporate expenses.......................................................... 3,000 1,500 Rental expense(1)........................................................... 3,525 2,610 Depreciation................................................................ 7,970 6,242 -------- -------- Operating income............................................................ 77,738 49,633 Interest expense, net....................................................... (20,263) (18,959) -------- -------- Net income.................................................................. 57,475 30,674 Preferred stock dividends................................................... (7,245) (3,622) -------- -------- Net income applicable to common stock....................................... $ 50,230 $ 27,052 -------- -------- -------- -------- Earnings per common share(3)................................................ $ 0.78 $ 0.42 -------- -------- -------- -------- OTHER FINANCIAL DATA: Net income applicable to common stock....................................... $ 50,230 $ 27,052 Add: Depreciation........................................................... 7,970 6,242 -------- -------- Funds From Operations(4).................................................... $ 58,200 $ 33,294 -------- -------- -------- -------- Funds From Operations per common share(3)(4)................................ $ 0.90 $ 0.52 -------- -------- -------- --------
AS OF SEPTEMBER 30, 1997 ----------------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......................................................... $ 28,272 Total assets....................................................................... 777,306 Long-term debt..................................................................... 531,430 Stockholders' equity............................................................... 219,410
- -------------------------- (1) Reflects less than a full year's operations for Sunset Station, which, commenced operations on June 10, 1997, and Station Casino Kansas City, which, commenced operations on January 16, 1997. The aggregate annualized lease revenues for all Initial Properties, had they been open for a full twelve months, would have been $126 million. (2) Represents the amount of pass-through rents with respect to head leases on the Initial Properties. (3) Excludes the Common Stock issuable upon conversion of the Convertible Preferred Stock (as defined herein) and exercise of options. (4) Funds From Operations represents cash flow from operations because there are no pro forma working capital adjustments. Industry analysts generally consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered an alternative to net income as an indicator of Station REIT's operating performance or to cash flow as a measure of liquidity. 15 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA OF OPCO The following summary unaudited pro forma financial data make adjustments to OpCo's historical statement of operations as if the Reorganization Transactions had occurred on April 1, 1996 and make adjustments to OpCo's historical balance sheet as if the Reorganization Transactions had occurred on September 30, 1997. See "Station Operating Company Unaudited Pro Forma Combined Balance Sheet" and "Station Operating Company Unaudited Pro Forma Combined Statements of Operations" for a description of the pro forma adjustments made in the preparation of the pro forma financial data. The pro forma financial statements of OpCo do not purport to be indicative of the future results of operations or financial position of OpCo or what the results of operations would have been if the Reorganization Transaction had occurred on the dates indicated.
SIX MONTHS YEAR ENDED ENDED MARCH 31, SEPTEMBER 30, 1997 1997 ----------- ------------- STATEMENTS OF OPERATIONS DATA: Operating revenues: Casino.......................................................................... $ 450,013 $ 282,700 Food and beverage............................................................... 92,220 63,577 Room............................................................................ 27,420 17,218 Other........................................................................... 48,957 28,676 ----------- ------------- Gross revenues.................................................................. 618,610 392,171 Promotional allowances.......................................................... (35,095) (24,558) ----------- ------------- Net revenues.................................................................... 583,515 367,613 ----------- ------------- Operating costs and expenses: Casino.......................................................................... 203,857 137,592 Food and beverage............................................................... 68,994 44,862 Room............................................................................ 10,318 6,481 Other........................................................................... 23,927 13,481 Lease expense................................................................... 88,708 57,375 Selling, general and administrative............................................. 120,285 81,896 Corporate expenses.............................................................. 18,284 7,644 Restructuring charge............................................................ 2,016 -- Development expenses............................................................ 1,302 104 Depreciation and amortization................................................... 36,619 26,927 Preopening expenses............................................................. 31,820 10,866 ----------- ------------- Total costs and expenses........................................................ 606,130 387,228 ----------- ------------- Operating loss.................................................................... (22,615) (19,615) Interest expense, net........................................................... (9,592) (4,795) Other........................................................................... (47) (4,996) ----------- ------------- Loss before income taxes.......................................................... (32,254) (29,406) Income tax benefit................................................................ 11,900 10,584 ----------- ------------- Net loss.......................................................................... (20,354) (18,822) Preferred stock dividends......................................................... (2,400) (1,200) ----------- ------------- Net loss applicable to common stock............................................... $ (22,754) $ (20,022) ----------- ------------- ----------- ------------- Loss per share.................................................................... $ (11.38) $ (10.01 ) ----------- ------------- ----------- -------------
AS OF SEPTEMBER 30, 1997 ----------------------- BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 43,923 Total assets.......................................................................... 573,092 Long term debt........................................................................ 105,000 Preferred stock....................................................................... 20,000 Stockholders' equity.................................................................. 308,504
16 THE SPECIAL MEETING AND VOTING THE SPECIAL MEETING The Meeting will be held at Sunset Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada on , 1998, beginning at .m. local time. Holders of record of shares of the Common Stock at the close of business on , 1998, (the "Record Date"), are entitled to notice of and to vote at the Meeting. At the Meeting, stockholders will be asked to consider and vote upon Charter Amendments which will: (a) increase the authorized shares of the Company to 360,000,000 shares consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock; (b) add certain transfer restrictions preventing transfers that would result in the transferee (other than certain stockholders) constructively holding in excess of 5.5% of the capital stock of Station REIT and related provisions desirable for the Company to protect its status as a real estate investment trust for federal income tax purposes; and (c) change the name of the Company to "Station Entertainment Properties, Inc." See "Description of Capital Stock--Terms of Stock as Modified by Charter Amendments." The Charter Amendments, if approved, will not become effective unless and until the Closing. The Closing is conditioned upon a number of factors, including approval of Nevada and Missouri gaming authorities. There can be no assurance that the Closing will occur or will not be delayed. No commitments are currently in place with respect to any of the financing transactions anticipated in connection with the Reorganization Transactions, and the Company expects that the precise nature and composition of such financing may not be fully determined by the time of the Meeting. Consequently, there can be no assurance that the terms of the Reorganization Transactions will not change significantly after the Meeting from those currently contemplated as described herein. REVOCATION OF PROXIES Any stockholder giving a proxy may revoke it at any time prior to its exercise at the Meeting by giving notice of such revocation either personally or in writing to the Secretary of the Company at the Company's executive offices, by subsequently executing and delivering another proxy or by voting in person at the Meeting. Attendance at the Meeting will not, by itself, constitute revocation of a proxy. VOTING Shares represented by duly executed and unrevoked proxies on the enclosed form of proxy received by the Company will be voted at the Meeting in accordance with the specifications made therein by the stockholders returning such proxies, unless authority to do so is withheld. If no specification is made, shares represented by duly executed and unrevoked proxies in the enclosed form will be voted FOR the Charter Amendments and, with respect to any other matter that may properly come before the meeting, in the discretion of the persons voting the respective proxies. The cost of preparing, assembling and mailing the proxy materials will be borne by the Company. The Company has retained D.F. King & Co., Inc. to solicit proxies at an estimated cost of $7,500. Only holders of record, at the close of business on the Record Date, of the Common Stock, will be entitled to notice of and to vote at the Meeting. On the Record Date, there were [ ] shares of Common Stock outstanding. Each share of Common Stock is entitled to one vote on the Charter Amendments. 17 VOTE REQUIRED Article IX of the Articles requires the affirmative vote of not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all shares of the Common Stock to approve the adoption of the Charter Amendments. Shares as to which a stockholder abstains or withholds from voting on the Charter Amendments will be treated as a vote against the Charter Amendments. The executive officers and directors of the Company hold approximately 42.8% of the outstanding Common Stock and are expected to vote in favor of approval of the Charter Amendments. See "Principal Stockholders." RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors believes the Charter Amendments are in the best interests of the Company and its stockholders and unanimously recommends that stockholders vote FOR the Charter Amendments. Although there can be no assurances that the Reorganization Transactions will occur or that they will have the intended results, the Board of Directors believes that if the Reorganization Transactions occur, the value of the Common Stock would increase because of the tax advantages that apply to REITs and because of the value placed on REIT stock by the securities markets generally. The Board of Directors also believes that as a REIT, Station REIT would be able more readily to access capital and that its improved balance sheet would better allow Station REIT to implement the Company's strategy of master-planned development and acquisitions outlined below. See "--Business Strategy." The Board of Directors believes continuation of the Company's master-planned development would allow Station REIT and OpCo to take advantage of significant value in the real estate it currently holds. In addition, Station REIT's common stockholders would receive quarterly dividends as required to be paid pursuant to the provisions governing qualification of REITs. See "Certain Federal Income Tax Considerations--Annual distribution Requirements." DISSENTERS' RIGHTS OF APPRAISAL NRS 92A.300 through 92A.500, the "Rights of Dissenting Owners" statutes, provide that a stockholder of a company is entitled to dissent from certain corporate actions, and to obtain the statutorily prescribed fair value of the stockholder's shares of Common Stock. "Fair value" equals the value of a stockholder's shares of Common Stock immediately before the effectuation of the corporate action to which the stockholder objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. Although a stockholder is entitled to dissent from and obtain payment of the fair value of the stockholder's shares of Common Stock, the stockholder may not challenge the corporate action creating such entitlement unless the action is unlawful or fraudulent with respect to the stockholder or the Company. If a stockholder wishes to assert dissenter's rights, that stockholder must: (i) deliver to the Company, before a vote on the corporate action is taken, written notice of the stockholder's intent to demand payment for the stockholder's shares of Common Stock should the corporate action take effect, and (ii) not vote the stockholder's shares of Common Stock in favor of the proposed corporate action. A failure to vote against the adoption of the Charter Amendments will not be considered a waiver of the stockholder's dissenters' rights. A stockholder who does not satisfy the foregoing requirements is not entitled to payment for that stockholder's shares of Common Stock under Nevada's Rights of Dissenting Owners statutes. All stockholders that meet the requirements of NRS 92A.300 through 92A.500 are entitled to dissent from the vote in favor of the Charter Amendments. Therefore, the Company advises each stockholder, before such stockholder decides whether to vote in favor of the Charter Amendments, to read the complete text of the Rights of Dissenting Owners statute, a copy of which is attached hereto as Exhibit A. After the Meeting, the Company will provide all stockholders who satisfy the statute's requirements with a Dissenter's Notice which will set forth where and when a demand for payment must be made. 18 CERTAIN CONSIDERATIONS EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS PROXY STATEMENT, THE MATTERS DISCUSSED HEREIN CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), SUCH AS BUSINESS STRATEGY, EXPECTED LEASE INCOME, EXPECTED INCOME OF OPERATIONS, ABILITY TO QUALIFY AS A REIT, PLANS FOR FUTURE EXPANSIONS, CAPITAL SPENDING AND FINANCIAL RESOURCES INCLUDING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS. SUCH FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN, AND INVESTORS MUST RECOGNIZE THAT ACTUAL RESULTS MAY DIFFER FROM MANAGEMENT'S EXPECTATIONS. COMPANY STOCKHOLDERS WILL CONTINUE TO BE SUBJECT TO THE SAME CONSIDERATIONS AND RISKS INHERENT IN THE BUSINESS OF THE COMPANY AS CURRENTLY CONDUCTED. IN ADDITION, STOCKHOLDERS SHOULD CONSIDER THE FOLLOWING KEY FACTORS AFFECTING FUTURE OPERATIONS OF STATION REIT AND OPCO IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROXY WHICH STOCKHOLDERS SHOULD READ CAREFULLY AND IN THEIR ENTIRETY. NEW BUSINESS STRATEGY; NEWLY ORGANIZED ENTITY; NO OPERATING HISTORY If the Reorganization Transactions occur and the Charter Amendments become effective, the Company will cease to conduct gaming operations and instead will limit its activities generally to holding and developing real estate and associated assets. Management of the Company has no experience operating as a REIT or acquiring additional properties. Station REIT will need to rely on OpCo to generate sufficient cash flow from the operation of the Initial Properties to enable OpCo to meet the rent obligations under the Leases. OpCo has been recently organized and has no operating history. Station REIT will hold the real estate and associated assets with respect to the Initial Properties and OpCo will manage and operate the Initial Properties. Although there will be certain rights of first offer between Station REIT and OpCo, there can be no assurance that all hotel/casino properties held by Station REIT will be operated by OpCo in the future or that the real estate and associated assets of all hotel/casino properties managed and operated by OpCo will be held by Station REIT. See "Relationship Between Station REIT and OpCo--Cooperation Agreement." DEPENDENCE OF STATION REIT ON OPCO OpCo will be the lessee of all the Initial Properties. Station REIT's initial revenues, and its ability to make distributions to its stockholders, initially will depend on rental payments by OpCo under the Leases (which will depend entirely on OpCo's ability to generate sufficient cash flow from the Initial Properties). OpCo is expected to have sufficient assets, income and access to financing to enable it to satisfy its obligations under the Leases at the time of the Closing; however, there can be no assurance that OpCo will have such assets, income and access to financing in the future. See "Station Operating Company Combined Statements of Operations," "Station Operating Company Combined Statements of Cash Flows," "Station Operating Company Unaudited Pro Forma Combined Balance Sheet" and "Station Operating Company Unaudited Pro Forma Combined Statements of Operations." Due to Station REIT's initial dependence on OpCo's rental payments as the principal source of Station REIT's revenues, Station REIT may be limited in its ability to fully enforce its rights under the Leases or to terminate the Leases. Failure by OpCo to materially comply with the terms of a Lease or to maintain required Gaming Licenses (as defined herein) could require Station REIT to find another lessee to lease such Initial Property since, as a REIT, Station REIT is generally precluded from operating its properties. In the event of a default by OpCo, there could be a decrease or cessation of rental payments or, in the case of ground-leased Initial Properties, Station REIT would be required to make the ground lease payments or lose the applicable Initial Property. Moreover, there can be no assurance that OpCo will elect to renew a Lease upon expiration of its initial term, which would also force Station REIT to find a suitable replacement lessee. In either circumstance, Station REIT may be unable to locate a suitable lessee at similar rental rates, which would have the effect of reducing Station REIT's rental revenues. See 19 "Relationship Between Station REIT and OpCo--The Leases," "--Hotel/Casino Industry Risks--Regulation" and "--Conflicts of Interest." LACK OF CONTROL BY STATION REIT OVER HOTEL/CASINO PROPERTIES Station REIT also will be dependent on the ability of OpCo, as net lessee under the Leases, to manage the Initial Properties, and will grant OpCo certain rights of first offer to lease casino properties in the Las Vegas locals market area subsequently acquired or developed by Station REIT. To maintain its status as a REIT, Station REIT will not be able to operate the Initial Properties or any such subsequently acquired or developed properties. As a result, Station REIT will be unable to implement strategic business decisions directly with respect to the marketing of its properties, such as decisions with respect to marketing casino operations, the setting of room rates, changes in gaming or food and beverage operations and certain similar decisions. Station REIT may be unable to take action if it believes OpCo is operating one of the Initial Properties inefficiently or in a manner adverse to Station REIT's interests, unless a specific material default exists under the Lease. In the case of such a default Station REIT's redress will be limited to terminating the applicable Lease and seeking to recover damages from OpCo. See "Relationship Between Station REIT and OpCo--The Leases." In addition, lenders to OpCo may limit Station REIT's termination rights. If a Lease is terminated, Station REIT will be required to find another suitable lessee or risk losing its qualification to be a REIT. In addition, Station REIT will be unable directly to control decisions to expand the Initial Properties. See "--Dependence of Station REIT on OpCo." CONFLICTS OF INTEREST GENERAL Because of the pre-existing and continuing ownership interests and interrelationships of the parties involved, there are inherent conflicts of interest with respect to the Reorganization Transactions. See "Summary--The Reorganization Transactions" and "Policies and Objectives with Respect to Certain Activities--Conflicts of Interest Policies." Consequently, the terms of the Reorganization Transactions, including the Leases, will not reflect arm's-length negotiations between independent parties. Management believes the Leases reflect terms that would have been obtained in arm's-length negotiations. Mr. Frank J. Fertitta III, Chairman of the Board, President and Chief Executive Officer of Station REIT will hold the same position at OpCo and four directors of OpCo and Station REIT will be the same. As a result, most decisions relating to the contractual and other business relationships between Station REIT and OpCo will be subject to conflicts in interests and loyalties. CONFLICTING DEMANDS FOR MANAGEMENT TIME Mr. Frank J. Fertitta III, Chairman of the Board, President and Chief Executive Officer of Station REIT will hold the same positions at OpCo. Therefore, Mr. Fertitta will be subject to competing demands on his time. CONFLICTING CORPORATE OBJECTIVES AND INHERENT CONFLICTS OF INTEREST OpCo and Station REIT will be permitted to pursue business opportunities independently from one another subject to certain rights of first offer. See "Relationship Between Station REIT and OpCo--The Cooperation Agreement." In addition, certain business relations between the two companies will be subject to inherent conflicts of interest. 20 RISKS OF LEVERAGE STATION REIT As of September 30, 1997, after giving effect to the Reorganization Transactions and application of the net proceeds therefrom, Station REIT would have had approximately $553.2 million of indebtedness and other liabilities (including construction payables) outstanding on a consolidated basis. Station REIT initially will be entirely dependent upon Lease payments from OpCo to meet its interest expense and principal repayment obligations under its existing indebtedness and dividend payment obligations under the Convertible Preferred Stock, and all such obligations need to be made before distributions for any period are made to holders of Common Stock. Station REIT expects to obtain a commitment for the Bank Facility under which Station REIT would have $500 million total availability. The Bank Facility is expected to be secured by substantially all of the assets of Station REIT (including without limitation the Initial Properties and the Leases) and its significant subsidiaries. A portion of the availability may be used to fund the master-planned development of its hotel/casino properties, acquisition and development of additional hotel/casino properties, Station REIT's intended repurchase or redemption of the 9 5/8% Senior Subordinated Notes due 2003 and general corporate purposes. See "Station REIT Pro Forma Capitalization." Subject to limitations in the Bank Facility and the Existing Indentures (as defined herein), Station REIT may borrow additional amounts from the same or other lenders in the future, or may issue corporate debt securities in public or private offerings. Certain of such additional borrowings may be secured by properties and leasehold interests held by Station REIT. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company--Liquidity and Capital Resources," "Policies and Objectives with Respect to Certain Activities--Financing" and "Description of Certain New Indebtedness." There can be no assurances that Station REIT will be able to meet its debt service obligations and, to the extent that it cannot, Station REIT risks the loss of some or all of its assets, including the Initial Properties, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if Station REIT is in need of capital to repay indebtedness in accordance with its terms or otherwise it could be required to liquidate one or more investments in hotel/casino properties at times which may not permit realization of the maximum return on such investments. OPCO After giving effect to the Reorganization Transactions and consummation of the OpCo bank facility financing, OpCo would have had approximately $180.8 million of indebtedness and other outstanding liabilities (including trade payables but excluding guarantees of obligations of its subsidiaries under the Leases). OpCo will be entirely dependent upon payments from its subsidiaries to meet its interest expense and principal repayment obligations under the terms of its bank facility and its dividend payment obligations under the OpCo Preferred Stock. OpCo expects to obtain a commitment for a bank facility for an aggregate principal amount of $150 million of which $45 million will be available for borrowings after repayment of the Intermediate Notes. The OpCo bank facility is expected to be secured by substantially all of the assets of OpCo (including without limitation OpCo's leasehold interests under the Leases) and its significant subsidiaries. Subject to limitations in the bank facility, OpCo may borrow additional amounts from the same or other lenders in the future, or may issue corporate debt securities in public or private offerings. Certain of such additional borrowings may be secured by properties and leasehold interests held by OpCo. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of OpCo-- Liquidity and Capital Resources," and "Description of Certain New Indebtedness." 21 There can be no assurances that OpCo will be able to meet its debt service obligations and, to the extent that it cannot, OpCo risks the loss of some or all of its assets to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if OpCo is in need of capital to repay indebtedness in accordance with its terms or otherwise it could be required to liquidate assets at times which may not permit realization of the maximum return on such investments. ABILITY TO MAINTAIN DISTRIBUTIONS Station REIT's estimated initial annual distribution to stockholders is approximately $ per share. See "Distribution Policy." There can be no assurance Station REIT will be able to distribute dividends at this level, or at all, in the future. Decreases in Funds From Operations due to unfinanced expenditures for acquisitions or development of hotel/casino properties or increases in the number of shares of Common Stock outstanding without commensurate increases in Funds From Operations each would adversely affect the ability of Station REIT to maintain distributions to common stockholders. In addition, Station REIT's indebtedness will restrict dividends. See "Description of Certain New Indebtedness." To qualify as a REIT for federal tax purposes, Station REIT will be required to pay out at least 95% of its net income as distributions each year to its stockholders. See "Adverse Effects of REIT Minimum Distribution Requirements." Consequently Station REIT's ability to pay distributions to qualify as a REIT for federal tax purposes is expected to depend in part on its ability to generate Funds From Operations and consummate equity offerings. HOTEL/CASINO INDUSTRY RISKS COMPETITION Through its dependence upon lease payments as its sole source of revenue, Station REIT will be subject to competitive pressures in the hotel/casino industry. The ability of OpCo and other lessees to generate profits and pay rent under the Leases may be adversely impacted by such competition. Intense competition exists among companies in the gaming industry, many of which have significantly greater resources than OpCo and may have greater resources than other lessees. Palace Station, Boulder Station, Texas Station and Sunset Station 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 eight hotel/ casino properties targeted primarily towards local residents and repeat visitors, as well as numerous non-hotel gaming facilities targeted towards local residents. Several direct competitors of the Initial Properties have major expansion projects planned. Major expansions or enhancements of existing properties or the construction of new properties by competitors could have a material adverse effect on the business of Palace Station, Boulder Station, Texas Station and Sunset Station and, thereby adversely affect OpCo's ability to pay rent under the Leases. Other gaming operators own undeveloped properties on which gaming facilities could be developed in the immediate vicinity of Texas Station and Sunset Station, and at least two operators are exploring development opportunities in the immediate vicinity of Sunset Station. Station Casino Kansas City, which opened January 16, 1997, competes primarily with other gaming operations in and around Kansas City, Missouri. Currently, there are four gaming facilities being operated in the Kansas City market in addition to Station Casino Kansas City. Gaming has been approved by local voters in jurisdictions near Kansas City, including St. Josephs (which currently has one gaming riverboat in operation), and other cities and counties along the Missouri River. Any new gaming operations developed near Kansas City would likely provide significant competition to Station Casino Kansas City. 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 five other gaming operators in the St. Louis market, including a shared facility in Maryland Heights which opened in March 1997 and which caused a significant decline in revenues at Station Casino St. Charles. While there has been a decline in revenues at Station Casino St. Charles since the opening of the Maryland Heights facility, OpCo is 22 expected to continue steps begun by the Company to mitigate the effects of such competition. Additionally, two of the five competitors operating in the St. Louis market are located in Illinois, which does not impose a $500 loss limit. Gaming also has been approved by local voters in jurisdictions near St. Louis, including St. Charles, and other cities and counties along the Mississippi and Missouri Rivers. Any new gaming operations developed near St. Louis would likely provide significant competition to Station Casino St. Charles. Gaming laws in surrounding states and in other areas may be amended in ways that would increase the competition to Station Casino St. Charles and Station Casino Kansas City. This increasing competition could have a material adverse effect on OpCo's business and, thereby adversely effect OpCo's ability to pay rent under the Leases. UNCERTAIN EFFECT OF RECENT COURT DECISION On January 16, 1997, the Company's gaming license in Kansas City was formally issued for its facility which is located in a man made basin filled with water piped in from the surface of the Missouri River. In reliance on numerous approvals from the Missouri Commission (the "Missouri Commission") specific to the configuration and granted prior to the formal issuance of its gaming license, the Company built and opened the Station Casino Kansas City facility. The license issued to the Company and the resolutions related thereto specifically acknowledge that the Missouri Commission had reviewed and approved this configuration. On November 24, 1997, the Supreme Court of Missouri, in a case challenging the gaming licenses of certain operators who compete with Station Casino St. Charles, located in Maryland Heights, Missouri, ruled that gaming may occur only in artificial spaces that are contiguous to the surface stream of the Missouri and Mississippi rivers. The case was remanded to trial court for a factual determination as to whether such competing operators meet this requirement. As a result of this decision, the Missouri Commission may also review this issue as it relates to the relicensing of Station Casino Kansas City. Such relicensing hearing is scheduled to occur in January 1998. Because of the open questions raised but not answered in the Missouri Supreme Court's decision, and because the Company is not subject to any claim with regard to this matter at this time, the Company cannot predict what effect the Missouri Supreme Court ruling or Missouri Commission's actions at such relicensing hearing will have on operations at Station Casino Kansas City, and cannot provide any assurance that there will not be a material adverse impact. The Company does not believe the court ruling will have an adverse impact on the Station Casino St. Charles operations. OPERATING COSTS AND CAPITAL EXPENDITURES; HOTEL/CASINO RENOVATION Hotel/casino properties in general, including the Initial Properties, have an ongoing need for renovations and other capital improvements, particularly in older structures, including periodic replacement or refurbishment of FF&E. Under the terms of the Leases, OpCo is obligated to pay for all capital expenditures and other expenses for the maintenance, repair, restoration or refurbishment of the Initial Properties other than certain material Capital Projects. See "Relationship Between Station REIT and OpCo--The Leases." There can be no assurance OpCo or any other lessee of Station REIT's hotel/casino properties will be able to meet its obligations to maintain such properties in which case Station REIT may be required to make such expenditures. OpCo may not undertake any Capital Project that materially adds to, further materially improves or effects a complete or substantially complete refurbishment of any Initial Property without the approval of Station REIT. If Station REIT approves any such Capital Projects, it may elect to finance such material Capital Projects subject to the Lease with OpCo. If Station REIT elects not to finance such material Capital Projects it will not receive additional Lease revenues from such Capital Projects. Such material Capital Projects may be necessary to ensure the continued competitiveness of the hotel/casino properties and failure to complete such projects may have a material adverse impact on the ability of OpCo to make Lease payments, and, therefore, Station REIT's ability to make expected distributions to its stockholders. In addition, Station REIT may acquire hotel/casino properties in the future that require significant renovation. Renovation of hotel/casino properties involves certain risks, including the possibility of environmental problems, construction cost overruns and delays, uncertainties as 23 to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from hotels. REGULATION The ownership and operation of casino gaming facilities is subject to extensive state and local regulation. The states of Nevada and Missouri and the applicable local authorities require various licenses, findings of suitability, registrations, permits and approvals (individually, a "Gaming License" and collectively, "Gaming Licenses") to be held by Station REIT, OpCo (once it is a Registered Corporation (as defined herein)) and their respective subsidiaries. The Nevada Gaming Commission (the "Nevada Commission") and the Missouri Commission may, among other things, limit, condition, suspend or revoke a Gaming License to own the stock of any of Station REIT's or OpCo's Nevada or Missouri subsidiaries, respectively, for any cause deemed reasonable by such licensing authority. The Missouri Commission may also have the right to review the validity of the Company's Gaming License for Station Casino Kansas City at a relicensing hearing scheduled to occur in January 1998. Substantial fines or forfeiture of assets for violations of gaming laws or regulations may be levied against Station REIT, Opco, their respective subsidiaries and the persons involved. The suspension or revocation of any of Station REIT's or OpCo's Gaming Licenses or the levy on Station REIT or OpCo of substantial fines or forfeiture of assets would have a material adverse effect on the ownership and leasing of Station REIT's hotel/casino properties or the operation of hotel/casino properties by OpCo. Station REIT and OpCo expect to be able to obtain all Gaming Licenses necessary for the ownership, leasing and operation of the Initial Properties and approvals of the Reorganization Transactions. However, Gaming Licenses and related approvals are deemed to be privileges under Nevada and Missouri law, and no assurances can be given that any new Gaming Licenses that may be required in the future will be given or that existing ones will not be revoked or that approval of the Reorganization Transactions, if required, will be obtained. Any expansion of Station REIT's hotel/casino property holdings or OpCo's gaming operations in Nevada, Missouri or into new jurisdictions will require various Gaming Licenses and approvals of the relevant gaming authorities, which approval process can be time-consuming and costly and has no assurance of success. Gaming authorities have the authority generally to require that any record or beneficial owner of the Station REIT's or OpCo's securities, including Common Stock, file an application and be investigated for a finding of suitability. If a record or beneficial owner of Common Stock is required by any Gaming Authority to be found suitable, such owner will be required to apply for a finding of suitability within 30 days after request of such Gaming Authority or within such earlier period prescribed by such Gaming Authority. The applicant for a finding of suitability must pay all costs of the investigation for such finding of suitability. If a record or beneficial owner is required to be found suitable and is not found suitable by such Gaming Authority, such owner may be required pursuant to the terms of the Articles or law to dispose of the Common Stock. See "Regulation and Licensing" and "Description of Capital Stock." OpCo, as the operator of Initial Properties, will be subject to gaming regulations on its gaming activities similar to those applicable to the Company prior to the Distribution. Any failure by OpCo to obtain and maintain Gaming Licenses necessary for the operation of gaming activities at the Initial Properties could materially adversely impact such operations and OpCo's ability to generate profits and to make Lease payments and, therefore, Station REIT's ability to make distributions. No assurances can be given that OpCo will obtain and maintain such Gaming Licenses. UNCERTAIN EFFECT OF NATIONAL GAMBLING COMMISSION The U.S. Congress has created the National Gambling Impact and Policy Commission to conduct a comprehensive study of all matters relating to the economic and social impact of gaming in the United States. The enabling legislation provides that, not later than two years after the enactment of such legislation, the commission would be required to issue a report containing its findings and conclusions, together with recommendations for legislation and administrative actions. Any such recommendations, if 24 enacted into law, could adversely impact the gaming industry and have a material adverse effect on Station REIT's or OpCo's business, financial condition or results of operations. From time to time, certain legislators have proposed the imposition of a federal tax on gross gaming revenues. Any such tax could have a material adverse effect on Station REIT's or OpCo's business, financial condition or results of operations. COMPETITION FOR INVESTMENT OPPORTUNITIES Station REIT may compete for investment opportunities with entities that have substantially greater financial resources than Station REIT. These entities may generally be able to accept more risk than Station REIT can prudently manage, including risks with respect to the creditworthiness of a hotel/casino operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities available to Station REIT and increase the bargaining power of property owners seeking to sell. UNINSURED AND UNDERINSURED LOSSES Each Lease specifies comprehensive insurance be maintained by OpCo substantially at the levels currently maintained with respect to each of the Initial Properties including liability, fire and extended coverage. Leases for subsequently acquired hotels will contain similar provisions. There are certain types of losses, generally of a catastrophic nature, such as earthquake and floods, however, that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property. ACQUISITION AND DEVELOPMENT RISKS Station REIT is expected to pursue acquisitions of additional hotel/casino properties and, under appropriate circumstances, may pursue new hotel/casino property or other entertainment-oriented development opportunities. Acquisitions entail risks that investments will fail to perform in accordance with expectations and that estimates of the cost of improvements necessary to market acquired properties will prove inaccurate, as well as general investment risks associated with any new real estate investment. New project development is subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the incurrence of development costs in connection with projects that are not pursued to completion. The fact that Station REIT must distribute 95% of its net taxable income in order to maintain its qualification as a REIT may limit Station REIT's ability to rely upon lease income from the Initial Properties or subsequently acquired properties to finance acquisitions or new developments. As a result, if debt or equity financing were not available on acceptable terms, further acquisitions or development activities might be curtailed or Cash Available for Distribution might be adversely affected. FAILURE TO QUALIFY AS A REIT Station REIT is expected to operate and to cause its subsidiaries to operate so as to qualify as a REIT for federal income tax purposes. The Company has not operated as a REIT historically. The continued qualification of Station REIT as a REIT will depend on its continuing ability to meet various requirements concerning, among other things, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount of its distributions to its stockholders. If Station REIT were to fail to qualify 25 as a REIT in any taxable year, it would not be allowed a deduction for distributions to stockholders in computing its taxable income and would be subject to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretation. The complexity of these provisions is greater in the case of Station REIT because of the Reorganization Transactions that Station REIT has undertaken in order to qualify as a REIT, including the distribution of OpCo Common Stock and OpCo Preferred Stock and the elimination of any earnings and profits accumulated before the qualification of Station REIT as a REIT. Complexity is also greater in the case of a REIT that owns casinos and leases them to an operating company whose ownership may substantially overlap with the ownership of the REIT. Qualification as a REIT also involves the determination of various factual matters and circumstances not entirely in Station REIT's control. Unless entitled to relief under certain Code provisions, Station REIT also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, Station REIT's Cash Available for Distribution would be reduced for each of the years involved. Although Station REIT currently is expected to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Directors to revoke the REIT election. See "Certain Federal Income Tax Considerations." TAX RISKS FROM RELATED PARTY RENTALS If Station REIT and OpCo are treated by the Service as being under common control, the Service will be authorized to reallocate income and deductions between them to reflect arms' length terms. Were the Service successfully to establish that rents were excessive, (i) OpCo would be denied a deduction for the excessive portion, (ii) OpCo would be subject to a penalty on the portion deemed excessive and (iii) OpCo shareholders would be deemed to have received a distribution that was then contributed to the capital of Station REIT. To the extent that rents were insufficient, Station REIT (i) would be subject to a penalty on the portion deemed insufficient and (ii) would be deemed to have made a distribution to its shareholders equal to the insufficiency. Management believes the Leases reflect terms that would have been obtained in arm's-length negotiations. ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS In order to qualify as a REIT, Station REIT generally will be required each year to distribute to its stockholders at least 95% of its net taxable income (excluding any net capital gain). In addition, Station REIT will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it during (or required to be paid during) any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year (other than capital gain income which Station REIT elects to retain and pay tax on) and (iii) 100% of its undistributed income from prior years. Pursuant to recently enacted legislation, Station REIT may elect to retain rather than distribute its net long-term capital gains. The effect of such an election is that (i) Station REIT is required to pay the tax on such gains, (ii) U.S. Stockholders (as defined herein), while required to include their proportionate share of the undistributed long-term capital gains in income, will receive a credit or refund for their share of the tax paid by Station REIT, and (iii) the basis of a U.S. Stockholder's stock would be increased by the amount of the undistributed long-term capital gains (minus the amount of capital gains tax paid by Station REIT) included in the U.S. Stockholder's long-term capital gains. Station REIT will be required to make distributions to its stockholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. Station REIT's Funds From Operations will be generated primarily by its share of the income from the Leases. Differences in timing between taxable income and Funds From Operations could require Station REIT to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. Restrictions in 26 Station REIT's indebtedness and Convertible Preferred Stock could preclude it from meeting the 95% distribution requirement. Distributions by Station REIT will be determined by Station REIT's Board of Directors (the "Board of Directors") and will be dependent on a number of factors, including the amount of Station REIT's Funds From Operations, Station REIT's financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute such funds, Station REIT's capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. For federal income tax purposes, distributions paid to stockholders may consist of ordinary income, capital gains, nontaxable return of capital, or a combination thereof. Station REIT will provide its stockholders with an annual statement as to its designation of the taxability of distributions. See "Certain Federal Income Tax Considerations--Annual Distribution Requirements." LIMITATIONS ON ACQUISITIONS AND CHANGES IN CONTROL OWNERSHIP LIMIT; RENTS FROM REAL PROPERTY In order for Station REIT to maintain its qualification as a REIT, no more than 50% of the value of its outstanding stock may be owned, directly or constructively, by five or fewer individuals or entities (as set forth in the Code and as referred to herein as "Individual"). Upon consummation of the Offering, the Articles will, subject to adoption of the Charter Amendments, prohibit, subject to certain exceptions, direct, indirect and constructive ownership of more than 5.5% of the outstanding shares of capital stock of Station REIT by any Individual (except for certain existing stockholders who will be prohibited from owning, directly or indirectly, actually or constructively, more than 28.0% in the aggregate of the outstanding capital stock of the Company) (the "Ownership Limit"). See "Certain Federal Income Tax Provisions--Organizational Requirements." The constructive ownership rules are complex and may cause shares of capital stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. As a result, the acquisition of less than 5.5% of the outstanding shares of Station REIT's capital stock (or the acquisition of an interest in an entity which owns shares of Station REIT's capital stock) by an individual or entity could cause that individual or entity (or another individual or entity) to own constructively in excess of 5.5% of the outstanding shares of Station REIT's capital stock and thus subject such shares of Station REIT's capital stock to the Ownership Limit. As a result, the acquisition (directly or indirectly) of less than 5.5% of the outstanding capital stock of Station REIT by an individual or entity could cause constructive ownership of more than 5.5% of the outstanding capital stock of Station REIT. A transfer of shares to a person who, as a result of the transfer violates the Ownership Limit, may be void under some circumstances or may be transferred to a trust, for the benefit of one or more qualified charitable organizations designated by Station REIT, with the intended transferee having only a right to share (to the extent of the transferee's original purchase price for such shares) in proceeds from the trust's sale of such shares. See "Certain Federal Income Tax Considerations--Organizational Requirements" for additional information regarding the Ownership Limit. In order for Station REIT to maintain its qualification as a REIT, substantially all rent under the Leases must qualify as "rents from real property." Such qualification depends on the rents satisfying a number of complex requirements, including the requirement that the rents not be measured by the income or profits of OpCo (other than rents based on a fixed percentage of receipts or sales) and the requirement that Station REIT not own (directly, indirectly or constructively) 10% or more of the total number of OpCo shares outstanding or 10% or more of the voting power of OpCo capital stock. If Station REIT does not maintain its qualification as a REIT its income will be subject to corporate level taxation and requalification may be difficult. 27 POSSIBLE TAXATION ON CAPITAL GAINS Pursuant to an election to be made by Station REIT and to be made by its subsidiaries under Internal Revenue Service Notice 88-19, if during the ten-year period beginning on the first day (the "Qualification Date") of the first taxable year for which Station REIT qualified as a REIT, Station REIT or any such subsidiary recognizes gain on the disposition of any property (including, any partnership interest) held by Station REIT or any such subsidiary, then, to the extent of the excess of (i) the fair market value of such property as of the Qualification Date over (ii) the adjusted income tax basis of Station REIT or any such subsidiary in such property ("built-in gain") as of the Qualification Date, Station REIT and such subsidiary as the case may be, will be required to pay a corporate level federal income tax on such at the highest regular corporate rate. The amount of gain upon which Station REIT will be required to pay tax will not exceed Station REIT's aggregate net built-in gain as of the Qualification Date, I.E. the amount by which the fair market value of all its assets exceeded then adjusted income tax basis on that date. Station REIT and its subsidiaries are not currently expected to dispose of any such property in a manner that would trigger such tax consequences but there can be no assurance that such dispositions will not occur in the future. Distribution to stockholders are taxable as dividends to the extent of Station REIT's current and accumulated earnings and profits. Station REIT's earnings and profits would be increased by a gain on the sale of property. That gain will include built-in gain as of the Qualification Date. TAX RISKS FROM RELATED PARTY RENTALS If Station REIT and OpCo are treated by the Service as being under common control, the Service will be authorized to reallocate income and deductions between them to reflect arms' length terms. Were the Service successfully to establish that rents were excessive, (i) OpCo would be denied a deduction for the excessive portion, (ii) OpCo would be subject to a penalty on the portion deemed excessive and (iii) OpCo shareholders would be deemed to have received a distribution that was then contributed to the capital of Station REIT. To the extent that rents were insufficient, Station REIT (i) would be subject to a penalty on the portion deemed insufficient and (ii) would be deemed to have made a distribution to its shareholders equal to the insufficiency. Management believes the Leases reflect terms that would have been obtained in arm's-length negotiations. EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK AND COST OF FUNDS One of the factors that may influence the price of the Common Stock in public trading markets will be the annual yield from distributions by Station REIT on the Common Stock as compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the market price of the shares of Common Stock. In addition, increases in market interest rates could increase the cost of funds borrowed to make future investments. RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS Station REIT will establish investment policies and operating policies and strategies, certain of which are described in this Proxy Statement. These policies may be amended or revised from time to time at the discretion of the Board of Directors without a vote of Station REIT's stockholders. The ultimate effect of any change in the policies and strategies set forth in this Proxy Statement on a holder of Common Stock may be positive or negative. See "Policies and Objectives with Respect to Certain Activities." LIMITED RELEVANCE OF FINANCIAL INFORMATION The historical combined and pro forma financial information included in this Proxy Statement may not necessarily reflect the results of operations, financial position and cash flows of OpCo or Station REIT in the future or the results of operations, financial position and cash flows had OpCo operated as a separate stand-alone entity, had the Company operated as a REIT and had the entities operated under the relationships they will have in the future during the periods presented. The financial information included 28 herein does not reflect a number of significant changes that may occur in the funding and operations of OpCo or Station REIT as a result of or in connection with the Reorganization Transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of OpCo," "Station Operating Company Combined Balance Sheets," "Station Operating Company Combined Statements of Operations" "Station Operating Company Combined Statements of Cash Flows," "Station Operating Company Notes to Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations of Station REIT," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations," "Station Casinos, Inc. Consolidated Statements of Cash Flows," and "Station Casinos, Inc. Notes to Consolidated Financial Statements." POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL DIVIDEND REQUIREMENTS The Distribution is subject to review under federal and state fraudulent conveyance laws. Under these laws, if a court in a lawsuit by an unpaid creditor or a representative of creditors (such as a trustee or debtor-in-possession in bankruptcy of the Company or any of its respective subsidiaries) were to determine that the Company did not receive fair consideration or reasonably equivalent value for distributing the stock distributed in the Distribution and, at the time of Distribution, the Company or any of its subsidiaries (i) were insolvent or would be rendered insolvent, (ii) were to have had unreasonably small capital with which to carry on its business and all businesses in which it intended to engage, or (iii) were to have intended to incur, or believed it would incur, debts beyond its ability to repay such debts as they would mature, then such court could order the holders of the stock distributed in the Distribution to return the value of the stock and any dividends paid thereon, bar future dividend and redemption payments on the stock, and invalidate, in whole or in part, the Distribution, as a fraudulent conveyance. The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction's law is applied. Generally, however, an entity would be considered insolvent if the present fair saleable value of its assets is less than (i) the amount of its liabilities (including contingent liabilities) or (ii) the amount that will be required to pay its probable liabilities on its existing debts as they become absolute and mature. No assurance can be given as to what standard a court would apply in determining insolvency or that a court would not determine that the Company or any of its subsidiaries was "insolvent" at the time of or after giving effect to the Distribution. In addition, the Distribution is subject to review under state corporate distribution statutes. Under the NRS, a corporation may not pay dividends to its stockholders if after giving effect to such dividend (i) the corporation would not be able to pay its debts as they become due in the usual course of business or (ii) the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the dividend. Although the Distribution is intended to be made in such a manner as to comply with the NRS, no assurance can be given that a court will not later determine that the Distribution was unlawful. The Board of Directors of the Company believes that (i) the Company and each of its subsidiaries will be solvent (in accordance with the foregoing definitions) at the time of the Distribution, will be able to repay its debts as they mature following the Distribution and will have sufficient capital to carry on their respective businesses and (ii) the Distribution will be made entirely in compliance with Section 78.288 of the NRS. There is no certainty, however, that a court would reach the same conclusions in determining whether the Company was insolvent at the time of, or after giving effect to, the Distribution or whether lawful funds were available for the Distribution. The Distribution Agreement (as defined herein) and certain of the ancillary agreements to the Distribution Agreement provide for the allocation, immediately prior to the Distribution, of certain debt of the Company. Further, pursuant to the Distribution Agreement, from and after the date of the Distribution (the "Distribution Date"), each of the Company and OpCo will be responsible for the debts, liabilities 29 and other obligations related to the businesses which it owns and operates following the consummation of the Distribution. It is possible that a court would disregard the allocation agreed to among the parties, and require OpCo or the Company to assume responsibility for obligations allocated to the other, particularly if the other were to refuse or to be unable to pay or perform the subject allocated obligations. See "Relationship Between Station REIT and OpCo." DILUTION As part of the Reorganization Transaction, the Company intends to consummate the Offerings. As a result of the Offerings, holders of Common Stock will experience substantial dilution. See "Summary Unaudited Pro Forma Financial Data of Station REIT." ABSENCE OF PRIOR TRADING MARKET FOR OPCO CAPITAL STOCK There has not been any established public trading for the OpCo Common Stock or the OpCo Preferred Stock. It is currently anticipated that OpCo Common Stock and OpCo Preferred Stock will be approved for listing on the Nasdaq prior to the Distribution. There can be no assurance as to the prices at which OpCo Common Stock and OpCo Preferred Stock will trade. Until the OpCo Common Stock and the OpCo Preferred Stock are fully distributed and an orderly market develops, the prices at which such shares trade may fluctuate significantly and may be lower or higher than the price that would be expected for a fully distributed issue. Prices for shares of OpCo Common Stock and OpCo Preferred Stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, investor perception of OpCo, changes in economic conditions in the gaming industry and general economic and market conditions. In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. Market fluctuations, as well as economic conditions, could have a materially adverse impact on the market price of the shares of OpCo Common Stock and Opco Preferred Stock. PAYMENT OF DIVIDENDS OpCo does not intend to pay cash dividends on the OpCo Common Stock in the foreseeable future so that it may reinvest its earnings in the development of its business. The payment of dividends on the OpCo Common Stock in the future will be at the discretion of the board of directors of OpCo. Restrictions imposed by the OpCo bank facility, the OpCo Preferred Stock and other securities or agreements of OpCo are expected to limit the payment of dividends by OpCo. No assurance can be given that OpCo will pay any dividends. CERTAIN ANTI-TAKEOVER EFFECTS Upon consummation of the Distribution, certain provisions of OpCo's Articles of Incorporation (the "OpCo Articles") and OpCo's Bylaws (the "OpCo Bylaws") and Nevada statutory law could discourage potential acquisition proposals and could delay or prevent a change in control of OpCo. Such provisions could diminish the opportunities for a holder of OpCo Common Stock to participate in tender offers, including tender offers at a price above the then current market price for the OpCo Common Stock and could also inhibit fluctuations in the market price of the OpCo Common Stock that could result from takeover attempts. OpCo will be authorized to issue additional shares of OpCo Preferred Stock (the "Additional Preferred Stock") in addition to the currently outstanding shares of OpCo Preferred Stock. The OpCo board of directors, without further action by the holders of OpCo Common Stock may issue shares of Additional Preferred Stock in one or more series and may fix or alter the rights, preferences, privileges and restrictions of shares constituting any wholly unissued series of Additional Preferred Stock. Except as described above, the OpCo board of directors, without further approval by holders of OpCo Common Stock, may issue shares of Additional Preferred Stock with rights that could adversely affect the rights of 30 the holders of OpCo Common Stock. The issuance of shares of Additional Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of OpCo or other corporate action. In addition, the preferred stock purchase rights to be issued pursuant to a rights agreement and NRS Section 78.200 will provide discount purchase rights to common stockholders of OpCo in connection with certain acquisitions of beneficial ownership of or tenders offers for 10% or more of the outstanding shares of OpCo Common Stock. The effect of the foregoing may be to inhibit a change in control of OpCo that has not been approved by the Board of Directors of OpCo and which may be beneficial to the holders of the distributed OpCo Common Stock. OpCo will have a classified Board of Directors consisting of three classes, each class serving for a term of three years. According to the OpCo Articles, vacancies that occur on the OpCo board of directors will be filled by a majority vote of the directors then in office and directors so chosen will hold office for a term expiring at the next annual meeting of stockholders at which the term of the class to which the directors whose vacancy was filled have been elected expires. The classification has the effect of making it more difficult for holders of OpCo Common Stock to change the composition of the Board in a short period of time, thereby discouraging a third-party from making a tender offer or otherwise attempting to obtain control of OpCo. Chapter 78 of the NRS may delay or increase the difficulty of acquisitions or changes of control of OpCo. Sections 78.378 to 78.3793 of the NRS (i) limit the ability of persons who acquire certain threshold amounts of OpCo Common Stock to exercise voting rights in such shares acquired within 90 days immediately preceding the acquisition of such threshold amounts unless a majority of the disinterested stockholders of OpCo confer such voting rights and (ii) entitle dissenting stockholders in such a vote to certain fair payment rights. Sections 78.411 to 78.444 of the NRS restrict combinations with persons who acquire certain threshold amounts of OpCo Common Stock for three years after such acquisition unless the combination or purchase is approved by the OpCo board of directors prior to the acquisition or, subject to additional limitations, the stockholders. The Nevada legislature has declared that some corporation acquisitions opposed by management, repurchases of voting securities and some corporate defensive 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 (as defined herein) has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices which regulatory scheme could inhibit a change in control of OpCo. See "Regulation and Licensing." 31 DISTRIBUTION AND DIVIDEND POLICY STATION REIT Station REIT is expected to make regular quarterly distributions to its stockholders. Station REIT's first distribution, for the period from the Closing to June 30, 1998, is expected to equal the anticipated regular quarterly distribution of $ per share of Common Stock, which, on an annualized basis, will represent a distribution rate of $ per share. There can be no assurances that Station REIT will meet or maintain such distribution rate. See "Certain Considerations--Ability to Maintain Distributions." The Company established the initial distribution amount based upon pro forma Funds From Operations for its latest twelve month period, as further adjusted as described in footnote (1) below. "Funds From Operations" as defined by the National Association of Real Estate Investment Trusts is net income (loss) computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring or sales of property, plus depreciation and amortization on real estate assets and after adjustments, if any, for unconsolidated partnerships and joint ventures. Station REIT's "Cash Available for Distribution," which is Funds From Operations adjusted for certain non-cash items, less reserves for capital expenditures, is not expected to be materially different from its Funds From Operations, principally because under the Leases, OpCo is responsible for substantially all maintenance capital expenditures. See "Station Casino, Inc. Statements of Cash Flows" for information regarding cash flows provided by operating, investing and financing activities. The Company believes that such pro forma financial information, with the enumerated adjustments, provides a reasonable basis for setting the initial distribution rate. The foregoing is being set forth solely to describe the setting of the initial distribution rate and should not be construed as a forecast of Station REIT's results of operations or liquidity. The following table sets forth certain unaudited, supplementally adjusted pro forma financial information for the twelve month period ended September 30, 1997.
SUPPLEMENTAL ADJUSTED PRO FORMA TWELVE MONTHS ENDED SEPTEMBER 30, 1997(1) ------------------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Gross revenues...................................................... $ 131,820 -------- Expenses(2)......................................................... 63,920 Depreciation........................................................ 13,320 -------- Funds From Operations(3)............................................ 67,900 -------- -------- Initial Funds From Operations per share(3)(4)....................... $ 1.06 -------- --------
- ------------------------ (1) Represents the pro forma results of operations for the period presented, determined on the basis set forth in Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations and as adjusted to reflect (a) annualized Lease revenues, and associated expenses, as if each of the Initial Properties had been in operation from October 1, 1996, and (b) the redemption by Station REIT of all of its 9 5/8% Senior Subordinated Notes due 2003 with borrowings under the Bank Facility, as if the same had occurred on October 1, 1996. Although Station REIT is expected to redeem or repurchase such notes (see footnote (1) of Notes to Station REIT Pro Forma Capitalization), no assurance may given that such event will in fact occur on the assumed terms or at all. (2) Consists of interest expense and preferred stock dividends, rental expense and general and administrative expense. (3) Industry analysts generally consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered an alternative to net income as an indicator of Station REIT's operating performance or to cash flow as a measure of liquidity. (4) Based on approximately 64.3 million shares of Common Stock outstanding upon completion of the Offerings. Excludes shares of Common Stock issuable upon (a) conversion of outstanding convertible securities and (b) the underwriters' exercise, if any, of the over-allotment options. See "Station REIT Pro Forma Capitalization" and "Description of Capital Stock." Subject to restrictions under its debt instruments and other obligations, the Board of Directors, in its sole discretion, will determine the actual distribution amount and rate based on Station REIT's actual 32 results of operations, economic conditions, tax considerations (including those related to REITs) and other factors. Station REIT is expected to maintain the anticipated initial distribution rate for the remainder of 1998, unless actual results of operations, economic conditions or other factors differ from those indicated by the estimated results for the twelve months ended September 30, 1997 described herein. The estimate of anticipated initial quarterly distributions relates only to periods ending on or prior to December 31, 1998, and no assurance can be given as to the rate of distributions, if any, after that date. Station REIT's actual Funds From Operations will be affected by a number of factors, including operations at the Initial Properties. The timing and amount of distributions made by Station REIT will be determined by the Board of Directors and will depend on a number of factors, including the amount of Funds From Operations, Station REIT's financial condition, capital expenditure requirements for Station REIT's properties, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors may deem relevant. For a discussion of the tax treatment of distributions to holders of shares of Common Stock, see "Federal Income Tax Considerations." In order to maintain its qualification as a REIT, Station REIT must make annual distributions to its stockholders of at least 95% of its taxable income (which does not include net capital gains). Under certain circumstances, Station REIT may be required to make distributions in excess of Funds From Operations in order to meet such distribution requirements. In such event, Station REIT presently would be expected to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required to retain its qualification as a REIT for federal income tax purposes. See "Federal Income Tax Considerations--Annual Distribution Requirements." Station REIT anticipates that its cash flow from the Leases will be sufficient to enable it to make distributions at the estimated initial rate. To the extent that cash flow from operations were to be insufficient during any quarter, Station REIT is expected to utilize other cash on hand or borrowings under the Bank Facility to make such distributions. No assurance can be given, however, that Station REIT will make distributions in the future at the initially estimated rate, or at all. See "Risk Factors--Ability to Maintain Distributions." It presently is anticipated that additional acquisitions and developments, including initial capital improvements thereto, will be financed primarily through borrowings under the Bank Facility, other debt financing or the issuance of additional equity securities. To the extent that such financing is insufficient to meet all of such cash needs, or the cost of such financing exceeds the cash flow generated by the acquired or developed properties for any period, funds available for distribution could be reduced. See "Certain Considerations--Ability to Maintain Distributions." OPCO OpCo does not intend to pay cash dividends on the OpCo Common Stock for the foreseeable future so that it may reinvest its earnings in the development of its business. The payment of dividends on the OpCo Common Stock in the future will be at the discretion of OpCo's board of Directors. Restrictions imposed by OpCo's debt obligations and the OpCo Preferred Stock also are expected to limit the payment and dividends by OpCo to Common Stockholders. See "Certain Considerations--Payment of Dividends." 33 STATION REIT PRO FORMA CAPITALIZATION The following table sets forth the historical consolidated cash and capitalization of the Company at September 30, 1997, and on a pro forma basis to reflect the net proceeds to the Company of the Reorganization Transactions. This table should be read in conjunction with the more detailed information and financial statements appearing elsewhere in this Proxy Statement.
AT SEPTEMBER 30, 1997 ------------------------- HISTORICAL PRO FORMA ------------ ----------- (AMOUNTS IN THOUSANDS) Cash and cash equivalents.............................................................. $ 43,923 $ 28,272 ------------ ----------- ------------ ----------- Current Bank Facility.................................................................. $ 214,000 $ -- 9 5/8% Senior Subordinated Notes due 2003(1)........................................... 186,638 186,638 10 1/8% Senior Subordinated Notes due 2006(1).......................................... 196,862 196,862 9 3/4% Senior Subordinated Notes due 2007(1)........................................... 144,452 144,452 Sunset Station First Mortgage Note..................................................... 103,000 -- Other long-term debt, less current portion............................................. 40,740 3,371 ------------ ----------- ------------ ----------- Total long-term debt, less current portion(2).......................................... 885,692 531,323 ------------ ----------- Stockholders' Equity: Preferred stock; par value $.01; 5,000,000 shares authorized (60,000,000 as adjusted to reflect the Charter Amendments); 2,070,000 convertible preferred shares issued and outstanding.................................................................... 103,500 103,500 Common stock; par value $.01; 90,000,000 shares authorized (300,000,000 as adjusted to reflect the Charter Amendments); 35,306,657 shares issued and outstanding; (64,306,657 as adjusted for the Offerings)(3)...................................... 353 643 Additional paid-in capital............................................................. 167,154 492,114 Deferred compensation--restricted stock................................................ (774) (774) Retained earnings(deficit)............................................................. 19,268 (376,073) ------------ ----------- Total stockholders' equity............................................................. $ 289,501 $ 219,410 ------------ ----------- Total capitalization............................................................... $ 1,175,193 $ 750,733 ------------ ----------- ------------ -----------
- ------------------------ (1) Historical and Pro Forma amounts are net of combined original issue discount of $13.0 million as of September 30, 1997. The 9 5/8% Senior Subordinated Notes due 2003 are expected to be repaid with borrowings under the Bank Facility and first become redeemable in June 1998. (2) The Company expects that the Bank Facility will provide for borrowings up to an aggregate of $500 million. See "Description of Certain New Indebtedness." (3) Excludes the shares of Common Stock issuable upon conversion of the Preferred Stock, approximately 5.5 million shares subject to outstanding options issued under the Company's Stock Compensation Program and approximately 0.8 million shares available for grant thereunder as of September 30, 1997. 34 OPCO PRO FORMA CAPITALIZATION The following table sets forth the historical combined cash and capitalization of OpCo at September 30, 1997, and on a pro forma basis to reflect the net proceeds to OpCo of the Reorganization Transactions. This table should be read in conjunction with the more detailed information and financial statements appearing elsewhere in this Proxy Statement.
AT SEPTEMBER 30, 1997 ------------------------- HISTORICAL PRO FORMA ------------ ----------- (AMOUNTS IN THOUSANDS) Cash and cash equivalents.............................................................. $ 43,923 $ 43,923 ------------ ----------- ------------ ----------- Current Bank Facility.................................................................. $ 214,000 $ -- Sunset Station First Mortgage Note..................................................... 103,000 -- New OpCo bank facility................................................................. -- 105,000 Other long-term debt, less current portion............................................. 37,369 -- ------------ ----------- Total long-term debt, less current portion(1).......................................... 354,369 105,000 ------------ ----------- Preferred Stock; no par value; 50,000,000 shares authorized; 20,000,000 shares OpCo Preferred Stock issued and outstanding; mandatorily redeemable after ten years.............................................................................. -- 20,000 ------------ ----------- Investment by the Company.............................................................. 112,349 -- ------------ ----------- Stockholders' Equity: Common stock; no par value; 20,000,000 shares authorized; 2,017,523 shares issued and outstanding (2).................................................................... -- -- OpCo B Stock, no par value; 15,000 shares authorized; 7,214 shares issued and outstanding........................................................................ -- -- Additional paid-in capital............................................................. -- 308,504 ------------ ----------- Total stockholders' equity............................................................. $ -- $ 308,504 ------------ ----------- Total capitalization............................................................... $ 466,718 $ 433,504 ------------ ----------- ------------ -----------
- ------------------------------ (1) The Company expects that the Bank Facility will provide for borrowings up to an aggregate of $150 million. See "Description of Certain Indebtedness." (2) Excludes the shares of OpCo Common Stock issuable upon conversion of the OpCo B Stock and shares subject to outstanding options issued under the OpCo Stock Compensation Program. 35 SOURCES AND USES The following table sets forth the proposed sources and uses of the proceeds to the Company and OpCo, respectively, of the the Reorganization Transactions. No commitments are currently in place with respect to any of the financing anticipated to be required by the Company in connection with the Reorganization Transactions, and the Company expects that the precise nature and composition of such financing may not be fully determined by the time of the Meeting. See "Station REIT Pro Forma Capitalization," "OpCo Pro Forma Capitalization," "Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet" and "Station Operating Company Unaudited Pro Forma Combined Balance Sheet." THE COMPANY (AMOUNTS IN THOUSANDS)
SOURCES Gross Proceeds to the Company from the Offerings(1)............................ $ 350,000 Proceeds from repayment of Intermediate Notes................................... 105,000 Gross Proceeds from the resale of the OpCo Preferred Stock......................... 10,000 ---------- Total Sources........................... $ 465,000 ---------- ---------- USES Sunset Loan Agreement(2).................. $ 104,892 Sunset Operating Lease(3)................. 35,700 Current Bank Facility(4).................. 216,372 Repayment of certain obligations(5)....... 52,014 Transaction Costs and Available Cash(6)(7).............................. 56,022 ---------- Total Uses.............................. $ 465,000 ---------- ----------
- ------------------------ (1) The Company will receive no proceeds from the sale of Common Stock by the Selling Stockholders. (2) Represents the balance at September 30, 1997 (including accrued interest), although actual amounts at the Closing may vary. (3) Used for the purchase of FF&E at Sunset Station. (4) Represents the balance at September 30, 1997 (including accrued interest), although actual amounts at the Closing may vary. (5) The Company expects to repay certain obligations associated with certain assets that are not assumed by OpCo. (6) Excludes the effect of any decision by holders of Common Stock to assert dissenters' rights. (7) The Company also expects to incur approximately $3 million of financing costs in connection with the $500 million Bank Facility it expects to obtain at the Closing. See "Station REIT Pro Forma Capitalization." OPCO (AMOUNTS IN THOUSANDS)
SOURCES OpCo bank facility(1)..................... $ 105,000 ---------- Total Sources........................... $ 105,000 ---------- ---------- USES Repayment of Intermediate Notes........... $ 105,000 ---------- Total Uses.............................. $ 105,000 ---------- ----------
- ------------------------ (1) It is anticipated that OpCo will obtain a bank facility of $150 million. See "OpCo Pro Forma Capitalization" and "Station Operating Company Unaudited Pro Forma Combined Balance Sheet" and "Station Operating Company Unaudited Pro Forma Combined Statement of Operations." The figures in the preceding tables and footnotes are estimates that are considered reasonable, however, there can be no assurance that the estimates will be accurate. 36 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The selected consolidated financial data presented below as of and for the Company's fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from consolidated financial statements which, except for 1993 and 1994, are contained elsewhere in this Proxy Statement. The selected consolidated financial data presented below as of and for the six months ended September 30, 1997 and 1996 are derived from unaudited consolidated financial statements; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for such period have been included. 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 of the Company" and the consolidated financial statements, the notes thereto and other financial and statistical information included elsewhere in this Proxy Statement.
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Operating revenues: Casino................................... $ 100,426 $ 109,090 $ 210,534 $ 358,495 $ 450,013 $ 212,072 $ 282,700 Food and beverage........................ 25,157 26,078 43,208 73,057 92,220 42,626 63,577 Room..................................... 12,373 14,360 17,690 23,614 27,420 12,658 17,218 Other.................................... 20,743 31,226 36,561 39,099 48,957 22,752 28,676 --------- --------- --------- --------- --------- --------- --------- Gross revenues......................... 158,699 180,754 307,993 494,265 618,610 290,108 392,171 Less promotional allowances.............. (8,804) (11,211) (17,715) (27,408) (35,095) (16,634) (24,558) --------- --------- --------- --------- --------- --------- --------- Net revenues........................... 149,895 169,543 290,278 466,857 583,515 273,474 367,613 --------- --------- --------- --------- --------- --------- --------- Operating costs and expenses: Casino................................... 42,185 47,492 92,812 150,805 203,857 93,278 137,592 Food and beverage........................ 20,184 19,528 34,045 57,659 68,994 32,275 44,862 Room..................................... 5,398 5,439 7,014 9,147 10,318 5,097 6,481 Other.................................... 15,822 22,432 27,270 24,902 23,927 11,260 13,481 Selling, general and administrative...... 28,514 26,269 60,810 97,466 120,285 55,606 81,896 Corporate expenses....................... -- 7,920 13,141 15,979 18,284 8,642 7,644 Restructuring charge..................... -- -- -- -- 2,016 -- -- Development expenses..................... -- 1,791 7,200 3,960 1,302 602 104 Depreciation and amortization............ 10,935 12,976 22,220 35,039 44,589 20,092 33,169 Preopening expenses...................... -- -- 19,378 2,436 31,820 -- 10,866 --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses..... 123,038 143,847 283,890 397,393 525,392 226,852 336,095 --------- --------- --------- --------- --------- --------- --------- Operating income........................... 26,857 25,696 6,388 69,464 58,123 46,622 31,518 Interest expense, net...................... (8,949) (9,179) (19,967) (30,563) (36,698) (16,260) (35,713) Other income (expense)..................... 32 2,192 2,160 1,150 (47) 66 (4,996) --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes.......... 17,940 18,709 (11,419) 40,051 21,378 30,428 (9,191) Income tax (provision) benefit............. -- (4,806) 3,477 (14,579) (7,615) (10,851) 3,258 Reinstatement of deferred taxes............ -- (4,486) -- -- -- -- -- Pro forma income taxes (unaudited)(1)...... (6,100) -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss).......................... -- 9,417 (7,942) 25,472 13,763 19,577 (5,933) Preferred stock dividends.................. -- -- -- (53) (7,245) (3,622) (3,622) --------- --------- --------- --------- --------- --------- --------- Net income (loss) applicable to common stock.................................... $ -- $ 9,417 $ (7,942) $ 25,419 $ 6,518 $ 15,955 $ (9,555) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income after income taxes (unaudited)(1)........................... $ 11,840 $ 12,309 $ -- $ -- $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Earnings per share: Earnings (loss) per common share........... $ -- $ -- $ (0.26) $ 0.75 $ 0.18 $ 0.45 $ (0.27) Pro forma earnings per share (unaudited)(1)........................... $ 0.44 $ 0.42 $ -- $ -- $ -- $ -- $ -- Weighted average common shares outstanding.............................. -- -- 30,113 33,918 35,316 35,314 35,310 Pro forma weighted average common shares outstanding (unaudited).................. 26,681 29,413 -- -- -- -- --
37
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS) OTHER DATA(2): Number of hotel rooms...................... 1,028 1,028 1,328 1,528 1,708 1,528 2,106 Average daily occupancy rate:.............. Palace Station........................... 94% 97% 95% 94% 95% 97% 96% Boulder Station.......................... -- 92% 93% 94% 98% 98% 98% Sunset Station........................... -- -- -- -- -- -- 92% Texas Station............................ -- -- -- 86% 95% 96% 91% Station Casino Kansas City............... -- -- -- -- 95% -- 91% Casino square footage...................... 84,000 84,000 206,000 278,000 432,000 278,000 512,000 Number of slot machines.................... 3,202 3,323 7,020 9,555 13,008 9,449 15,345 Capital expenditures(3).................... $ 15,504 $ 102,687 $ 163,884 $ 307,745 $ 506,096 $ 218,797 $ 103,561 EBITDA(4).................................. 37,792 41,743 47,986 106,939 136,548 66,714 75,553 EBITDAR(5) 37,792 41,983 50,563 113,476 139,906 69,178 80,656 Cash flows provided by (used in): Operating activities..................... $ 29,658 $ 23,685 $ 48,494 $ 77,953 $ 111,803 $ 52,177 $ 54,644 Investing activities..................... (14,867) (111,072) (157,585) (266,935) (479,008) (195,853) (182,958) Financing activities..................... (10,309) 92,073 109,893 286,889 294,859 59,432 129,715
AS OF MARCH 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- AS OF SEPTEMBER 30, 1997 ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................... $ 11,473 $ 16,159 $ 16,961 $ 114,868 $ 42,522 $ 43,923 Total assets................................. 185,110 301,486 436,538 827,314 1,234,118 1,308,675 Long-term debt............................... 133,215 159,460 299,814 464,998 760,963 899,994 Stockholders' equity......................... 37,153 95,791 87,886 278,470 298,848 289,501
- ------------------------------ (1) Reflects provisions for federal income taxes (assuming a 34% effective tax rate for both periods) as if the Company had not been treated as an S corporation during the year ended March 31, 1993. (2) Other Data relating to the number of hotel rooms, the casino square footage and the number of slot machines represent end of period data. (3) Capital expenditures for the fiscal year ended March 31, 1994 included $52.8 million related to the development of Station Casino St. Charles and $31.9 million related to the development of Boulder Station. Capital expenditures for the fiscal year ended March 31, 1995 include $52.9 million related to the development of Station Casino St. Charles and $90.7 million related to the development of Boulder Station. Capital expenditures for the fiscal year ended March 31, 1996 include $84.9 million related to the acquisition and completion of Texas Station, $25.0 million related to the parking garage and entertainment complex at Boulder Station, $62.8 million related to the development and construction of Station Casino Kansas City, $29.7 million related to the development and construction of Sunset Station and $39.4 million related to the St. Charles Expansion Project. Capital expenditures for the fiscal year ended March 31, 1997 included $211.1 million related to the development and construction of Station Casino Kansas City, $112.8 million related to the development and construction of Sunset Station and $99.6 million related to the development and construction of the St. Charles Expansion Project. Capital expenditures for the six months ended September 30, 1997 include $40.7 million related to the development and construction of Sunset Station, and $23.9 million related to the development and construction of the St. Charles Expansion Project. (4) "EBITDA" consists of operating income and, in the case of Station Casino St. Charles, lease income of $3.1 million relating to the Station Casino St. Charles riverboat in fiscal year 1994, plus depreciation and amortization, including preopening expenses and a restructuring charge in 1997. EBITDA should not be construed as an alternative to operating income as an indicator of the Company's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. the Company has presented EBITDA solely as supplemental disclosure because the Company believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization. (5) "EBITDAR" consists of EBITDA plus lease expenses. EBITDAR should not be construed as an alternative to operating income as an indicator of the Company operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. The Company has presented EBITDAR solely as supplemental disclosure because the Company believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation, amortization and lease expenses. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the consolidated financial statements and notes thereto included elsewhere in this Proxy Statement. RESULTS OF OPERATIONS OVERVIEW: The following discussion and analysis addresses the historical results of operations of the Company prior to the Reorganization Transactions. Upon completion of the Reorganization Transactions, Station REIT's revenues will be generated by rent payments from OpCo under the Leases with respect to the Initial Properties. OpCo's ability to make payments to Station REIT under the Leases will accordingly be dependent upon OpCo's ability to generate cash flow from the operation of the Initial Properties. See "Certain Consideration--Dependence of Station REIT on OpCo." Station REIT's Funds From Operations is anticipated to be the Lease revenues from OpCo less (i) "pass-through" rental expense on the head leases, (ii) corporate expenses and (iii) depreciation. Annual corporate expenses will reflect the reduced size of management relative to historical operations, and are estimated to have been approximately $3 million had the Reorganization Transactions occurred on April 1, 1996. See "Station Casinos, Inc. Unaudited Pro Forma Financial Statements." There can be no assurance that the actual level of corporate expenses experienced by Station REIT in the future will not be higher. The following table highlights the historical results of operations for the Company:
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- NEVADA OPERATIONS: 1995 1996 1997 1996 1997 - ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) (UNAUDITED) PALACE STATION Net revenues......................................... $ 133,313 $ 131,178 $ 133,464 $ 68,500 $ 63,390 Operating income..................................... $ 31,390 $ 28,615 $ 30,802 $ 16,185 $ 13,988 EBITDA(1)............................................ $ 41,285 $ 38,225 $ 38,890 $ 20,230 $ 18,214 BOULDER STATION Net revenues......................................... $ 64,645 $ 118,040 $ 143,039 $ 70,044 $ 69,083 Operating income(2).................................. $ 5,450 $ 28,103 $ 37,728 $ 18,213 $ 18,846 EBITDA(1)............................................ $ 16,842 $ 35,650 $ 48,553 $ 23,467 $ 24,742 TEXAS STATION Net revenues......................................... $ -- $ 55,098 $ 80,690 $ 39,804 $ 42,657 Operating income..................................... $ -- $ 3,903 $ 4,062 $ 1,848 $ 4,656 EBITDA(1)............................................ $ -- $ 8,904 $ 12,462 $ 5,339 $ 9,068 SUNSET STATION Net revenues......................................... $ -- $ -- $ -- $ -- $ 42,150 Operating (loss)(3).................................. $ -- $ -- $ -- $ -- $ (3,386) EBITDAR(1)........................................... $ -- $ -- $ -- $ -- $ 11,827 EBITDA(1)............................................ $ -- $ -- $ -- $ -- $ 9,276 TOTAL NEVADA OPERATIONS: Net revenues......................................... $ 197,958 $ 304,316 $ 357,193 $ 178,348 $ 217,280 Operating income..................................... $ 36,840 $ 60,621 $ 72,592 $ 36,246 $ 34,104 EBITDA(1)............................................ $ 58,127 $ 82,779 $ 99,905 $ 49,036 $ 61,300
39
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- 1995 1996 1997 1996 1997 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) (UNAUDITED) MISSOURI OPERATIONS: - ----------------------------------------------------- STATION CASINO ST. CHARLES Net revenues......................................... $ 58,384 $ 129,878 $ 158,760 $ 80,817 $ 61,150 Operating income (loss)(4)........................... $ (12,039) $ 28,058 $ 34,996 $ 18,230 $ 6,590 EBITDA(1)............................................ $ 5,632 $ 39,627 $ 47,144 $ 24,082 $ 13,147 STATION CASINO KANSAS CITY Net revenues......................................... $ -- $ -- $ 39,071 $ -- $ 74,994 Operating loss(5).................................... $ -- $ -- $ (30,701) $ -- $ (2,314) EBITDA(1)............................................ $ -- $ -- $ 3,536 $ -- $ 6,518 TOTAL MISSOURI OPERATIONS: Net revenues......................................... $ 58,384 $ 129,878 $ 197,831 $ 80,817 $ 136,144 Operating income (loss).............................. $ (12,039) $ 28,058 $ 4,295 $ 18,230 $ 4,276 EBITDA(1)............................................ $ 5,632 $ 39,627 $ 50,680 $ 24,082 $ 19,665 STATION CASINOS, INC. AND OTHER: - ----------------------------------------------------- Net revenues......................................... $ 33,936 $ 32,663 $ 28,491 $ 14,309 $ 14,189 Operating loss....................................... $ (18,413) $ (19,215) $ (18,764) $ (7,854) $ (6,862) EBITDA(1)............................................ $ (15,773) $ (15,467) $ (14,037) $ (6,404) $ (5,412)
- ------------------------------ (1) "EBITDA" consists of operating income plus depreciation and amortization, including preopening expenses. "EBITDAR" consists of operating income plus depreciation, amortization, preopening expenses and rent expense. EBITDA and EBITDAR should not be construed as alternatives to operating income as an indicator of the Company's operating performance, or as alternatives to cash provided by operating activities as a measure of liquidity. The Company has presented EBITDA and EBITDAR solely as supplemental disclosure because the Company believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization, preopening expenses and rent expense. (2) Operating income for Boulder Station for the fiscal year ended March 31, 1995, includes preopening expenses of $7.5 million. (3) Operating loss for Sunset Station for the six months ended September 30, 1997, includes preopening expenses of $10.7 million. (4) Operating loss for Station Casino St. Charles for the fiscal year ended March 31, 1995, includes preopening expenses of $11.9 million. (5) Operating loss for Station Casino Kansas City for the fiscal year ended March 31, 1997, includes preopening expenses of $31.1 million. SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1996. Consolidated net revenues increased 34.4% to $367.6 million for the six months ended September 30, 1997, from $273.5 million in the prior year. The Company's operations in Nevada (the "Nevada Operations") contributed $217.3 million of net revenues for the six months ended September 30, 1997, an increase of 21.6% over the prior year. This increase in net revenues is due primarily to the opening of Sunset Station in June 1997, as well as the continued improvement at Texas Station. These increases were offset by a decline of 7.5% in net revenues at Palace Station due to a lower table games hold percentage as compared to the prior year and competitive market conditions in the tour and travel segment of Palace Station's business which had a negative impact on casino revenues, as well as hotel room rates and occupancy, especially during the second quarter. In addition, net revenues at Boulder Station declined 1.4% due primarily to the opening of Sunset Station. The Company's operations in Missouri (the "Missouri Operations") contributed $136.1 million of net revenues for the six months ended September 30, 1997, an increase of 68.5% over the prior year. This increase in net revenues is due to Station Casino Kansas City which opened in January 1997, offset by a decline of 24.3% in net revenues at Station Casino 40 St. Charles due to increased competition in the St. Louis market with the opening of a new hotel/casino in Maryland Heights in March 1997. Consolidated operating income decreased 32.4% to $31.5 million for the six months ended September 30, 1997, from $46.6 million in the prior year. Operating income of the Nevada Operations decreased 5.9% to $34.1 million for the six months ended September 30, 1997, from $36.2 million in the prior year. Excluding a $10.9 million write-off of preopening expenses primarily related to the opening of Sunset Station, the Nevada Operations generated operating income of $45.0 million, an increase of 24.1% over the prior year. Operating income of the Missouri Operations declined 76.5% to $4.3 million for the six months ended September 30, 1997, from $18.2 million in the prior year. This is due primarily to a decrease of $11.6 million at Station Casino St. Charles attributed to increased competition and an operating loss of $2.3 million at Station Casino Kansas City. The decline in consolidated operating income, an increase in net interest expense of $19.5 million, and the expiration of certain option payments to lease or acquire land for future development resulting in an expense of $5.0 million, resulted in a net loss applicable to common stock of $9.6 million, or a loss per common share of $0.27 for the six months ended September 30, 1997, compared to net income applicable to common stock of $16.0 million, or earnings per common share of $0.45 in the prior year. CASINO. Casino revenues increased 33.3% to $282.7 million for the six months ended September 30, 1997, from $212.1 million in the prior year. This increase is due to the opening of Sunset Station in June 1997, the opening of Station Casino Kansas City in January 1997 and improvements at Texas Station, offset by decreases at Palace Station and Station Casino St. Charles due to the factors noted above. Casino expenses increased 47.5% to $137.6 million for the six months ended September 30, 1997, from $93.3 million in the prior year. This increase in casino expenses is consistent with the increase in casino revenues noted above. The casino net profit margin decreased to 51.3% for the six months ended September 30, 1997, from 56.0% in the prior year. The Nevada Operations experienced a slight increase in net casino margin, while the Missouri Operations were negatively impacted in St. Charles due to the increased competition and Station Casino Kansas City which has a lower margin due to the start-up nature of its operations, and its late entry into the Kansas City market. In addition, the Missouri Operations have a lower margin than the Company's combined margin, due primarily to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased 49.2% to $63.6 million for the six months ended September 30, 1997, from $42.6 million in the prior year. This increase is due to the opening of Station Casino Kansas City and Sunset Station as noted above. Food and beverage net profit margins improved to 29.4% for the six months ended September 30, 1997, from 24.3% in the prior year. These increases in margin are due to improvement at the Nevada Operations primarily as a result of continued focus on cost control. ROOM. Room revenues increased 36.0% to $17.2 million for the six months ended September 30, 1997, from $12.7 million in the prior year. This increase is due primarily to the opening of Station Casino Kansas City and Sunset Station which added 632 rooms for a total of 2,160 rooms company-wide. Room occupancy company-wide decreased to 95% from 97%, while the average daily room rate increased to $49 from $46 during the six months ended September 30, 1997. OTHER. Other revenues increased 26.0% to $28.7 million for the six months ended September 30, 1997, from $22.8 million in the prior year. This increase is due primarily to the addition of Station Casino Kansas City and Sunset Station. Revenues from the Company's slot route business increased 19.3% to $12.1 million for the six months ended September 30, 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses ("SG&A") increased 47.3% to $81.9 million for the six months ended September 30, 1997, from $55.6 million in the prior year. This increase is due to the addition of Station Casino Kansas City and Sunset Station. SG&A as a 41 percentage of net revenues increased to 22.3% for the six months ended September 30, 1997, from 20.3% in the prior year. This increase is due primarily to the new operations at Sunset Station and Kansas City Station which, as new properties, tend to have a higher percentage of SG&A to net revenues. CORPORATE EXPENSES. Corporate expenses decreased 11.5% to $7.6 million for the six months ended September 30, 1997, from $8.6 million in the prior year. For the six months ended September 30, 1997, corporate expenses declined to 2.1% of net revenues from 3.2% in the prior year. DEVELOPMENT EXPENSES. Development expenses continue to decrease. Such costs are incurred by the Company in its efforts to identify and pursue potential gaming opportunities in selected jurisdictions, including those in which gaming has not been approved. The Company expenses development costs including lobbying, legal and consulting until such time as the jurisdiction has approved gaming and the Company has identified a specific site. Costs incurred subsequent to these criteria being met are capitalized. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 65.1% to $33.2 million for the six months ended September 30, 1997, from $20.1 million in the prior year. This increase is due primarily to the addition of Station Casino Kansas City and Sunset Station. PREOPENING EXPENSES. The Company capitalizes preopening expenses associated with its construction projects, including Sunset Station which opened June 10, 1997. These amounts are expensed upon the opening of the related project. During the six months ended September 30, 1997, the Company expensed preopening expenses of $10.9 million related primarily to Sunset Station. INTEREST EXPENSE, NET. Interest costs incurred (expensed and capitalized) increased 72.8% to $45.2 million for the six months ended September 30, 1997. This increase is primarily attributable to added interest costs associated with the 9 3/4% senior subordinated notes issued by the Company in April 1997, borrowings under the Sunset Station loan agreement and borrowings under the reducing revolving credit facility. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 Consolidated net revenues increased 25.0% to $583.5 million for the fiscal year ended March 31, 1997, from $466.9 million in the prior year. The Company's Nevada Operations contributed $357.2 million of net revenues for the fiscal year ended March 31, 1997, an increase of 17.4% over the prior year. This increase is primarily due to improved operations at Boulder Station and the operations of Texas Station which opened in July 1995. The Company's Missouri Operations contributed $197.8 million of net revenues for the fiscal year ended March 31, 1997, an increase of 52.3% over the prior year. This increase is due to the opening of Station Casino Kansas City in January 1997, as well as an increase in revenues at Station Casino St. Charles. For the fiscal year ended March 31, 1996, net revenues and operating income at Station Casino St. Charles were adversely impacted by flooding on the Missouri River, which closed operations for 16 days and disrupted operations through the balance of the first quarter of fiscal year 1996. During the fiscal year ended March 31, 1997, the improved results at Station Casino St. Charles were achieved despite disruption created from the construction of a new parking garage and elevated roadway, which opened in May 1996, and construction related to the further development of the property's master plan. Flooding on the Missouri River did occur again in May 1996. The newly completed parking garage and elevated roadway served one of its intended purposes in minimizing business disruption caused by the flood. Additionally, results at Station Casino St. Charles were adversely impacted with the opening of a new hotel/casino in March 1997. Consolidated operating income decreased 16.3% to $58.1 million for the fiscal year ended March 31, 1997, from $69.5 million in the prior year. Operating income at the Nevada Operations increased 19.8% to $72.6 million from $60.6 million in the prior year. Operating income at the Missouri Operations were negatively impacted by the write-off of preopening expenses for Station Casino Kansas City and a one-time restructuring charge from the implementation of a plan to reduce costs and improve efficiency which 42 resulted primarily in employee severance payments. Operating income at Station Casino St. Charles increased 24.7% to $35.0 million. For the fiscal year ended March 31, 1997, these results, including an increase in net interest expense of $6.1 million, a decrease in the income tax provision of $7.0 million and dividends of $7.2 million on the convertible preferred stock issued in March 1996, resulted in net income applicable to common stock of $6.5 million, or earnings per common share of $0.18, compared to net income applicable to common stock of $25.4 million or earnings per common share of $0.75 in the prior year. CASINO. Casino revenues increased 25.5% to $450.0 million for the fiscal year ended March 31, 1997, from $358.5 million in the prior year. This increase is due to the opening of Station Casino Kansas City, a full year of operations at Texas Station, as well as improved results at both Boulder Station and Station Casino St. Charles. Casino revenues increased $42.8 million and $51.6 million for the Nevada Operations and Missouri Operations, respectively. Station Casino Kansas City generated casino revenue of $29.9 million since opening in January 1997. Casino expenses increased 35.2% to $203.9 million for the fiscal year ended March 31, 1997, from $150.8 million in the prior year. These increases in casino expenses are consistent with the increases in casino revenues discussed above. Casino net profit margin decreased to 54.7% from 57.9% in the prior year. This decrease is due to a slight decrease at the Nevada Operations and a lower margin at Station Casino Kansas City due to the start-up nature of the new operations. In addition, the Missouri Operations have a lower margin than the Company's combined margin due primarily to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased 26.2% to $92.2 million for the fiscal year ended March 31, 1997, from $73.1 million in the prior year. This improvement is primarily due to an increase in food and beverage revenues at Station Casino St. Charles of $5.0 million resulting from two new full-service restaurant facilities which opened in October 1995, an increase of $5.0 million at Texas Station and $7.5 million from Station Casino Kansas City. Food and beverage net profit margins improved to 25.2% for the fiscal year ended March 31, 1997, from 21.1% in the prior year. This increase in net margins is primarily due to improvements at the Nevada Operations, especially Texas Station, as a result of continued focus on cost control and strong margins at Station Casino St. Charles with the addition of the two full-service restaurants. ROOM. Room revenues increased 16.1% to $27.4 million for the fiscal year ended March 31, 1997, from $23.6 million in the prior year. This increase is due primarily to the addition of Texas Station with a total of 200 rooms which contributed an increase of $1.6 million of room revenues and Station Casino Kansas City with a total of 180 rooms which contributed $1.2 million of room revenues for the fiscal year ended March 31, 1997. The company-wide room occupancy increased to 96% from 94%, while the average daily room rate increased to $48 from $46. OTHER. Other revenues increased 25.2% to $49.0 million for the fiscal year ended March 31, 1997, from $39.1 million in the prior year. This increase is due to $2.3 million for the Company's interest in the operating income of Barley's Casino & Brewing Company which opened in January 1996, $3.1 million of lease income from the lease of a riverboat gaming facility, combined increases in other revenues at the Company's other operating properties of $7.5 million, offset by lost revenues of $3.0 million from the sale of vending assets of Southwest Services which were sold in September 1995. The riverboat gaming facility lease terminated in August 1997. Revenues from the Company's slot route business remained constant at $21.0 million. SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased 23.4% to $120.3 million for the fiscal year ended March 31, 1997, from $97.5 million in the prior year. This increase is primarily due to the addition of Texas Station in July 1995 and Station Casino Kansas City in January 1997. SG&A as a percentage of net revenues decreased slightly to 20.6% from 20.9% in the prior year. 43 CORPORATE EXPENSES. Corporate expenses increased 14.4% to $18.3 million for the fiscal year ended March 31, 1997, from $16.0 million in the prior year. These increases are attributable to increases in personnel infrastructure to manage the Company's new properties and projects under development. Corporate expenses decreased to 3.1% of net revenues for the fiscal year ended March 31, 1997, from 3.4% in the prior year. DEVELOPMENT EXPENSES. Development expenses decreased significantly for the fiscal year ended March 31, 1997 compared to the prior year. This decrease is the result of reduced efforts to identify potential gaming opportunities. Such costs are incurred by the Company in its efforts to identify and pursue potential gaming opportunities in selected jurisdictions, including those in which gaming has not been approved. The Company expenses development costs including lobbying, legal and consulting until such time as the jurisdiction has approved gaming and the Company has identified a specific site. Costs incurred subsequent to these criteria being met are capitalized. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 27.3% to $44.6 million for the fiscal year ended March 31, 1997, from $35.0 million in the prior year. Station Casino Kansas City contributed $2.8 million of this increase, while Texas Station contributed $3.8 million. Depreciation expense increased at Boulder Station primarily as a result of the parking garage and entertainment facilities added during mid-fiscal year 1996 as well as at Station Casino St. Charles primarily as a result of the parking garage which opened in May 1996. These increases were offset by a decrease in depreciation expense at Palace Station. PREOPENING EXPENSES. The Company capitalizes significant preopening expenses associated with its construction projects, including Station Casino Kansas City which opened January 16, 1997, and Sunset Station. These amounts are expensed upon the opening of the related project and could have a material adverse impact on the Company's earnings. During the fiscal year ended March 31, 1997 the Company expensed preopening expenses of $31.8 million substantially related to Station Casino Kansas City. Preopening expenses for the fiscal year ended March 31, 1996 relate to the opening of the new restaurant facilities at Station Casino St. Charles, the theater and parking garage at Boulder Station, the opening of Texas Station in July 1995 and the opening at Barley's Casino & Brewing Company in January 1996. INTEREST EXPENSE, NET. Interest costs incurred (expensed and capitalized) increased 59.2% to $58.8 million for the fiscal year ended March 31, 1997. This increase is primarily attributable to added interest costs associated with the 10 1/8% Senior Subordinated Notes issued by the Company in March 1996 and borrowings under the reducing revolving credit facility. During the first quarter of fiscal year 1997, the Company recorded interest income of $0.7 million from investments in tax free municipal securities purchased with the excess proceeds of the public offerings completed in March 1996. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 The Company's results of operations include the operations of Texas Station located in northwest Las Vegas which opened on July 12, 1995, operations for the full fiscal year ended March 31, 1996 at Boulder Station, which opened on August 23, 1994, and full-scale gaming at Station Casino St. Charles which opened on a limited basis on May 27, 1994. Operations at Station Casino St. Charles were limited for a significant portion of fiscal year 1995 due to the unexpected decision of the Missouri Supreme Court in January 1994 that certain games of chance were prohibited under the Missouri Constitution. On November 8, 1994, by referendum, the Missouri voters amended the Missouri Constitution to permit full-scale gaming. Full-scale operations began at Station Casino St. Charles on December 9, 1994. Consolidated net revenues increased 60.8% to $466.9 million for the fiscal year ended March 31, 1996, as compared to $290.3 million for the prior year. This increase is due to the factors noted in the preceding paragraph. Station Casino St. Charles contributed $129.9 million of net revenues, an increase of $71.5 million as compared to the prior year, while Boulder Station contributed $118.0 million of net revenues, an increase of $53.4 million as compared to the prior year. Texas Station contributed $55.1 million of net 44 revenues during the fiscal year. For the fiscal year ended March 31, 1996, net revenues and operating income of Station Casino St. Charles were negatively impacted by the flooding of the Missouri River which led to the closing of the property from May 17 through June 1, 1995, and disruption of operations throughout the balance of the first quarter of fiscal year 1996. The operations of Station Casino St. Charles were further disrupted by ongoing construction, including a new parking garage and elevated roadway which opened in May 1996. Consolidated operating income increased $63.1 million to $69.5 million for the fiscal year ended March 31, 1996, as compared to $6.4 million for the prior year. This improvement is due to the new and expanded operations discussed above. In addition, contributing to the lower operating income for the fiscal year ended March 31, 1995 were preopening expenses of $19.4 million related to the opening of Boulder Station and Station Casino St. Charles. The Company did not incur a large amount of preopening expenses in connection with the Texas Station acquisition due to the fact that Texas Station was substantially ready to open upon acquisition. This improvement in operating income, partially offset by an increase in net interest expense of $10.6 million and an increase of $18.1 million in the income tax provision, resulted in net income applicable to common stock of $25.4 million, or earnings per common share of $0.75 for fiscal year 1996. CASINO. Casino revenues increased 70.3% to $358.5 million for the fiscal year ended March 31, 1996, as compared to $210.5 million for the prior year. This increase is directly related to $40.1 million in casino revenues generated by the new Texas Station property and combined casino revenue increases generated by Station Casino St. Charles and Boulder Station of $110.2 million. For the fiscal year ended March 31, 1996, casino revenues at Palace Station decreased $2.2 million or 2.3% as compared to the prior year, primarily as a result of a decline in sports book revenue. Management believes that Palace Station's revenues were negatively impacted by road construction at Interstate 15 and Sahara Avenue. This construction was substantially completed in October 1995. In addition, two of the restaurants at Palace Station were closed for remodeling during different parts of the fiscal year which management believes also had a negative impact on casino revenues. Both restaurants have been reopened. Revenues at the Southwest Company's Louisiana Downs Race Track video poker operation (all but a 1% interest of which the Company sold in September 1997) declined by $2.2 million for the fiscal year ended March 31, 1996 as compared to the prior year. This decrease is a result of increased competition in northwest Louisiana from riverboats opened in the first two quarters of fiscal year 1995. Casino expenses increased 62.5% to $150.8 million for the fiscal year ended March 31, 1996, as compared to $92.8 million for the prior year. This increase in casino expenses is consistent with the increase in casino revenues discussed above. Casino net profit margin improved to 57.9% from 55.9% during the prior year. This improvement comes primarily from the operations at Station Casino St. Charles where the casino profit margin was 53.1% for the fiscal year ended March 31, 1996, compared to 45.0% for the prior year. The improvement at Station Casino St. Charles was primarily due to increased revenues generated as a result of the Missouri vote which allowed full-scale gaming beginning in December 1994. The increased revenues allowed for substantial operational efficiencies. The casino net profit margins at Station Casino St. Charles are lower than the Company's combined margin primarily due to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased $29.8 million or 69.1% for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is due to food and beverage revenues of $15.1 million at the newly opened Texas Station property and combined food and beverage revenue increases at Station Casino St. Charles and Boulder Station of $14.2 million. Food and beverage revenues at Station Casino St. Charles increased with the opening of two full service restaurants in October 1995. Food and beverage net profit margins remained relatively flat, with a margin of 21.1% in fiscal year 1996. Net profit margins for Boulder Station improved significantly over the prior year from 5.4% to 17.8% for the fiscal year ended March 31, 1996. Management believes that the low margin experienced in the prior year was due to typical initial operating inefficiencies of a new property. In fiscal year 1996 the 45 increase in margin at Boulder Station was due to efficiencies resulting from effective cost control measures implemented. The net profit margin at Texas Station was 9.7% which management attributes primarily to initial operating inefficiencies typical for a new property. ROOM. Room revenues increased 33.5% to $23.6 million for the fiscal year ended March 31, 1996, as compared to $17.7 million for the prior year. This increase is due primarily to the addition of Texas Station and a full year of operations at Boulder Station. Texas Station, with a total of 200 rooms, contributed $2.1 million of the increase. Boulder Station, with a total of 300 rooms, contributed $2.7 million of the increase. Palace Station contributed an increase of $1.1 million over the prior year. The company-wide room occupancy rate declined from 95% in the prior year to 94% for the fiscal year ended March 31, 1996, while the average daily room rate increased from $41 to $46. OTHER. Other revenues increased $2.5 million or 6.9% to $39.1 million for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is due primarily to increased slot route revenues of $4.0 million and an increase in other revenues at Boulder Station of $1.8 million. In addition, Texas Station added $1.8 million of other revenues during the fiscal year ended March 31, 1996. These increases were offset by decreases in operating revenues resulting after the sale of certain assets of the pay phone division at the end of fiscal year 1995 and the vending division in the middle of fiscal year 1996. SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased $36.7 million or 60.3% for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is primarily due to the operations at Station Casino St. Charles and Boulder Station, which combined, contributed an increase of $20.5 million over the prior year. In addition, Texas Station added $14.8 million of SG&A for the fiscal year ended March 31, 1996. SG&A as a percentage of net revenues remained consistent at 20.9%. CORPORATE EXPENSES. Corporate expenses increased $2.8 million or 21.6% to $16.0 million for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is attributable to increases in personnel and other infrastructure costs required to manage the Company's new properties and expansion plans for fiscal years 1997 and beyond. Corporate expenses declined to 3.4% of net revenues for the fiscal year ended March 31, 1996, as compared to 4.5% in the prior year. DEVELOPMENT EXPENSES. Development expenses decreased significantly for the fiscal year ended March 31, 1996, compared to the prior year. This decrease was the result of reduced efforts to identify potential gaming opportunities. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $12.8 million or 57.7% to $35.0 million for the fiscal year ended March 31, 1996. This increase is attributed to increases of $3.5 million at Boulder Station and $5.2 million at Station Casino St. Charles due to expansions at these facilities. In addition, Texas Station generated $4.1 million of depreciation and amortization for the fiscal year ended March 31, 1996. INTEREST EXPENSE, NET. Interest costs incurred (expensed and capitalized) for the fiscal year ended March 31, 1996 were $36.7 million, a 41.5% increase over the prior year. This increase is primarily attributable to increases in term note and revolving line of credit balances as a result of the capital required for the Company's expansion strategy. Other income includes a $1.2 million gain recorded as a result of the sale of certain assets of the vending division of Southwest Services, Inc. LIQUIDITY AND CAPITAL RESOURCES HISTORICAL During the six months ended September 30, 1997, the Company's sources of capital included net proceeds of $144.3 million from the issuance of 9 3/4% Senior Subordinated Notes, which were used to re-pay amounts outstanding under the Current Bank Facility, cash flows from operating activities of 46 $54.6 million, and borrowings under the Sunset Loan Agreement of $57.0 million. At September 30, 1997, the Company had available borrowings of $116.0 million under its reducing revolving credit facility, subject to covenant restrictions, $7.0 million under the Sunset Loan Agreement and $43.9 million in cash and cash equivalents. During the six months ended September 30, 1997, total capital expenditures were approximately $103.6 million, of which approximately (i) $40.7 million was associated with the development and construction of Sunset Station, (ii) $23.9 million was associated with the development and construction of the expansion project at Station Casino St. Charles, (iii) $7.0 million was associated with the acquisition of land adjacent to Boulder Station, and (iv) $32.0 million was associated with various other projects, maintenance capital expenditures and net construction period interest. STATION REIT PRO FORMA Station REIT's primary requirements during 1998 are expected to include (i) the payment of construction contracts payable of approximately $7.2 million as of September 30, 1997, (ii) the possible repurchase or redemption of the 9 5/8% Senior Subordinated Notes due 2003 in June of 1998, (iii) costs of construction associated with Boulder Station, Texas Station and Sunset Station, (iv) principal and interest payments on indebtedness, (v) dividend payments on Convertible Preferred Stock and on the Common Stock and (vi) general corporate purposes. Upon completion of the Reorganization Transactions, Station REIT's long-term indebtedness will be reduced by approximately $354.4 million, and Station REIT expects to have $500 million available for borrowing under the Bank Facility. See "Station REIT Pro Forma Capitalization" and "Description of Certain New Indebtedness." The Company believes the Reorganization Transactions will improve its financial position through these changes in its capital structure, in addition to the benefits expected to result from the changes summarized in "--Results of Operations--Overview." Primary liquidity requirements during 1998 are expected to be met from net cash provided by operations. See "Distribution Policy." Management has identified approximately $80 million of potential investments that it expects would be made at the Initial Properties in Las Vegas during 1998. These investments continue the master-planned development at Boulder Station, Texas Station and Sunset Station. All of these projects are expected to be completed in the first quarter of calendar year 1999. At Boulder Station, the next phase of expansion includes the addition of 20,000 square feet of banquet and meeting space estimated to cost $13 million (excluding construction period interest). At Texas Station, the next phase of expansion includes adding 168 hotel rooms, approximately 21,360 square feet of casino space, a 2,000-space parking garage, a 10,000 square-foot food court with six to ten fast food tenants and a 10,000 square foot child care facility estimated to cost $40 million (excluding construction period interest). Management estimates that the size and scope of this project may cause some disruption to current operations. At Sunset Station, the next phase of expansion includes a 2,088-space parking garage, and the addition of 13,670 square feet of casino space with an additional 300 slot machines at a cost of $28 million, (excluding construction period interest). In addition, the Company is in negotiations with Act III Theaters to develop a 12-screen theater which would raise the total cost to $36 million. The Lease payments, borrowings under the Bank Facility, proceeds from the Offerings and existing cash balances are expected to be adequate to satisfy Station REIT's anticipated uses of capital during 1998. The Company continually evaluates its financing needs. If more attractive financing alternatives become available to the Company, the Company may pursue these financing plans assuming such financing would be permitted under its existing debt agreements and other applicable agreements. See "Description of Certain New Indebtedness." 47 SELECTED COMBINED FINANCIAL DATA OF OPCO The selected combined financial data presented below as of and for OpCo's fiscal years ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from combined financial statements which, except for 1993 and 1994, are contained elsewhere in this Proxy Statement. The selected combined financial data presented below as of and for years ended March 31, 1993 and 1994 and the six months ended September 30, 1997 and 1996 are derived from unaudited combined financial statements; however, in the opinion of OpCo, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of OpCo's financial position and results of operations for such period have been included. The selected combined 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 of OpCo" and the combined financial statements, the notes thereto and other financial and statistical information included elsewhere in this Proxy Statement. The following selected combined financial data of OpCo relates to the business of OpCo as it was operated as a part of the Company and may not reflect the results of operations or financial position that would have been obtained had OpCo been a separate, publicly held company during such periods. In particular, the effect of Lease payments that would have been incurred by OpCo are not reflected. See "Summary Unaudited Pro Forma Financial Data of OpCo."
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Operating revenues: Casino................................... $ 100,426 $ 109,090 $ 210,534 $ 358,495 $ 450,013 $ 212,072 $ 282,700 Food and beverage........................ 25,157 26,078 43,208 73,057 92,220 42,626 63,577 Room..................................... 12,373 14,360 17,690 23,614 27,420 12,658 17,218 Other.................................... 20,743 31,226 36,561 39,099 48,957 22,752 28,676 --------- --------- --------- --------- --------- --------- --------- Gross revenues......................... 158,699 180,754 307,993 494,265 618,610 290,108 392,171 Less promotional allowances.............. (8,804) (11,211) (17,715) (27,408) (35,095) (16,634) (24,558) --------- --------- --------- --------- --------- --------- --------- Net revenues........................... 149,895 169,543 290,278 466,857 583,515 273,474 367,613 --------- --------- --------- --------- --------- --------- --------- Operating costs and expenses: Casino................................... 42,185 47,492 92,812 150,805 203,857 93,278 137,592 Food and beverage........................ 20,184 19,528 34,045 57,659 68,994 32,275 44,862 Room..................................... 5,398 5,439 7,014 9,147 10,318 5,097 6,481 Other.................................... 15,822 22,432 27,270 24,902 23,927 11,260 13,481 Selling, general and administrative...... 28,514 26,269 60,810 97,466 120,285 55,606 81,896 Corporate expenses....................... -- 7,920 13,141 15,979 18,284 8,642 7,644 Restructuring charge..................... -- -- -- -- 2,016 -- -- Development expenses..................... -- 1,791 7,200 3,960 1,302 602 104 Intercompany expense..................... 2,070 1,929 3,333 5,202 7,970 3,655 6,242 Depreciation and amortization............ 8,865 11,047 18,887 29,837 36,619 16,437 26,927 Preopening expenses...................... -- -- 19,378 2,436 31,820 -- 10,866 --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses..... 123,038 143,847 283,890 397,393 525,392 226,852 336,095 --------- --------- --------- --------- --------- --------- --------- Operating income........................... 26,857 25,696 6,388 69,464 58,123 46,622 31,518 Interest expense, net...................... (8,949) (7,443) (6,980) (10,546) (7,413) (3,479) (6,172) Other income (expense), net................ 32 2,192 2,160 1,150 (47) 67 (4,996) --------- --------- --------- --------- --------- --------- --------- Income before income taxes................. 17,940 20,445 1,568 60,068 50,663 43,210 20,350 Income tax provision....................... -- (4,148) (812) (21,596) (17,121) (15,152) (6,830) Reinstatement of deferred taxes............ -- (3,232) -- -- -- -- -- Pro forma income taxes (unaudited)(1)...... (6,260) -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income................................. $ -- $ 13,065 $ 756 $ 38,472 $ 33,542 $ 28,058 $ 13,520 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income after income taxes (unaudited)(1)........................... $ 11,680 $ 13,494 $ -- $ -- $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
48
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) OTHER DATA(2): Number of hotel rooms...................... 1,028 1,028 1,328 1,528 1,708 1,528 2,106 Average daily occupancy rate: Palace Station........................... 94% 97% 95% 94% 95% 97% 96% Boulder Station.......................... -- 92% 93% 94% 98% 98% 98% Sunset Station........................... -- -- -- -- -- -- 92% Texas Station............................ -- -- -- 86% 95% 96% 91% Station Casino Kansas City............... -- -- -- -- 95% -- 91% Casino square footage...................... 84,000 84,000 206,000 278,000 432,000 278,000 512,000 Number of slot machines.................... 3,202 3,323 7,020 9,555 13,008 9,449 15,345 Capital expenditures....................... $ 6,311 $ 24,485 $ 144,624 $ 85,780 $ 251,386 $ 35,252 $ 43,707 EBITDA(3).................................. 37,792 41,743 47,986 106,939 136,548 66,714 75,553 EBITDAR(4) 37,792 41,983 50,563 113,476 139,906 69,178 80,656 Cash flows provided by (used in): Operating activities..................... $ 28,822 $ 30,910 $ 58,257 $ 88,479 $ 127,813 $ 55,288 $ 62,033 Investing activities..................... (7,158) (44,728) (132,373) (74,633) (285,108) (37,225) (48,787) Financing activities..................... (17,173) 18,495 74,918 84,061 84,949 (102,307) (11,845)
AS OF MARCH 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- AS OF SEPTEMBER 30, 1997 ------------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................... $ 11,482 $ 16,159 $ 16,961 $ 114,868 $ 42,522 $ 43,923 Total assets................................. 86,084 135,098 249,530 398,091 557,313 580,857 Long-term debt............................... 126,642 48,561 114,923 76,580 377,897 368,564 Investment by Station Casinos, Inc........... (65,809) 47,990 83,694 269,452 95,616 112,349
- ------------------------------ (1) Reflects provisions for federal income taxes (assuming a 34% effective tax rate for both periods) as if OpCo had not been treated as an S corporation during the year ended March 31, 1993. (2) Other Data relating to the number of hotel rooms, the casino square footage and the number of slot machines represent end of period data. (3) "EBITDA" consists of operating income and, in the case of Station Casino St. Charles, lease income of $3.1 million relating to the Station Casino St. Charles riverboat in fiscal year 1994, plus depreciation and amortization, including preopening expenses, intercompany expense related to depreciation on real estate assets to be held by Station REIT and a restructuring charge in 1997. EBITDA should not be construed as an alternative to operating income as an indicator of OpCo's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. OpCo has presented EBITDA solely as supplemental disclosure because OpCo believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization. (4) "EBITDAR" consists of EBITDA plus lease expenses. EBITDAR should not be construed as an alternative to operating income as an indicator of OpCo's operating performance, or as an alternative to cash provided by operating activities as a measure of liquidity. OpCo has presented EBITDAR solely as supplemental disclosure because OpCo believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation, amortization and lease expenses. 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OPCO The following discussion and analysis should be read in conjunction with "Selected Combined Financial Data of OpCo" and the combined financial statements and notes thereto included elsewhere in this Proxy Statement. RESULTS OF OPERATIONS OVERVIEW: Historical results set forth in the Station Operating Company Combined Balance Sheet and Station Operating Company Combined Statements of Operations should not be taken as indicative of future operations. Such financial statements relate to the business of OpCo as it was operated as a part of the Company and may not reflect the financial position that would have been obtained had OpCo been a separate publicly held company during such periods. Upon completion of the Reorganization Transactions OpCo will incur significant rent expense under the Leases. The ability of OpCo to make payments under the Leases will be dependent upon its ability to generate cash flow from the operation of the Initial Casino Properties. Any profits generated by OpCo after the Lease payments, property tax, and property and casualty insurance will be retained by OpCo. The following table highlights the historical results of operations for OpCo:
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- 1995 1996 1997 1996 1997 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) (UNAUDITED) NEVADA OPERATIONS: - ----------------------------------------------------- PALACE STATION Net revenues......................................... $ 133,313 $ 131,178 $ 133,464 $ 68,500 $ 63,390 Operating income..................................... $ 31,390 $ 28,615 $ 30,802 $ 16,185 $ 13,988 EBITDA(1)............................................ $ 41,285 $ 38,225 $ 38,890 $ 20,230 $ 18,214 BOULDER STATION Net revenues......................................... $ 64,645 $ 118,040 $ 143,039 $ 70,044 $ 69,083 Operating income(2).................................. $ 5,450 $ 28,103 $ 37,728 $ 18,213 $ 18,846 EBITDA(1)............................................ $ 16,842 $ 35,650 $ 48,553 $ 23,467 $ 24,742 TEXAS STATION Net revenues......................................... $ -- $ 55,098 $ 80,690 $ 39,804 $ 42,657 Operating income..................................... $ -- $ 3,903 $ 4,062 $ 1,848 $ 4,656 EBITDA(1)............................................ $ -- $ 8,904 $ 12,462 $ 5,339 $ 9,068 SUNSET STATION Net revenues......................................... $ -- $ -- $ -- $ -- $ 42,150 Operating (loss)(3).................................. $ -- $ -- $ -- $ -- $ (3,386) EBITDAR(1)........................................... $ -- $ -- $ -- $ -- $ 11,827 EBITDA(1)............................................ $ -- $ -- $ -- $ -- $ 9,276 TOTAL NEVADA OPERATIONS: Net revenues......................................... $ 197,958 $ 304,316 $ 357,193 $ 178,348 $ 217,280 Operating income..................................... $ 36,840 $ 60,621 $ 72,592 $ 36,246 $ 34,104 EBITDA(1)............................................ $ 58,127 $ 82,779 $ 99,905 $ 49,036 $ 61,300
50
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- 1995 1996 1997 1996 1997 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (AMOUNTS IN THOUSANDS) MISSOURI OPERATIONS: - ----------------------------------------------------- STATION CASINO ST. CHARLES Net revenues......................................... $ 58,384 $ 129,878 $ 158,760 $ 80,817 $ 61,150 Operating income (loss)(3)(4)........................ $ (12,039) $ 28,058 $ 34,996 $ 18,230 $ 6,590 EBITDA(1)............................................ $ 5,632 $ 39,627 $ 47,144 $ 24,082 $ 13,147 STATION CASINO KANSAS CITY Net revenues......................................... $ -- $ -- $ 39,071 $ -- $ 74,994 Operating loss(5).................................... $ -- $ -- $ (30,701) $ -- $ (2,314) EBITDA(1)............................................ $ -- $ -- $ 3,536 $ -- $ 6,518 TOTAL MISSOURI OPERATIONS: Net revenues......................................... $ 58,384 $ 129,878 $ 197,831 $ 80,817 $ 136,144 Operating income (loss).............................. $ (12,039) $ 28,058 $ 4,295 $ 18,230 $ 4,276 EBITDA(1)............................................ $ 5,632 $ 39,627 $ 50,680 $ 24,082 $ 19,665 CORPORATE AND OTHER: - ----------------------------------------------------- Net revenues......................................... $ 33,936 $ 32,663 $ 28,491 $ 14,309 $ 14,189 Operating loss....................................... $ (18,413) $ (19,215) $ (18,764) $ (7,854) $ (6,862) EBITDA(1)............................................ $ (15,773) $ (15,467) $ (14,037) $ (6,404) $ (5,412)
- ------------------------------ (1) "EBITDA" consists of operating income plus depreciation and amortization, including preopening expenses and intercompany expense related to depreciation on real estate assets to be held by Station REIT. "EBITDAR" consists of operating income plus depreciation, amortization, preopening expenses, intercompany expense related to depreciation on real estate assets to be held by Station REIT and rent expense. EBITDA and EBITDAR should not be construed as alternatives to operating income as an indicator of OpCo's operating performance, or as alternatives to cash provided by operating activities as a measure of liquidity. EBITDA and EBITDAR are presented solely as supplemental disclosure because management believes that certain investors consider this information useful in the evaluation of the financial performance of companies with substantial depreciation and amortization, preopening expenses and rent expense. (2) Operating income for Boulder Station for the fiscal year ended March 31, 1995, includes preopening expenses of $7.5 million. (3) Operating loss for Sunset Station for the six months ended September 30, 1997, includes preopening expenses of $10.7 million. (4) Operating loss for Station Casino St. Charles for the fiscal year ended March 31, 1995, includes preopening expenses of $11.9 million. (5) Operating loss for Station Casino Kansas City for the fiscal year ended March 31, 1997, includes preopening expenses of $31.1 million. 51 SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1996. Combined net revenues increased 34.4% to $367.6 million for the six months ended September 30, 1997, from $273.5 million in the prior year. The Nevada Operations contributed $217.3 million of net revenues for the six months ended September 30, 1997, an increase of 21.6% over the prior year. This increase in net revenues is due primarily to the opening of Sunset Station in June 1997, as well as the continued improvement at Texas Station. These increases were offset by a decline of 7.5% in net revenues at Palace Station due to a lower table games hold percentage as compared to the prior year and competitive market conditions in the tour and travel segment of Palace Station's business which had a negative impact on casino revenues, as well as hotel room rates and occupancy, especially during the second quarter. In addition, net revenues at Boulder Station declined 1.4% due primarily to the opening of Sunset Station. The Missouri Operations contributed $136.1 million of net revenues for the six months ended September 30, 1997, an increase of 68.5% over the prior year. This increase in net revenues is due to Station Casino Kansas City which opened in January 1997, offset by a decline of 24.3% in net revenues at Station Casino St. Charles due to increased competition in the St. Louis market with the opening of a new hotel/casino in Maryland Heights in March 1997. Combined operating income decreased 32.4% to $31.5 million for the six months ended September 30, 1997, from $46.6 million in the prior year. Operating income at the Nevada Operations decreased 5.9% to $34.1 million for the six months ended September 30, 1997, from $36.2 million in the prior year. Excluding a $10.9 million write-off of preopening expenses primarily related to the opening of Sunset Station, the Nevada Operations generated operating income of $45.0 million, an increase of 24.1% over the prior year. Operating income at the Missouri Operations declined 76.5% to $4.3 million for the six months ended September 30, 1997, from $18.2 million in the prior year. This is due primarily to a decrease of $11.6 million at Station Casino St. Charles attributed to increased competition and an operating loss of $2.3 million at Station Casino Kansas City. The decline in combined operating income, an increase in net interest expense of $2.7 million, and the expiration of certain option payments to lease or acquire land for future development resulting in an expense of $5.0 million, resulted in net income of $13.5 million for the six months ended September 30, 1997, compared to net income of $28.1 million in the prior year. CASINO. Casino revenues increased 33.3% to $282.7 million for the six months ended September 30, 1997, from $212.1 million in the prior year. This increase is due to the opening of Sunset Station in June 1997, the opening of Station Casino Kansas City in January 1997 and improvements at Texas Station, offset by decreases at Palace Station and Station Casino St. Charles due to the factors noted above. Casino expenses increased 47.5% to $137.6 million for the six months ended September 30, 1997, from $93.3 million in the prior year. This increase in casino expenses is consistent with the increase in casino revenues noted above. The casino net profit margin decreased to 51.3% for the six months ended September 30, 1997, from 56.0% in the prior year. The Nevada Operations experienced a slight increase in net casino margin, while the Missouri Operations were negatively impacted in St. Charles due to the increased competition and Station Casino Kansas City which has a lower margin due to the start-up nature of its operations, and its late entry into the Kansas City market. In addition, the Missouri Operations have a lower margin than OpCo's combined margin would have had, due primarily to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased 49.2% to $63.6 million for the six months ended September 30, 1997, from $42.6 million in the prior year. This increase is due to the opening of Station Casino Kansas City and Sunset Station as noted above. Food and beverage net profit margins improved to 29.4% for the six months ended September 30, 1997, from 24.3% in the prior year. These increases in margin are due to improvement at the Nevada Operations primarily as a result of continued focus on cost control. ROOM. Room revenues increased 36.0% to $17.2 million for the six months ended September 30, 1997, from $12.7 million in the prior year. This increase is due primarily to the opening of Station Casino 52 Kansas City and Sunset Station which added 632 rooms for a total of 2,160 rooms company-wide. Room occupancy company-wide decreased to 95% from 97%, while the average daily room rate increased to $49 from $46 during the six months ended September 30, 1997. OTHER. Other revenues increased 26.0% to $28.7 million for the six months ended September 30, 1997, from $22.8 million in the prior year. This increase is due primarily to the addition of Station Casino Kansas City and Sunset Station. Revenues from the slot route business increased 19.3% to $12.1 million for the six months ended September 30, 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses ("SG&A") increased 47.3% to $81.9 million for the six months ended September 30, 1997, from $55.6 million in the prior year. This increase is due to the addition of Station Casino Kansas City and Sunset Station. SG&A as a percentage of net revenues increased to 22.3% for the six months ended September 30, 1997, from 20.3% in the prior year. This increase is due primarily to the new operations at Sunset Station and Station Casino Kansas City which, as new properties, tend to have a higher percentage of SG&A to net revenues. CORPORATE EXPENSES. Corporate expenses decreased 11.5% to $7.6 million for the six months ended September 30, 1997, from $8.6 million in the prior year. For the six months ended September 30, 1997, corporate expenses declined to 2.1% of net revenues from 3.2% in the prior year. DEVELOPMENT EXPENSES. Development expenses continue to decrease. Such costs are incurred in connection with efforts to identify and pursue potential gaming opportunities in selected jurisdictions, including those in which gaming has not been approved. Development costs including lobbying, legal and consulting are expensed until such time as the jurisdiction has approved gaming and a specific site has been identified. Costs incurred subsequent to these criteria being met are capitalized. INTERCOMPANY EXPENSE. Intercompany expense represents depreciation or real estate assets to be held by Station REIT which OpCo historically has utilized in conducting its hotel/casino operations. Intercompany expense increased 70.8% to $6.2 million for the six months ended September 30, 1997 from $3.7 million in the prior year. This increase is due primarily to the addition of Station Casino Kansas City and Sunset Station. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 63.8% to $26.9 million for the six months ended September 30, 1997, from $16.4 million in the prior year. This increase is due primarily to the addition of Station Casino Kansas City and Sunset Station. PREOPENING EXPENSES. Preopening expenses associated with construction projects are capitalized, including Sunset Station which opened June 10, 1997. These amounts are expensed upon the opening of the related project. During the six months ended September 30, 1997, preopening expenses of $10.9 million related primarily to Sunset Station were expensed. INTEREST EXPENSE, NET. Interest expense increased 77.4% to $6.2 million for the six months ended September 30, 1997, primarily due to increased borrowings under the reducing revolving credit facility and the Sunset Station Loan Agreement. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 Combined net revenues increased 25.0% to $583.5 million for the fiscal year ended March 31, 1997, from $466.9 million in the prior year. The Nevada Operations contributed $357.2 million of net revenues for the fiscal year ended March 31, 1997, an increase of 17.4% over the prior year. This increase is primarily due to improved operations at Boulder Station and the operations of Texas Station which opened in July 1995. The Missouri Operations contributed $197.8 million of net revenues for the fiscal year ended March 31, 1997, an increase of 52.3% over the prior year. This increase is due to the opening of Station Casino Kansas City in January 1997, as well as an increase in revenues at Station Casino St. Charles. For the fiscal year ended March 31, 1996, net revenues and operating income at Station Casino St. Charles 53 were adversely impacted by flooding on the Missouri River, which closed operations for 16 days and disrupted operations through the balance of the first quarter of fiscal year 1996. During the fiscal year ended March 31, 1997, the improved results at Station Casino St. Charles were achieved despite disruption created from the construction of a new parking garage and elevated roadway, which opened in May 1996, and construction related to the further development of the property's master plan. Flooding on the Missouri River did occur again in May 1996. The newly completed parking garage and elevated roadway served one of its intended purposes in minimizing business disruption caused by the flood. Additionally, results at Station Casino St. Charles were adversely impacted with the opening of a new hotel/casino in March 1997. Combined operating income decreased 16.3% to $58.1 million for the fiscal year ended March 31, 1997, from $69.5 million in the prior year. Operating income at the Nevada Operations increased 19.8% to $72.6 million from $60.6 million in the prior year. Operating income at the Missouri Operations were negatively impacted by the write-off of preopening expenses for Station Casino Kansas City and a one-time restructuring charge from the implementation of a plan to reduce costs and improve efficiency which resulted primarily in employee severance payments. Operating income at Station Casino St. Charles increased 24.7% to $35.0 million. For the fiscal year ended March 31, 1997, these results, including a decrease in net interest expense of $3.1 million, a decrease in the income tax provision of $4.5 million resulted in net income of $33.5 million, compared to net income of $38.5 million in the prior year. CASINO. Casino revenues increased 25.5% to $450.0 million for the fiscal year ended March 31, 1997, from $358.5 million in the prior year. This increase is due to the opening of Station Casino Kansas City, a full year of operations at Texas Station, as well as improved results at both Boulder Station and Station Casino St. Charles. Casino revenues increased $42.8 million and $51.6 million for the Nevada Operations and Missouri Operations, respectively. Station Casino Kansas City generated casino revenue of $29.9 million since opening in January 1997. Casino expenses increased 35.2% to $203.9 million for the fiscal year ended March 31, 1997, from $150.8 million in the prior year. These increases in casino expenses are consistent with the increases in casino revenues discussed above. Casino net profit margin decreased to 54.7% from 57.9% in the prior year. This decrease is due to a slight decrease at the Nevada Operations and a lower margin at Station Casino Kansas City due to the start-up nature of the new operations. In addition, the Missouri Operations have a lower margin than OpCo's combined margin due primarily to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased 26.2% to $92.2 million for the fiscal year ended March 31, 1997, from $73.1 million in the prior year. This improvement is primarily due to an increase in food and beverage revenues at Station Casino St. Charles of $5.0 million resulting from two new full-service restaurant facilities which opened in October 1995, an increase of $5.0 million at Texas Station and $7.5 million from Station Casino Kansas City. Food and beverage net profit margins improved to 25.2% for the fiscal year ended March 31, 1997, from 21.1% in the prior year. This increase in net margins is primarily due to improvements at the Nevada Operations, especially Texas Station, as a result of continued focus on cost control and strong margins at Station Casino St. Charles with the addition of the two full-service restaurants. ROOM. Room revenues increased 16.1% to $27.4 million for the fiscal year ended March 31, 1997, from $23.6 million in the prior year. This increase is due primarily to the addition of Texas Station with a total of 200 rooms which contributed an increase of $1.6 million of room revenues and Station Casino Kansas City with a total of 180 rooms which contributed $1.2 million of room revenues for the fiscal year ended March 31, 1997. Room occupancy increased to 96% from 94%, while the average daily room rate increased to $48 from $46. 54 OTHER. Other revenues increased 25.2% to $49.0 million for the fiscal year ended March 31, 1997, from $39.1 million in the prior year. This increase is due to $2.3 million from OpCo's interest in the operating income of Barley's Casino & Brewing Company which opened in January 1996, $3.1 million of lease income from the lease of a riverboat gaming facility, combined increases in other revenues at the other operating properties of $7.5 million, offset by lost revenues of $3.0 million from the sale of vending assets of Southwest Services which were sold in September 1995. The riverboat gaming facility lease will terminate in August 1997. Revenues from the slot route business remained constant at $21.0 million. SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased 23.4% to $120.3 million for the fiscal year ended March 31, 1997, from $97.5 million in the prior year. This increase is primarily due to the addition of Texas Station in July 1995 and Station Casino Kansas City in January 1997. SG&A as a percentage of net revenues decreased slightly to 20.6% from 20.9% in the prior year. CORPORATE EXPENSES. Corporate expenses increased 14.4% to $18.3 million for the fiscal year ended March 31, 1997, from $16.0 million in the prior year. These increases are attributable to increases in personnel infrastructure to manage new properties and projects under development. Corporate expenses decreased to 3.1% of net revenues for the fiscal year ended March 31, 1997, from 3.4% in the prior year. DEVELOPMENT EXPENSES. Development expenses decreased significantly for the fiscal year ended March 31, 1997 compared to the prior year. This decrease is the result of reduced efforts to identify potential gaming opportunities. INTERCOMPANY EXPENSE. Intercompany expense represents depreciation of real estate assets to be held by Station REIT which OpCo historically has utilized in conducting its hotel/casino operations. Intercompany expense increased 53.2% to $8.0 million for the fiscal year ended March 31, 1997 from $5.2 million in the prior year. Station Casino Kansas City contributed $0.5 million of the increase, Texas Station contributed $0.6 million, Boulder Station contributed $0.7 million and Station Casino St. Charles contributed $0.8 million. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 22.7% to $36.6 million for the fiscal year ended March 31, 1997, from $29.8 million in the prior year. Station Casino Kansas City contributed $2.4 million of this increase, while Texas Station contributed $3.3 million. These increases were offset by a decrease in depreciation expense at Palace Station. PREOPENING EXPENSES. Preopening expenses associated with construction projects are capitalized, including Station Casino Kansas City which opened January 16, 1997, and Sunset Station. These amounts are expensed upon the opening of the related project and could have a material adverse impact on earnings. During the fiscal year ended March 31, 1997, OpCo expensed $31.8 million of preopening expenses substantially related to Station Casino Kansas City. Preopening expenses for the fiscal year ended March 31, 1996 relate to the opening of the new restaurant facilities at Station Casino St. Charles, the theater and parking garage at Boulder Station, the opening of Texas Station in July 1995 and the opening at Barley's Casino & Brewing Company in January 1996. INTEREST EXPENSE, NET. Interest expense decreased 29.7% to $7.4 million for the fiscal year ended March 31, 1997, primarily due to increased capitalization of interest and lower outstanding indebtedness on the bank credit facility for most of the year. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Results of operations include the operations of Texas Station located in northwest Las Vegas which opened on July 12, 1995, operations for the full fiscal year ended March 31, 1996 at Boulder Station, which opened on August 23, 1994, and full-scale gaming at Station Casino St. Charles which opened on a limited basis on May 27, 1994. Operations at Station Casino St. Charles were limited for a significant portion of fiscal year 1995 due to the unexpected decision of the Missouri Supreme Court in January 1994 that certain games of chance were prohibited under the Missouri Constitution. On November 8, 1994, by 55 referendum, the Missouri voters amended the Missouri Constitution to permit full-scale gaming. Full-scale operations began at Station Casino St. Charles on December 9, 1994. Combined net revenues increased 60.8% to $466.9 million for the fiscal year ended March 31, 1996, as compared to $290.3 million for the prior year. This increase is due to the factors noted in the preceding paragraph. Station Casino St. Charles contributed $129.9 million of net revenues, an increase of $71.5 million as compared to the prior year, while Boulder Station contributed $118.0 million of net revenues, an increase of $53.4 million as compared to the prior year. Texas Station contributed $55.1 million of net revenues during the current fiscal year. For the fiscal year ended March 31, 1996, net revenues and operating income of Station Casino St. Charles were negatively impacted by the flooding of the Missouri River which led to the closing of the property from May 17 through June 1, 1995, and disruption of operations throughout the balance of the first quarter. The operations of Station Casino St. Charles were further disrupted by ongoing construction, including a new parking garage and elevated roadway which opened in May 1996. Combined operating income increased $63.1 million to $69.5 million for the fiscal year ended March 31, 1996, as compared to $6.4 million for the prior year. This improvement is due to the new and expanded operations discussed above. In addition, contributing to the lower operating income for the fiscal year ended March 31, 1995 were preopening expenses of $19.4 million related to the opening of Boulder Station and Station Casino St. Charles. Significant preopening expenses were not incurred in connection with the Texas Station acquisition due to the fact that Texas Station was substantially ready to open upon acquisition. This improvement in operating income, partially offset by an increase in net interest expense of $3.6 million and an increase of $20.8 million in the income tax provision, resulted in net income $38.5 million for fiscal year 1996. CASINO. Casino revenues increased 70.3% to $358.5 million for the fiscal year ended March 31, 1996, as compared to $210.5 million for the prior year. This increase is directly related to $40.1 million in casino revenues generated by the new Texas Station property and combined casino revenue increases generated by Station Casino St. Charles and Boulder Station of $110.2 million. For the fiscal year ended March 31, 1996, casino revenues at Palace Station decreased $2.2 million or 2.3% as compared to the prior year, primarily as a result of a decline in sports book revenue. Management believes that Palace Station's revenues were negatively impacted by road construction at Interstate 15 and Sahara Avenue. This construction was substantially completed in October 1995. In addition, two of the restaurants at Palace Station were closed for remodeling during different parts of the fiscal year which management believes also had a negative impact on casino revenues. Both restaurants have been reopened. Revenues at the Southwest Company's Louisiana Downs Race Track video poker operation (all but a one percent interest of which was sold in September 1997) declined by $2.2 million for the fiscal year ended March 31, 1996 as compared to the prior year. This decrease is a result of increased competition in northwest Louisiana from riverboats opened in the first two quarters of fiscal year 1995. Casino expenses increased 62.5% to $150.8 million for the fiscal year ended March 31, 1996, as compared to $92.8 million for the prior year. This increase in casino expenses is consistent with the increase in casino revenues discussed above. Casino net profit margin improved to 57.9% from 55.9% during the prior year. This improvement comes primarily from the operations at Station Casino St. Charles where the casino profit margin was 53.1% for the fiscal year ended March 31, 1996, compared to 45.0% for the prior year. The improvement at Station Casino St. Charles was primarily due to increased revenues generated as a result of the Missouri vote which allowed full-scale gaming beginning in December 1994. The increased revenues allowed for substantial operational efficiencies. The casino net profit margins at Station Casino St. Charles are lower than the combined margin primarily due to higher gaming tax rates in Missouri as compared to Nevada. FOOD AND BEVERAGE. Food and beverage revenues increased $29.8 million or 69.1% for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is due to food and beverage revenues of $15.1 million at the newly opened Texas Station property and combined food and beverage revenue 56 increases at Station Casino St. Charles and Boulder Station of $14.2 million. Food and beverage revenues at Station Casino St. Charles increased with the opening of two full service restaurants in October 1995. Food and beverage net profit margins have remained relatively flat, with a margin of 21.1% in fiscal year 1996. Net profit margins for Boulder Station have improved significantly over the prior year from 5.4% to 17.8% for the fiscal year ended March 31, 1996. Management believes that the low margin experienced in the prior year was due to typical initial operating inefficiencies of a new property. In fiscal year 1996 the increase in margin at Boulder Station was due to efficiencies resulting from effective cost control measures implemented. The net profit margin at Texas Station was 9.7% which management attributes primarily to initial operating inefficiencies typical for a new property. ROOM. Room revenues increased 33.5% to $23.6 million for the fiscal year ended March 31, 1996, as compared to $17.7 million for the prior year. This increase is due primarily to the addition of Texas Station and a full year of operations at Boulder Station. Texas Station, with a total of 200 rooms, contributed $2.1 million of the increase. Boulder Station, with a total of 300 rooms, contributed $2.7 million of the increase. Palace Station contributed an increase of $1.1 million over the prior year. Room occupancy rate declined from 95% in the prior year to 94% for the fiscal year ended March 31, 1996, while the average daily room rate increased from $41 to $46. OTHER. Other revenues increased $2.5 million or 6.9% to $39.1 million for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is due primarily to increased slot route revenues of $4.0 million and an increase in other revenues at Boulder Station of $1.8 million. In addition, Texas Station added $1.8 million of other revenues during the fiscal year ended March 31, 1996. These increases were offset by decreases in operating revenues resulting after the sale of certain assets of the pay phone division at the end of fiscal year 1995 and the vending division in the middle of fiscal year 1996. SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased $36.7 million or 60.3% for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is primarily due to the operations at Station Casino St. Charles and Boulder Station, which combined, contributed an increase of $20.5 million over the prior year. In addition, Texas Station added $14.8 million of SG&A for the fiscal year ended March 31, 1996. SG&A as a percentage of net revenues remained consistent at 20.9%. CORPORATE EXPENSES. Corporate expenses increased $2.8 million or 21.6% to $16.0 million for the fiscal year ended March 31, 1996, as compared to the prior year. This increase is attributable to increases in personnel and other infrastructure costs required to manage new properties and expansion plans for fiscal years 1997 and beyond. Corporate expenses declined to 3.4% of net revenues for the fiscal year ended March 31, 1996, as compared to 4.5% in the prior year. DEVELOPMENT EXPENSES. Development expenses decreased significantly for the fiscal year ended March 31, 1996, compared to the prior year. This decrease was the result of reduced efforts to identify potential gaming opportunities. INTERCOMPANY EXPENSE. Intercompany expense represents depreciation of real estate assets to be held by Station REIT which OpCo historically has utilized in conducting its hotel/casino operation. Intercompany expense increased 56.1% to $5.2 million for the fiscal year ended March 31, 1996 from $3.3 million in the prior year. This increase is primarily attributable to an increase of $1.0 million at Boulder Station and $0.7 million of depreciation expense on real estate assets at Texas Station for the fiscal year ended March 31, 1996. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $11.0 million or 57.9% to $29.8 million for the fiscal year ended March 31, 1996. This increase is attributed to increases of $2.5 million at Boulder Station and $5.1 million at Station Casino St. Charles due to expansions at these facilities. In addition, Texas Station generated $3.6 million of depreciation and amortization for the fiscal year ended March 31, 1996. 57 INTEREST EXPENSE, NET. Interest expense for the fiscal year ended March 31, 1996 increased $3.6 million, a 51.1% increase over the prior year, primarily due to increased amounts outstanding under the bank credit facility. OTHER INCOME. Other income includes a $1.2 million gain recorded as a result of the sale of certain assets of the vending division of Southwest Services, Inc. LIQUIDITY AND CAPITAL RESOURCES HISTORICAL The primary sources of capital have been cash flow generated from operations, investments by the Company, proceeds from the Company's reducing revolving credit facility and the Sunset Loan Agreement, and vendor and lease financing of equipment. As of September 30, 1997, OpCo would have had $43.9 million in cash and cash equivalents. During the six months ended September 30, 1997, total capital expenditures were approximately $43.7 million, primarily associated with equipment purchased for the completion of Sunset Station, continued construction in St. Charles and maintenance capital expenditures at the Initial Properties. OPCO PRO FORMA Concurrently with the Distribution, OpCo expects to enter into a bank credit agreement with a syndicate of banks (the "OpCo Lenders") pursuant to which the OpCo Lenders will provide to OpCo a $150 million reducing revolving bank credit facility. Loans made pursuant to which the bank facility will bear interest at a variable rate, based on LIBOR or at an alternate rate based upon a designated bank's prime rate or the federal funds rate. The bank facility will contain customary covenants with respect to OpCo including negative pledges, limitations on other debt, financial covenants relating to tangible net worth, interest coverage, and maximum debt to cash flow level and limitation on investments and the payment of dividends. Funds borrowed under the bank facility will be used to repay the Intermediate Notes in the amount of $105 million. Subsequent to the Distribution, one of OpCo's principal use of funds will be payments required under the Leases. Pursuant to the Leases, OpCo will lease certain real property necessary to the operation of the gaming activities of the Initial Properties from Station REIT. Each Lease will have primary terms ranging from 13 to 15 years and will be renewable for six five-year renewal terms. The Lease provides for OpCo to pay monthly a fixed base rent, percentage rent and add-on rent, each as defined in the Leases. OpCo's primary requirements during fiscal year 1998 are expected to include (i) Lease payments, (ii) maintenance capital expenditures, (iii) principal and interest payments on indebtedness, (iv) dividend payments on the OpCo Preferred Stock and (v) general corporate purposes. It is expected that OpCo's cash balances, cash flows from operations, vendor and lease financing of equipment and borrowings under the OpCo bank facility will be adequate to satisfy OpCo's anticipated working capital and capital expenditures requirements for at least the next twelve months. There can be no assurance, however, that the amounts available from such sources will be sufficient. OpCo may be required to seek additional capital in the form of public debt offerings or additional bank financing. OpCo's ability to borrow amounts under the OpCo bank facility or obtain other sources of capital will be limited if OpCo does not meet certain financial ratios as required by the OpCo bank facility. OpCo, however, expects to continually evaluate its financing needs. If more attractive financing alternatives become available to OpCo, OpCo may amend its financing plans. 58 BUSINESS STRATEGY HISTORICAL OVERVIEW The Company has been a leading Las Vegas hotel/casino operator, catering primarily to local residents and repeat visitors. The Initial Properties have over 10,000 slot and video poker machines in Las Vegas, more than any other owner/operator in the entire Las Vegas market. The Company targets the full- service locals and repeat visitors segment of the Las Vegas gaming market. Slot and video poker machines at the Company's Las Vegas properties account for approximately 38% of the installed base of machines within its targeted market. Consequently, management believes the Initial Properties in Las Vegas are well-positioned to continue to benefit from the business and population growth in Las Vegas and its surrounding areas. The Company has implemented its long-term Las Vegas business strategy by developing four fully-integrated entertainment destinations in key population centers in each quadrant of the Las Vegas market. Each of these Initial Properties has been master-planned for future expansion in order to capitalize on Las Vegas' expected population growth. In applying a similar philosophy of identifying projects with long-term potential in the locals' market niche, the Company has diversified into two major markets in Missouri. Management believes that its track record of sustained growth in its target market is attributable to its philosophy of developing long-term competitive assets. Specifically, management believes that its ability to secure properties in high traffic areas having ease of access and high visibility has provided the Initial Properties with a long-term competitive advantage. GROWTH STRATEGY Station REIT's growth strategy is expected to encompass three key elements: (1) continued master-planned development of the Initial Properties; (2) acquisitions and development of casino properties within Las Vegas; and (3) acquisitions and development of casino properties outside of Las Vegas. In addition, Station REIT will benefit from growth at the Initial Properties to the extent it realizes additional Lease revenues. OpCo is expected to initiate master-planned development at the Initial Properties and seek to participate in acquisitions and development by Station REIT when such opportunities fit with OpCo's growth plans and OpCo is not otherwise precluded from such participation. CONTINUED MASTER-PLANNED DEVELOPMENT Each of the Initial Properties was designed to facilitate staged, master-planned development. The Company has successfully implemented this strategy at several of the Initial Properties. For example, Palace Station was opened in 1976 as a 5,000 square foot facility. Today, Palace Station encompasses 287,000 square feet with 2,250 slot and video poker machines, 1,028 hotel rooms, five full-service restaurants, 3,700 parking spaces and approximately 20,000 square feet of banquet and convention space. Similarly, since their respective openings in 1994 and 1995, operating performance at Boulder Station and Texas Station has benefited from the execution of master-planned development, including Boulder Station's parking structure and movie theater complex additions and Texas Station's parking structure and bingo parlor additions. The emphasis of the master plan at each of the Initial Properties has been the development of diversified entertainment destinations for a targeted customer base. To further this strategy, management has secured exclusive arrangements with certain third-party tenants such as Act III Theaters and Kid's Quest child care facilities. In addition, several of the Initial Properties have sufficient acreage for management to pursue "build-to-suit" retail/entertainment opportunities. Management believes that the establishment of these tenant relationships will generate incremental Lease revenues, diversify the tenant base and drive additional traffic through the Initial Properties, thereby increasing the opportunity for additional percentage rent. The Company has budgeted $80 million for potential investments at the Initial Properties in Las Vegas during calendar 1998. OpCo is expected to initiate this master-planned development at each of the Initial Properties when it determines that economic conditions warrants expansion and will produce revenues sufficiently in excess of 59 those needed to pay for such capital improvements or the increased rents at the Initial Properties if Station REIT elects to finance such development. See "Relationship Between Station REIT and OpCo--The Leases." The following paragraphs summarize the master-planned expansions at each Initial Property: LAS VEGAS PROPERTIES - PALACE STATION As are all of the Initial Properties, Palace Station is master planned for further growth. The master plan includes a total of 3,000 hotel rooms, approximately 148,000 square feet of casino space, 3,200 slot machines and 90 table games. Additionally, the expanded Palace Station would offer approximately 50,000 square feet of rentable banquet space, a Kid's Quest child-care facility, an expanded arcade, expanded retail lease space, an estimated 5,600 parking spaces, a Las Vegas-style showroom and several new restaurants, bars and other entertainment amenities. This master plan is designed to be executed in multiple phases over several years. At the present time, no decision as to the timing or budget of the master planned expansion at Palace Station has been made. Furthermore, the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, obtaining necessary regulatory approval, an assessment of current market conditions and the ability of Station REIT to finance the expansion. - BOULDER STATION NEAR-TERM EXPANSION. The next phase of expansion at Boulder Station is planned to be the addition of banquet and meeting space ("Boulder Phase One") to the property. Boulder Phase One would add approximately 20,000 square feet of banquet and meeting space at an estimated cost of $13 million. Boulder Phase One construction is expected to commence in the second quarter of 1998 and would likely be completed in the first quarter of calendar year 1999. MASTER PLANNED EXPANSION. At the completion of Boulder Phase One, OpCo is expected to evaluate market conditions and the timing and scope of the next phase of the master-planned development at Boulder Station. Boulder Station after completion of the potential master-planned development would offer 1,500 hotel rooms, 140,000 square feet of casino space with 3,500 slot and video poker machines and 50 table games, a 23-screen Act III movie theater complex, a bowling center, several restaurant concepts and additional lease space for food and retail uses. At the present time, there exists no definitive plans, designs or budgets for a project of this scope. Furthermore the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, obtaining necessary regulatory approvals, an assessment of current market conditions and the ability of Station REIT to finance the expansion. - TEXAS STATION NEAR TERM EXPANSION. To accommodate future growth, Texas Station has been master-planned for additional hotel rooms, casino space and entertainment facilities. The first phase of such master-planned development at Texas Station ("Texas Phase One") is anticipated to add 168 hotel rooms, 21,360 square feet of casino space accommodating an additional 600 slot machines, a 2,000-space parking garage, a 10,000 square-foot food court with six to ten fast food outlets and a 10,000-square foot Kid's Quest child-care facility. At the completion of Texas Phase One, Texas Station would have a total of 368 hotel rooms, approximately 96,360 square feet of casino space, 2,585 slot machines, and 5,500 parking spaces. Similar to Boulder Station, Sunset Station, and Kansas City Station, the Kid's Quest child care facility at Texas Station would be adjacent to the Act III movie theaters. The lease agreement with Kid's Quest at Texas Station is expected to be substantially the same as the agreements at the other Initial Properties. Station REIT anticipates that Texas Phase One will be completed by the first quarter of calendar year 1999 at a total cost of approximately $40 million. Disruption from the construction of Texas Phase One should be expected. 60 MASTER PLANNED EXPANSION. After OpCo assesses the Texas Phase One expansion initial operating results, it is expected that OpCo will further evaluate and determine the appropriate scope and timing of completion of the next phase of master-planned development. Texas Station after completion of the potential master-planned development, which is designed to be executed over several years, would offer 700 hotel rooms, 127,000 square feet of casino space with approximately 3,500 slots and video poker machines and 50 table games, over 55,000 square feet of banquet and meeting space, a 24-screen Act III movie theater, 42,000 square feet of space for the purpose of retail leasing or an entertainment venue, additional arcade space and a 70-lane bowling alley. Currently, there are neither definitive construction plans nor budgets for any further portion of the master-planned development and the scope of any project may vary significantly from that which has been described. Furthermore, the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, regulatory approval, market conditions and the ability of Station REIT to finance the expansion. - SUNSET STATION NEAR TERM EXPANSION. The first phase of the master-planned development at Sunset Station ("Sunset Phase One") includes a 2,088-space parking garage, an addition of 13 screens to the Act III movie theater complex and 13,670 square feet of casino space with an additional 300 slot and video poker machines. Subsequent to the completion of Sunset Phase One, Sunset Station would have approximately 5,800 parking spaces, 93,000 square feet of casino space and 3,000 slot machines. The construction of Sunset Phase One, which is expected to cost approximately $28 million is expected to be completed by the first quarter of calendar 1999. In addition, Station REIT is currently in discussions with Act III to develop an additional 12-screen theater which would raise the total cost at Sunset Phase One to $36 million. MASTER PLANNED EXPANSION. The Sunset Station master-planned development, which is designed to be executed over several years would offer 2,000 hotel rooms, 130,000 square feet of casino space, 60,550 square feet of banquet and meeting space, a bowling center and additional leasable space for retail and entertainment venues. No decision has been made as to the timing of Sunset Station's master plan and the design could change before the commencement of any portion of the master plan. Furthermore, the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, obtaining necessary regulatory approvals, assessment of current market conditions and the ability of Station REIT to finance the expansion. FUTURE LAND DEVELOPMENT. Sunset Station is located on 100-acres of which only approximately 70 acres have been developed and will be leased to OpCo. Station REIT is currently evaluating potential development plans for such property not under lease to OpCo. Uses for the land could include a life-style entertainment retail center, as well as the development of several pads for various build-to-suit retail, restaurant and entertainment concepts and a 199-gaming machine bar and restaurant. Timing and definitive plans have not yet been determined for the development. The development of the land is dependent upon market conditions and the availability of financing. - ADDITIONAL PROPERTY Station REIT also owns a 27-acre parcel of real property located at Boulder Highway and Nellis Boulevard in Clark County, Nevada (the "Wild Wild West Property"), across Boulder Highway from two existing hotel/casinos. The Wild Wild West Property is zoned for a resort hotel and has obtained all of the entitlements necessary for such development. The Wild Wild West Property was also designated in a recently enacted statute (S.B. 208), as being permanently "grandfathered" into the Clark County gaming enterprise district so that the right to develop a hotel/casino on this property will not expire. The Wild Wild West Property also is suitable for commercial, retail or high density residential uses. 61 MISSOURI CASINO PROPERTIES - STATION CASINO KANSAS CITY MASTER PLANNED EXPANSION. Station Casino Kansas City is master-planned for multi-phased growth including additional hotel rooms, restaurants, other entertainment facilities, a parking garage and banquet and meeting space. Furthermore, the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, obtaining required regulatory approval, assessment of current market conditions and the ability of Station REIT to finance the expansion. FUTURE LAND DEVELOPMENT. Station Casino Kansas City is located on 171-acres of land of which only approximately 85 acres have been developed and will be leased to OpCo. Station REIT is currently considering entering into options for the development of the remainder of the real property and is evaluating the sale or lease of certain parcels for the development of complimentary hotel rooms, separate and apart from the existing hotel. Station REIT is also currently evaluating the development of a significant retail facility on a portion of this real property. At the current time, no decisions have been made as to the future use of the real property. Furthermore, it is expected that Station REIT will not make any decisions concerning the development of the residual property until it is determined that Station Casino Kansas City's regulatory and competitive environment warrants further investment. - STATION CASINO ST. CHARLES MASTER-PLANNED EXPANSION. Station Casino St. Charles is master planned to be a complete gaming and entertainment destination, similar to Station Casino Kansas City. The St. Charles master plan includes two new gaming vessels to be located in a recently completed protective basin contiguous to the Missouri River, a uniquely designed retail and entertainment complex, a full-service hotel, banquet and meeting facilities and an additional parking structure. The new gaming vessels will offer up to a combined 140,000 square feet of gaming space with 3,000 slot machines and 190 gaming tables. The master-planned entertainment complex is expected to include a 14-screen Act III movie theater, a 600-seat Feast-Around-the-World Buffet, a Kid's Quest child-care facility, and various leased and OpCo operated restaurants and fast-food venues. Opportunities for a third party to develop and lease certain portions of the entertainment complex are expected to be explored. A decision concerning further development of the master planned expansion at Station Casino St. Charles will likely not be made until it is determined that the regulatory and operating environment warrants further investment. Furthermore, the execution of any expansion is dependent upon initiation by OpCo pursuant to the Leases, obtaining necessary regulatory approval, assessment of current market conditions and the ability of Station REIT to finance the expansion. ACQUISITIONS AND DEVELOPMENT WITHIN THE LAS VEGAS MARKET Management believes that Las Vegas' rapidly growing population creates attractive acquisition and development opportunities for Station REIT and growth and additional management opportunities for OpCo. From 1990 to 1996, the cities of Las Vegas and its suburb Henderson were the sixth and first fastest growing metropolitan areas in the United States. Management has significant expertise in the Las Vegas market, where approximately 82% of the base Lease revenues initially will be generated by OpCo. Management believes that its locals market expertise, leading market position and strong capitalization will afford Station REIT an advantage over many other potential acquirors. Station REIT intends to identify Las Vegas properties with attributes that are compatible with its master-planned development strategy. These characteristics include: (a) a central location, (b) convenient highway access, (c) ample parking and (d) adequate acreage for growth. Management believes that Las Vegas also offers acquisition opportunities for Station REIT outside the locals market. 62 OpCo is expected to exercise its rights to manage properties acquired or developed by Station REIT to the extent they are within the Las Vegas locals market and, with respect to acquired properties, Station REIT does not elect to retain current management. OpCo also may manage properties Station REIT acquires or develops in Las Vegas outside the locals market to the extent OpCo and Station REIT reach mutually satisfactory terms. OpCo does not have a right of first offer to manage properties held by Station REIT in Las Vegas outside the locals market. Subject to Station REIT's rights of first offer, OpCo also is expected to develop and manage properties independently of Station REIT within the Las Vegas Market. ACQUISITIONS AND DEVELOPMENT OUTSIDE THE LAS VEGAS MARKET Gaming outside of the Las Vegas market has experienced substantial growth over the last decade. In addition to the developed markets of Atlantic City, New Jersey and other markets in Nevada, the gaming industry has expanded into several new jurisdictions including Illinois, Missouri, Louisiana and Mississippi. Management believes that many of these gaming markets are largely dependent on attracting customers from local and regional surrounding communities. Consequently, these markets are similar to the Las Vegas locals and repeat visitors market and provide opportunities for Station REIT to employ its investment philosophy. Additionally, management believes that many owner/operators within these markets are relatively undercapitalized and will be required to invest additional capital if their properties are to remain competitive. As a result of Station REIT's improved balance sheet, management believes it will be well-positioned to pursue acquisition and development opportunities in these markets. OpCo also may manage properties Station REIT acquires or develops outside the Las Vegas market to the extent OpCo and Station REIT reach mutually satisfactory terms. OpCo does not have a right of first offer to manage properties held by Station REIT outside the Las Vegas locals market. Subject to Station REIT's right of first offer, OpCo is expected to develop and manage properties independently of Station REIT outside the Las Vegas Market. OPERATING STRATEGY Station REIT will enter into triple-net leases with OpCo and, potentially, other third-party lessees for gaming, hotel and entertainment facilities. Management anticipates the long-term lease arrangements with these lessees will require the lessee to maintain the property and provide opportunities for Station REIT to participate in revenue growth. Station REIT also may invest in non-gaming entertainment facilities and enter into leases with third-party lessees to enhance the overall diversification of its real estate portfolio. Station REIT's existing lease arrangements with Act III and Kids Quest are examples of the type of tenant relationship management intends to pursue. OpCo expects to continue the management and operating strategy currently employed by the Company. The operating strategy at the Initial Casino Properties emphasizes attracting and retaining customers primarily from the local and repeat visitor markets. The Initial 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. CAPITAL STRATEGY Upon completion of the Reorganization Transactions, Station REIT's long-term indebtedness will be reduced by over $350 million, and Station REIT expects to have $500 million available for borrowing under a new bank credit facility (the "Bank Facility"). Management believes that these improvements in its capital structure and the anticipated increase in its access to additional capital will improve the competitive position of Station REIT in pursuing its growth strategy. Management intends to utilize moderate leverage to grow its portfolio of real estate assets. Currently, management anticipates a maximum debt to market 63 capitalization ratio of 50%. Station REIT intends that distributions to holders of Common Stock will increase with any growth in Funds From Operations (as defined herein). See "--Distribution Policy." Upon completion of the Reorganization Transactions, OpCo expects to have $45 million available for borrowing under a new bank credit facility and $105 million in long-term debt incurred to repay the Intermediate Notes. DISTRIBUTION AND DIVIDEND POLICY Station REIT is expected to make regular quarterly distributions to holders of Common Stock initially equal to $ per share, which, on an annualized basis, would be equal to $ per share. The first distribution, for the period from the Closing to June 30, 1998, is expected to equal the anticipated regular quarterly distribution. Station REIT's Board of Directors will periodically determine the actual distribution rate in its sole discretion. The estimate of anticipated initial quarterly distributions relates only to periods ending on or prior to December 31, 1998, and no assurance can be given as to the amount of distributions, if any, after that date. Station REIT's actual Funds From Operations will be affected by a number of factors, including operations at the Initial Properties. OpCo does not intend to pay cash dividends on the OpCo Common Stock in the foreseeable future so that it may reinvest its earnings in the development of its business. The payment of dividends on the OpCo Common Stock in the future will be at the discretion of the board of directors of OpCo. Restrictions imposed by the OpCo bank facility and other securities or agreements of OpCo are expected to limit the payment of dividends by OpCo. No assurance can be given that OpCo will pay any dividends. 64 REGULATION AND LICENSING NEVADA GAMING REGULATIONS The ownership and operation of casino gaming facilities, the operation of gaming device routes and the manufacture, selling and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada are subject to the Nevada Gaming Control Act (the "Nevada Act") and various local ordinances and regulations, and to the licensing and regulatory control of the Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), and various other local city and county regulatory agencies (collectively, the "Nevada Gaming Authorities"). The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs 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 OpCo's gaming operations and the Company's ability to participate in the Leases. Although the Company is currently licensed to conduct gaming operations at the Initial Properties, the Company's direct and indirect subsidiaries that will have an interest in earnings from gaming operations through the Leases (a "Gaming Interest") in Nevada are required to be licensed by the Nevada Gaming Authorities. PSHC is required to be licensed to have a Gaming Interest at Palace Station. BSI is required to be licensed to have a Gaming Interest at Boulder Station and TSI is required to be licensed to have a Gaming Interest at Texas Station and SSI is required to be licensed to have a Gaming Interest at Sunset Station. The Company is and OpCo will be required to be registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation"). The Company has been found suitable to own the stock of PSHC, BSI, TSI and SSI (individually, a "Gaming Subsidiary" and, collectively, the "Gaming Subsidiaries") under the terms of the Nevada Act. OpCo will be required to be found suitable to own the stock of its subsidiaries that will operate the Initial Properties (individually, an "OpCo Gaming Subsidiary" and, collectively, the "OpCo Gaming Subsidiaries") and to own the capital stock of certain subsidiaries included in the Transferred Assets, including Southwest Gaming Services, Inc. and Green Valley Station, Inc. which owns approximately 50% of a casino and brew pub located in southeast Las Vegas. The OpCo Gaming Subsidiaries will be required to be licensed to conduct gaming operations. As a Registered Corporation, the Company is and OpCo will be 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 or the OpCo Gaming Subsidiaries without first obtaining Gaming Licenses and approvals from the Nevada Gaming Authorities. The Company, the Gaming Subsidiaries, OpCo and the OpCo Gaming Subsidiaries will be required to obtain from the Nevada Gaming Authorities the Gaming Licenses required in order to have a Gaming Interest in gaming activities in Nevada, and to conduct gaming operations at the Initial Properties in Nevada, respectively. The following regulatory requirements are currently applicable to the Company and the Gaming Subsidiaries, and will be to OpCo and the OpCo Gaming Subsidiaries upon their receipt of all necessary Gaming Licenses and approvals from the Nevada Gaming Authorities to conduct gaming operations at the Initial Properties. OpCo and the OpCo Gaming Subsidiaries have not yet obtained Gaming Licenses required in order to conduct gaming operations in Nevada. The Company and the Gaming Subsidiaries have not yet obtained Gaming Licenses required in order to have a Gaming Interest. 65 No assurances can be given that such Gaming Licenses will be obtained, or that any required approvals of the Reorganization Transactions will be obtained, or that they will be obtained on a timely basis. 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 OpCo, or the Gaming Subsidiaries or the OpCo Gaming Subsidiaries, which holds a license, in order to determine whether such individual is suitable or should be licensed as a business associate of a Registered Corporation or a gaming licensee. Officers, directors and certain key employees of the Gaming Subsidiaries and the OpCo Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and will be required to be licensed or found suitable by the Nevada Gaming Authorities in connection with the Reorganization Transactions. Officers, directors and key employees of the Company and OpCo who are actively and directly involved in gaming activities of the Gaming Subsidiaries and the OpCo 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 a corporate or company position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company, OpCo, the Gaming Subsidiaries or the OpCo Gaming Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company, OpCo, the Gaming Subsidiaries or the OpCo Gaming Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and the Gaming Subsidiaries are required, and OpCo and the OpCo Gaming Subsidiaries will be 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 Gaming Subsidiaries and the OpCo Gaming Subsidiaries will be required to be reported to or approved by the Nevada Commission. If it were determined that the Nevada Act was violated by a Gaming Subsidiary or an OpCo 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, OpCo, the Gaming Subsidiaries, the OpCo 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. Limitation, conditioning or suspension of the Gaming Licenses of the Gaming Subsidiaries or the OpCo Gaming Subsidiaries or the appointment of a supervisor could (and revocation of any Gaming License would) materially adversely affect the business operations of the Company and its ability to have a Gaming Interest. Any beneficial holder of the Station REIT's or OpCo's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of Station REIT's or OpCo'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 requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman 66 of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Corporation'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 Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation'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 found unsuitable and who holds, directly or indirectly, any beneficial ownership of the voting securities beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is and OpCo will be 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, OpCo or the OpCo Gaming Subsidiaries, respectively, the Company or OpCo, respectively, (i) pays that person any dividend or interest upon voting securities of the Company or OpCo, respectively, (ii) allows that person, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays 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, necessary, the immediate purchase of said voting securities for cash at fair market value. 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 determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is, and OpCo will be, 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, and OpCo will be, required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's and OpCo'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 and it is unknown whether such a requirement will be imposed on OpCo. 67 The Company may not and OpCo will not be permitted to, make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. On March 20, 1997, the Nevada Commission granted the Company prior approval to make 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 to place restrictions upon and enter into agreements not to encumber equity securities of the Gaming Subsidiaries, and for the Gaming Subsidiaries to guarantee any security issued by, or to hypothecate their assets to secure the payment or performance of any obligations issued by, the Company or an Affiliate in a public offering under the Shelf Approval. The Shelf Approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. The sale of Common stock pursuant to the Offerings will qualify as a public offering (as such term is defined in the Nevada Act) and will be made pursuant to the Shelf Approval. OpCo will seek approval similar to the Shelf Approval. Changes in control of the Company or OpCo 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, and, in the case of OpCo, will not be permitted to, occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission and 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 the 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 purposes of acquiring control of the Registered Corporation. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada 68 Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operations, fail to conduct the foreign gaming operations in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. NEVADA LIQUOR REGULATIONS The sale of alcoholic beverages at Palace Station and Boulder Station is subject to licensing, control and regulation by the City of Las Vegas and the Clark County Board, respectively. Texas Station is subject to licensing control and regulation of the City of North Las Vegas. Sunset Station is subject to the licensing, control and regulation of the City of Henderson. 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 OpCo Gaming Subsidiaries and therefore, impact the ability of OpCo to make Lease payments. MISSOURI GAMING REGULATIONS Gaming was originally authorized in the State of Missouri and the City of St. Charles on November 3, 1992, although no governmental action was taken to enforce or implement the original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law which replaced the original law and established the Missouri Commission, which is responsible for the licensing and regulation of riverboat gaming in Missouri. The Missouri 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 Commission for either a dockside or a cruising gaming license in St. Charles, Missouri, which license was issued on May 27, 1994, thereby making the Company one of the first two entrants in the Missouri riverboat gaming market. However, due to both a January 25, 1994, ruling by the Missouri Supreme Court which held that games of chance, including certain games authorized under the Missouri Gaming Law such as bingo and keno, constitute "lotteries" and were therefore prohibited under the Missouri Constitution and the failure of a state wide election on April 5, 1994, to adopt a constitutional amendment that would have exempted excursion boats and floating facilities from such constitutional prohibition on lotteries, the Company commenced operations only with those games which involve some element of skill ("limited gaming"), such as poker and blackjack, that would be constitutionally permissible. The authorization of both games of skill and games of chance ("full-scale gaming") occurred on November 9, 1994 with passage by Missouri voters of a constitutional amendment virtually identical to the measure which was defeated on April 5, 1994. Full-scale gaming became effective on December 9, 1994, and by the end of December 1994, the Company was conducting full scale gaming on both its excursion and dockside casinos in St. Charles, Missouri. Opponents of gaming in Missouri have brought several legal challenges to gaming in the past and may possibly bring similar challenges in the future. There can be no assurances that any future challenges, if brought, would not further interfere with full-scale gaming operations in Missouri, including the operations of the Company and its subsidiaries. The Supreme Court of Missouri has recently ruled, in a case, 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 on the Missouri and Mississippi rivers. The Company cannot predict the effect this ruling may have on operations at Station Casino Kansas City. 69 On January 16, 1997, the Missouri Commission granted Station Casino Kansas City a Class A and Class B Excursion Gambling Boat license to own and operate the River King and River Queen floating gaming facilities. Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. By virtue of its gaming license in Missouri, the Company, any subsidiaries it has or it may form and certain of its officers and employees are subject to the Missouri Gaming Law and the regulations of the Missouri Commission. Upon obtaining Gaming Licenses in Missouri, OpCo and subsidiaries it has or may form and certain of its officers and employees will be subject to the laws and regulations of the Missouri 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 Commission. Each applicant has an ongoing duty to update the information provided to the Missouri 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 Commission. Operators' licenses are issued through application to the Missouri 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 Commission may revoke or suspend gaming licenses and impose other penalties for violation of the Missouri Gaming Law and the rules and regulations which may be promulgated thereunder, including, without limitation, forfeiture of all gaming equipment used for improper gaming and fines of up to three times an operator's highest daily gross adjusted receipts during the preceding twelve months. The gaming licenses may not be transferred nor pledged as collateral, and the Missouri Gaming Law regulations bar a licensee from taking any of the following actions without 15 days' prior notice to, and approval by, the Missouri Commission: any issuance of an ownership interest of five percent or more of the issued and outstanding ownership interest, any private incurrence of debt by the licensee or any holding company of $1,000,000 or more, and any public issuance of debt by a licensee or its holding company. The Missouri Commission may reopen the licensing hearing of the applicable gaming licensee prior to or following the consummation date to consider the effect of the transaction on the gaming licensee's suitability. In addition, the licensee must notify the Missouri Commission of other transactions, including the transfer of five percent or more of an ownership interest in the licensee or holding company, the pledge of five percent or more of the ownership interest in a license or holding company, and any transaction of at least $1,000,000. The restrictions on transfer of ownership apply to the Company and its subsidiaries. The Missouri Gaming Law imposes operational requirements on riverboat operators, including a charge of two dollars per gaming customer that licensees must pay to the Missouri 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 Commission for all costs of any Missouri Commission staff necessary to protect the public on the licensee's riverboat. Licensees must also submit audited quarterly financial reports to the Missouri Commission and pay the associated auditing fees. Other areas of operation which are subject to regulation under Missouri rules are the size, denomination and handling of chips and tokens; the surveillance methods and computer monitoring of electronic games; accounting and audit methods and procedures; and approval of an extensive internal control system. The Missouri rules also require that all of an operator's purchases of chips, tokens, dice, playing cards and electronic gaming devices must be acquired from suppliers licensed by the Missouri Commission. The Missouri Gaming Law provides for a loss limit of $500 per person per excursion and requires licensees to maintain scheduled excursions with 70 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 Commission is empowered to impose such space limitations through the adoption of rules and regulations. Additionally, United States Coast Guard safety regulations could affect the amount of riverboat space that may be devoted to gaming. The Missouri Gaming Law also includes requirements as to the form of riverboats, which must resemble Missouri's riverboat history to the extent practicable and include certain non-gaming amenities. All eleven licensees in Missouri are authorized to conduct all or a portion of their operations on a dockside basis. With respect to the availability of dockside gaming, which may be more profitable than excursion gaming, the Missouri Commission is empowered to determine on a site-by-site basis where such gaming is appropriate and shall be permitted. GENERAL GAMING REGULATIONS IN OTHER JURISDICTIONS If Station REIT becomes involved in gaming operations in any other jurisdictions, such gaming operations will subject Station REIT, OpCo or certain of their 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"). Station REIT, OpCo and the Regulated Persons will need to satisfy the licensing, approval and suitability requirements of each jurisdiction in which Station REIT 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 Station REIT, OpCo 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, Station REIT, OpCo and each Regulated Person must pay the costs of such investigation. An application for any Gaming License or approval may be denied for any cause that the Regulatory Authorities deem reasonable. Once obtained, Gaming Licenses and approvals may be subject to periodic renewal and generally are not transferable. The Regulatory Authorities may at any time revoke, suspend, condition, limit or restrict a Gaming License or approval for any cause they deem reasonable. Fines for violations may be levied against the holder of a Gaming 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 Station REIT or OpCo will obtain all of the necessary Gaming Licenses and approvals 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 Gaming Licenses or approvals, if obtained, will not be revoked or renewed in the future. Failure by Station REIT or OpCo to obtain, or the loss or suspension of, any necessary Gaming Licenses or approval would prevent Station REIT or OpCo from having an interest in gaming operations in such jurisdiction and possibly in other jurisdictions. Station REIT or OpCo 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 Station REIT or OpCo. 71 THE DISTRIBUTION The Company's Board of Directors has decided to separate the Company into two publicly held companies: (i) OpCo, a recently formed corporation which will own and operate the Transferred Assets and which will lease the Initial Properties and (ii) the Company, which will elect to be treated as a REIT for federal income tax purposes. The Distribution is necessary in order to allow the Company to convert to a REIT. A stockholder who elects to hold shares of both Station REIT and OpCo will initially have the same ownership interest in the companies after the Distribution as such stockholder had in the Company before the Distribution except as such ownership interest in the Company may be diluted as a result of the Offerings. As a result of the Distribution, however, current stockholders and other investors will have the ability to make separate investment decisions regarding each business. The Distribution will be reflected in the Company's financial statements as a charge against stockholder's equity. As of September 30, 1997, the effect on the Company of the Distribution (assuming the consummation of the Reorganization Transactions, including the Offering) would be to reduce the Company's stockholder's equity by approximately $70.1 million. The Distribution is expected to be made on the basis of one share of OpCo Common Stock and approximately five shares of OpCo Preferred Stock for every 17.5 shares of the Company Common Stock outstanding on the Record Date. Pursuant to adjustments made in accordance with the terms of the Convertible Preferred Stock, the conversion price of the Convertible Preferred Stock will be adjusted to reflect the decrease in the value of assets distributed to holders of the Company Common Stock pursuant to the Distribution. See "Description of Capital Stock--Terms of Preferred Stock Generally" and "-- Convertible Preferred Stock." The actual number of shares of OpCo Common Stock and OpCo Preferred Stock to be distributed will depend on the number of shares of the Common Stock outstanding on the Record Date. Based upon the approximately 35.3 million shares of the Common Stock outstanding on September 30, 1997, OpCo estimates that approximately two million shares of OpCo Common Stock and ten million shares of OpCo Preferred Stock will be distributed to holders of the Common Stock. The Distribution will not affect the number of, or the rights attaching to, outstanding shares of the Common Stock. Certificates representing outstanding shares of the Common Stock will continue to represent rights to purchase the Preferred Shares (as defined herein) pursuant to the Rights Agreement, dated October 6, 1997, between the Company and Continental Stock Transfer & Trust Company (the "Rights Agreement"). See "Description of Capital Stock--Terms of Common Stock Generally." There has not been any established public trading for the OpCo Common Stock or the OpCo Preferred Stock. It is currently anticipated that OpCo Common Stock and OpCo Preferred Stock will be approved for listing on the Nasdaq prior to the Distribution. The Common Stock is expected to trade on a regular basis through the date of the Distribution and to be acompanied by due bills representing the OpCo Common Stock and OpCo Preferred Stock to be distributed in the Distribution. There can be no assurance as to the prices at which OpCo Common Stock and OpCo Preferred Stock will trade before or after the Distribution Date. Until the OpCo Common Stock and the OpCo Preferred Stock are fully distributed and an orderly market develops, the prices at which such shares trade may fluctuate significantly and may be lower or higher than the price that would be expected for a fully distributed issue. Prices for shares of OpCo Common Stock and OpCo Preferred Stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, investor perception of OpCo, OpCo's dividend policy changes in economic conditions in the gaming industry and general economic and market conditions. In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. Market fluctuations, as well as economic conditions, could have a 72 materially adverse impact on the market price of the shares of OpCo Common Stock and Opco Preferred Stock. See "Certain Considerations--Absence of Prior Trading Market for OpCo Capital Stock." Such prices may also be affected by the anti-takeover provisions in the OpCo Articles and the OpCo By-Laws. See "Certain Considerations--Certain Anti-Takeover Effects." The shares of OpCo Common Stock and OpCo Preferred Stock to be received by holders of the Common Stock in the Distribution will be freely transferable, unless a holder is deemed to be an "affiliate" of OpCo under the Securities Act. Persons who may be deemed affiliates of OpCo after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with OpCo and may include certain of OpCo's officers and directors. Persons who are affiliates of OpCo will be permitted to sell their shares of OpCo Common Stock and OpCo Preferred Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as exemptions afforded by Section 4(2) of the Securities Act or Rule 144 thereunder. 73 RELATIONSHIP BETWEEN STATION REIT AND OPCO For purposes of governing certain of the ongoing relationships between Station REIT and OpCo after the Distribution and to provide for an orderly transition on the date of the Distribution (the "Distribution Date"), Station REIT and OpCo intend to enter into the Leases, the Distribution Agreement and the various agreements described below. The discussion below is a summary of certain provisions of the Distribution Agreement, the Cooperation Agreement, the Tax Allocation Agreement, the Transition Services Agreement, the Employee Benefits Agreement and the Intellectual Property Agreement. The Summary does not purport to be complete. Reference is made to the complete provisions of, and such summary is qualified in its entirety by reference to, forms of such agreements. There can be no assurances however, that the Company will consummate the Distribution. THE LEASES The following description of the Leases does not purport to be complete but contains a summary of all material provisions of the Leases. Concurrently with the Distribution, Station REIT will lease certain real property necessary to the operation of gaming activities at the Initial Properties to certain subsidiaries of OpCo, the obligations of which will be guaranteed by OpCo, pursuant to the Leases. The Leases will, in most cases, be subleases made in accordance with the terms of head leases held by Station REIT. Each Lease will include land, buildings, structures and other improvements on the land, easements and similar appurtenances to the land and improvements, and permanently fixed equipment, machinery and other fixtures relating to the operation of the Initial Properties. Each Lease will be between the operating subsidiary of Station REIT that owns the Initial Property and, in the case of Initial Property located in Nevada, a Nevada limited liability company of which OpCo is the sole member and, in the case of Initial Property located in Missouri, a Missouri limited liability company of which OpCo is the sole member. The Leases will have primary terms ranging from 13 to 15 years (the "Base Term"). Upon the agreement of Station REIT and OpCo, the Leases may be extended for six five-year renewal terms beyond the Base Term ("Renewal Term") except that the Lease at Palace Station may not be extended past five years prior to the expiration of the relevant head lease. The Base Term and Renewal Term of each Lease will be subject to termination upon default and certain other contingencies described in the Lease. Assurance as to Value." USE OF THE LEASED PROPERTY The Leases will require that OpCo utilize the Initial Properties solely for the operation of first class casinos and hotels and related uses and as Station REIT may otherwise consent (which consent may be granted or withheld in its discretion). OpCo will have the responsibility to maintain all licenses, certificates and permits necessary in order for it to operate the Initial Property as a hotel/casino property. RENTAL AMOUNTS For the Base Term and each Renewal Term, rent will equal the sum of (i) Base Rent, (ii) Percentage Rent, (iii) Add-on Rent and (iv) a pass-through of rental amounts due on the underlying head lease, if any (each as described below). Base Rent will be payable in 12 equal installments, increased as of each anniversary of the first day of the Base Term by an amount equal to the CPI Percentage (as defined herein) multiplied by the Base Rent in effect immediately prior to such anniversaries. The CPI Percentage is the percentage, not less than 100% and not more than 104%, derived from dividing the relevant consumer price index (the "CPI") on the measurement date by the CPI on the first day of the 12-month period ending on such measurement date (the "CPI Percentage"). If Station REIT receives a ruling from the Service confirming that the computation of Percentage Rent in this form is consistent with qualification as a REIT, Percentage Rent will be additional rent, calculated by multiplying fixed percentages by the excess 74 of gaming gross receipts (net "winnings," I.E., the gross amount wagered less casino losses) and other gross receipts (generally, all revenues, receipts and income from all sources, subject to certain exclusions) for the preceding year in excess of the Hurdle Amount (as defined in the Leases) with respect to such Initial Property. The Hurdle Amount will be increased, upon completion of an Approved Capital Project (as defined herein), by an amount equal to the quotient obtained by dividing the Add-On Rent for one year resulting from such Approved Capital Project by a percentage. Percentage Rent is payable quarterly with annual adjustments based on actual results. Revenues at the Initial Properties are currently insufficient to trigger Percentage Rent payment obligations and is not expected to trigger such obligations for at least two years. If Station REIT does not obtain a ruling from the Service, Percentage Rents will be determined on an alternate basis with gross gaming revenues being determined as a total amount wagered at certain games. Add-On Rent will be an annual amount, payable monthly in advance, in 12 equal installments, equal to the portion of the cost of any Approved Capital Project paid for by, or financed with recourse to, Station REIT multiplied by the greater of (i) 11% per annum and (ii) a percentage per annum fixed at closing of this Offering to yield 11% per annum when added to the rate on U.S. Treasuries having a term to maturity of ten years, increased as of each anniversary of the first date of the Base Term (commencing with the first such anniversary that is at least one month following the substantial completion of the relevant Approved Capital Project) to an amount equal to the CPI Percentage of the Add-On Rent in effect immediately prior to such anniversary. Each Lease is what is commonly known as a triple net lease or an absolute net lease. OpCo will be required to pay for (i) all insurance required in connection with the Initial Properties and the business conducted on the Initial Properties, (ii) all taxes levied on or with respect to the Initial Properties (other than taxes on the net income of Station REIT) and (iii) all utilities and other services necessary or appropriate for the Initial Property and the business conducted on the Initial Property. MAINTENANCE, MODIFICATION AND CAPITAL ADDITIONS OpCo will be required to maintain the Initial Properties in good repair and condition, making all repairs required by law, provided that any Capital Project shall require the prior approval of Station REIT. OpCo will be required to pay for all Maintenance Capital Expenditures. Maintenance Capital Expenditures are all capital expenditures and other expenses for the maintenance, repair, restoration or refurbishment of the Initial Property (other than a Capital Project). OpCo will also be required under the Leases to upgrade, replace, repair and otherwise maintain FF&E at the Initial Property in first-rate condition. To the extent a Capital Project is required by law or in order for the Initial Property to be repaired or restored to a condition appropriate to the operation of the Initial Property, the Leases will require Station REIT to provide such financing. OpCo may not undertake any Capital Project that materially adds to, further materially improves or effects a complete or substantially complete refurbishment of the Initial Property (a "Capital Project") without the prior approval of Station REIT (which may be denied or granted in its discretion and upon such conditions as Station REIT may elect). If approved (an "Approved Capital Project"), Station REIT may at its option, elect to pay for, or finance with recourse to it, all or part of the cost of such Approved Capital Project, in which case Add-on Rent will become applicable as provided above. To the extent Station REIT has not elected to pay for, or finance with recourse to it, any part of such cost, OpCo will not be permitted to commence any such Approved Capital Project unless it has demonstrated to the reasonable satisfaction of Station REIT that it has the funds or the financing reasonably estimated to be necessary to complete such Capital Project. In the event that OpCo obtains such funds or financing independent from Station REIT, Station REIT will not be entitled to Add-On Rent with respect to such Capital Project. Any Approved Capital Project will become the property of Station REIT and subject to the Lease as part of the Initial Property. 75 INSURANCE OpCo will be required to maintain insurance for the Initial Properties at a level at least comparable to that currently in place at the Initial Properties. ENVIRONMENTAL MATTERS Each Lease will provide that OpCo will indemnify Station REIT (and its officers, directors and stockholders) against any environmental claims (including penalties and clean up costs) resulting from any condition existing at, on or under the Initial Properties at any time before the first day of the Base Term. OpCo will also indemnify Station REIT (and its officers, directors and stockholders) against any environmental claim (including penalties and clean up costs) resulting from any condition arising, or permitted to deteriorate, on or after such first day (including as a result of migration from adjacent properties not owned or operated by Station REIT or any of its affiliates other than OpCo and its direct affiliates). ASSIGNMENT AND SUBLETTING Each Lease will provide that, subject to certain financing exceptions, OpCo may not assign, sublease or otherwise transfer the Lease or any portion of the Initial Property as a whole (or in substantial part) without the consent of Station REIT, which (except in the case of a Change of Control (as defined herein)) may not be unreasonably withheld if the proposed assignee is sufficiently credit worthy, has the expertise to operate the Initial Property and has a favorable business reputation and character; however, no such assignment or sublease shall be permitted unless all other leases of real property between the Station REIT or any affiliate of the Station REIT and OpCo and any affiliate are concurrently so being assigned or subleased to the same assignee and OpCo and each such affiliate are concurrently assigning to such assignee all or substantially all personal property related to such Initial Property and such other real property. In the case of a Change of Control in which the new Lessee is adequately credit worthy and expert, and Station REIT still elects to terminate the Leases, Station REIT will be required to pay to OpCo an amount equal to the value to OpCo of the Leases. The Lessee may sublease portions of the Initial Property for restaurants, gift shops and other retail stores customarily found in hotels or casinos without the consent of the Lessor subject, however, to there being no material alteration in the character of the Initial Property or in the nature of the business conducted on such Initial Property and to requirements of the Code with which the Station REIT must comply to retain REIT status. A "Change of Control" under the Leases includes any of (a) a change in the composition of the board of directors of either OpCo or the ultimate corporate parent of OpCo (the "Parent") such that at the end of any period of 12 consecutive months the persons constituting a majority of such board of directors are not the same as the persons constituting a majority at the start of such period (or persons appointed by such majority), (b) the sale or other disposition by the Parent of any part of its interest in the Lessee (other than a bona fide pledge in connection with a commercial financing) or (c) any merger or consolidation involving the Parent as a result of which the stockholders of the Parent immediately prior to such event do not own at least 50% of the capital stock of the surviving entity. A Change of Control will constitute an assignment for purposes of the Leases. MORTGAGE ENCUMBRANCE Pursuant to the Leases, OpCo will have the right to encumber its rights under the Leases to one or more financing entities, and the Leases will contain customary mortgagee protection provisions; provided that such financing entities (a) recognize the option described below and (b) agree to defer any foreclosure and like remedies during the option exercise period. 76 OPTION In addition to, and without derogation of, any remedies available upon an Event of Default (as defined herein), Station REIT will have the option under each of the Leases, exercisable by notice to OpCo within a substantial period of time of Station REIT learning of such Event of Default, to purchase (or cause a third party to purchase) all or any part of the personal property of OpCo located at the Initial Property or, wherever located, used by it in connection with the Initial Property at a price equal to the greater of (a) the then fair market value of such property and (b) amounts necessary to pay all financing secured by personal property. Station REIT also will have this purchase right upon termination of a Lease. EVENTS OF DEFAULT An "Event of Default" will be deemed to have occurred under any Lease if, among other things, OpCo fails to pay rent or other amounts within 10 days after notice; fails to comply with covenants continuing for 30 days or, so long as diligent efforts to cure such failure are being made, such longer period (not over 120 days) as is necessary to cure such failure; abandons the Initial Property; loss of gaming licenses; defaults under any other lease to OpCo or an affiliate of OpCo (other than Station REIT and its direct affiliates) from Station REIT or an affiliate of Station REIT (other than OpCo and its direct affiliates) involving the failure to pay rent or other charges or the failure to maintain insurance; experiences certain bankruptcy or insolvency events. In addition to its other remedies with respect to an Event of Default, Station REIT will be able to enforce guarantees made by OpCo with respect to each Lease. MISCELLANEOUS The Leases will be governed by the law of the jurisdiction in which the Initial Property is located. COOPERATION AGREEMENT Assuming the Distribution occurs, Station REIT and OpCo intend to enter into a cooperation agreement (the "Cooperation Agreement") to provide each other with rights to participate in certain transactions. The Cooperation Agreement is expected to provide, subject to certain terms, that Station REIT will provide OpCo with a right of first offer to become the lessee of any real property acquired or developed by Station REIT and operated as a locals-oriented casino gaming facility in the Las Vegas locals market and its surrounding areas (generally excluding the Las Vegas Strip and downtown Las Vegas), provided that OpCo and Station REIT negotiate a mutually satisfactory lease arrangement and Station REIT determines, in its sole discretion, that OpCo is qualified to be the lessee. As to opportunities for OpCo to become the lessee of any assets under such a lease arrangement, the Cooperation Agreement is expected to provide that Station REIT must provide OpCo with written notice of the lessee opportunity. During the 45 days following such notice, OpCo will have a right of first offer to become a lessee and the right to negotiate with Station REIT on an exclusive basis regarding the terms and conditions of the lease. If a mutually satisfactory agreement cannot be reached within the 45-day period (or such longer period to which OpCo and Station REIT may agree), Station REIT may offer the opportunity to others for a period of one year thereafter before it must again offer the opportunity to OpCo in accordance with the procedures specified above. Station REIT will not be required to provide OpCo with a right of first offer when Station REIT elects to retain management at properties it acquires. Under the Cooperation Agreement, OpCo is expected to agree not to acquire or make (i) investments in real estate which, for purposes of the Cooperation Agreement, includes the provision of services related to real estate and investment in hotel properties, real estate mortgages, real estate derivatives or entities that invest in real estate assets or (ii) any other investments that may be structured in a manner that qualifies under the federal income tax requirements applicable to REITs unless it has provided written notice to Station REIT of the material terms and conditions of the acquisition or investment opportunity, 77 and Station REIT has determined not to pursue such acquisitions or investments either by providing written notice to OpCo rejecting the opportunity within 10 days from the date of receipt of notice of the opportunity or by allowing such 10-day period to lapse. OpCo is also expected to agree to assist Station REIT in structuring and consummating any such acquisition or investment which Station REIT elects to pursue, on terms determined by Station REIT. OpCo will be permitted, in the absence of real estate investment opportunity, to provide services for such properties. Each of Station REIT and OpCo are expected to have the right to terminate the Cooperation Agreement in the event of a change of control of the other party. DISTRIBUTION AGREEMENT Assuming the Distribution occurs, Station REIT and OpCo expect to enter into a distribution agreement (the "Distribution Agreement") which will provide for, among other things, the principal corporate transactions required to effect the Distribution, the transfer to OpCo of the Transferred Assets in exchange for the issuance by OpCo to Station REIT of the OpCo Common Stock, the OpCo Preferred Stock and the Intermediate Notes, the division between Station REIT and OpCo of certain liabilities, the transition to OpCo's status as a company separate and independent from Station REIT and certain other agreements governing the relationship between Station REIT and OpCo after the Distribution. Pursuant to the Distribution Agreement, OpCo would indemnify Station REIT against most liabilities relating to OpCo operations, whether such liabilities arise on, prior to, or after the Distribution Date, except for liabilities arising out of events or occurrences prior to the Distribution Date that are covered by Station REIT's insurance and are not also covered by OpCo's insurance. Station REIT is expected to indemnify OpCo against all other liabilities relating to such operations before, on or after the Distribution Date. In addition, the Distribution Agreement is expected to provide that each of OpCo and Station REIT will indemnify the other against all liabilities arising under the Exchange Act. The Distribution Agreement would include procedures for notice and payment of such claims and generally provides that the indemnifying party may assume the defense of a claim or suit brought by a third party. None of the foregoing indemnities applies to tax or employee benefit claims or liabilities, which are addressed in the Tax Allocation Agreement and the Employee Benefits Agreement respectively, as described below. The Distribution Agreement is expected to provide that each of Station REIT and OpCo would be granted access to certain records and information in the possession of the other, and require retention of all such information for a period of five years and the provision of notice and an opportunity to copy such information prior to its destruction thereafter. In addition, the Distribution Agreement is expected to provide allocate shared privileges with respect to certain information and require consent of the non-waiving party before such privilege can be waived. The Distribution Agreement is also is expected to impose certain confidentiality obligations on each of OpCo and Station REIT. The Distribution Agreement is expected to provide for the allocation of benefits between Station REIT and OpCo under existing insurance policies after the Distribution Date, and set forth procedures for the administration of insured claims. TAX ALLOCATION AGREEMENT Assuming the Distribution occurs, Station REIT and OpCo expect to enter into a tax allocation agreement on or prior to the Distribution Date (the "Tax Allocation Agreement") which will allocate responsibility for U.S. federal income and various other taxes ("Taxes") among the companies. In general, pursuant to the Tax Allocation Agreement, Station REIT is expected to be liable for the U.S. federal income taxes payable with respect to the returns of Station REIT consolidated group (which prior to the Distribution Date includes OpCo and its subsidiaries) as well as certain other Taxes payable with respect to returns attributable to OpCo operations for periods ending on or prior to the Distribution 78 Date. OpCo and its subsidiaries would be liable for Taxes payable with respect to returns filed after the Distribution Date that are attributable to OpCo operations after the Distribution Date. If, in connection with a Tax audit contest, or the filing of an amended return, a taxing authority adjusts Station REIT's consolidated federal income tax return or any other return described above with respect to which Station REIT was liable for payment of Taxes, Station REIT would be liable for the resulting Tax assessments or would be entitled to the resulting Tax refund. Similarly, OpCo would be responsible for the Tax assessments and entitled to the Tax refunds, in connection with the above described returns with respect to which OpCo was liable for payment of Taxes. Station REIT, in general, would be responsible for Tax assessments and would be entitled to the Tax refunds in connection with returns originally filed prior to the Distribution Date. TRANSITION SERVICES AGREEMENT Assuming the Distribution occurs, Station REIT and OpCo expect to enter into a Transition Services Agreement prior to the Distribution Date (the "Transition Services Agreement") pursuant to which, in exchange for the fees specified in the Transition Services Agreement, OpCo would agree to continue to provide certain administrative and other services typical for public companies to Station REIT in connection with Station REIT's operations including marketing, information services, human resources, accounting, payroll processing, regulatory compliance, tax filing assistance and legal services. In general, these services would be provided at a price deemed by the board of directors of the respective providers to be fair market value. In this agreement, the respective service provider will undertake to provide the same degree of care and diligence as it uses in providing these services to itself and its subsidiaries. The Transition Services Agreement would expire one year from the Distribution Date and would include provisions for a termination of the agreement in the event of a change in control of either of the parties. EMPLOYEE BENEFITS AGREEMENT Assuming the Distribution occurs, Station REIT and OpCo expect to enter into an agreement with regard to their respective liabilities for employee benefit-related matters for Station REIT and OpCo Employees (as defined herein) for periods before and after the Distribution Date and to provide for certain other employee benefit matters (the "Employee Benefits Agreement"). Station REIT would assign, and OpCo would assume, the assets and liabilities attributable to the account balances of employees of OpCo ("OpCo Employees") under its 401(k) plan and the OpCo 401(k) plan would become effective as of the Coverage Date (as defined in the Employee Benefits Agreement). OpCo will adopt and assume such plan, effective as of the Coverage Date and Station REIT would withdraw its sponsorship of its plan. The Employee Benefits Agreement would also provide that OpCo will establish and assume employee welfare benefit plans for salaried employees, effective as of the Coverage Date, providing medical, long-term disability, flexible spending and life insurance and other welfare benefits to OpCo Employees which are generally comparable to those provided by Station REIT at such time. In addition, OpCo would assume sponsorship of certain insured welfare benefit plans covering hourly OpCo Employees (subject to any required consent of the insurer) and the cafeteria plan, and Station REIT would withdraw as sponsor of such plans, effective as of the Coverage Date. Effective as of the Distribution Date, OpCo would assume all accrued liabilities for vacation pay for OpCo Employees. Station REIT's long term disability plan for salaried employees would be assumed by OpCo and will, at OpCo's expense, continue to cover individuals who are totally disabled on the Coverage Date and who would have become OpCo Employees if in active employment on the Coverage Date for so long as such individuals remain totally disabled. Effective on the Coverage Date, OpCo will assume sole responsibility for all OpCo Employees who are on medical leave from Station REIT. The Employee Benefits Agreement would also provide for the establishment of certain incentive and pension benefit plans, effective as of the Coverage Date, providing certain equity-based and deferred 79 compensation benefits to certain OpCo employees which are generally comparable to those provided by Station REIT at such time. In connection with this establishment, OpCo would assume and become liable for certain obligations payable to OpCo employees under these plans. In addition, on or before the Distribution Date all outstanding shares of Station REIT's restricted stock may in the sole discretion of Station REIT become vested and the holder's rights to such stock would thereafter be non-forfeitable. INTELLECTUAL PROPERTY AGREEMENT Assuming the Distribution occurs, OpCo and Station REIT expect to enter into an intellectual property agreement (the "Intellectual Property Agreement") providing for the allocation and acknowledgement of certain Intellectual Property used in connection with the Initial Properties, including those trademarks used in connection with the operation of the Initial Properties. The Intellectual Property Agreement would provide for the transfer of ownership of certain Intellectual Property to Opco in partial exchange for the Intermediate Notes. Opco would license certain Intellectual Property which it owns, and which is used solely or primarily in the operation of the Initial Properties, to Station REIT on a royalty-free, nonexclusive basis, subject to the limitations set forth in the Intellectual Property Agreement. Under the Intellectual Property Agreement, certain intellectual property transferred to OpCo by Station REIT, including the trademarks used in connection with the Initial Properties would be licensed to Station REIT. No license fees would be required to be paid by Station REIT under the Intellectual Property Agreement. The Intellectual Property Agreement would provide for termination of the agreement in the event of a change in control of OpCo or Station REIT, or if necessary to safeguard the intellectual property or the goodwill associated therewith, or symbolized thereby, from injury or devaluation. 80 PRINCIPAL STOCKHOLDERS The following table sets forth, as of November 30, 1997, certain information regarding the shares of Common Stock beneficially owned by each stockholder who is known by the Company to beneficially own in excess of 5% of the outstanding shares of Common Stock, by each director and named executive officer and by all executive officers and directors as a group.
BENEFICIAL OWNERSHIP OF SHARES ------------------------- PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER(2) CLASS - ------------------------------------------------------------------------------------------ ------------ ----------- Frank J. Fertitta III..................................................................... 5,611,290 15.6 Blake L. Sartini(3)....................................................................... 4,851,703 13.7 Lorenzo J. Fertitta(3).................................................................... 4,776,802 13.5 Delise F. Sartini(3)...................................................................... 4,727,010 13.4 The Capital Group Companies(4)............................................................ 3,317,830 9.4 Columbia Funds Management Company(5)...................................................... 2,176,600 6.2 Glenn C. Christenson...................................................................... 172,335 * Scott M. Nielson.......................................................................... 153,816 * R. Hal Dean(6)............................................................................ 41,765 * Lowell H. Lebermann, Jr.(6)............................................................... 21,000 * Executive Officers and Directors as a Group (8 persons)................................... 15,641,148 42.8
- ------------------------ * Less than one percent (1) Excludes the shares of Common Stock issuable upon conversion of the Convertible Preferred Stock. (2) Unless otherwise indicated in the footnotes to this table and subject to the community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned. The address of each of the stockholders named in this table is: c/o Station Casinos, Inc., 2411 West Sahara Avenue, Las Vegas, Nevada 89102. (3) Of the total number of shares reported in this table, the following are the approximate number of vested options beneficially owned by each individual in the table: Frank J. Fertitta III 742,410; Blake L. Sartini 137,124; Delise F. Sartini 12,432; Lorenzo J. Fertitta 84,150; Glenn C. Christenson 134,135; Scott M. Nielson 109,816; R. Hal Dean 20,000 and Lowell H. Lebermann, Jr. 20,000. (4) Reflects beneficial ownership shared by Blake and Delise Sartini. Blake and Delise Sartini do not, however, share beneficial ownership of the vested options reflected in note (3) and thus have different total ownership figures. (5) As reported in a Schedule 13G dated February 14, 1997 and filed with the Securities and Exchange Commission (the "Commission"). Beneficial ownership is disclaimed. The Capital Group Companies, Inc. reports that it is the parent holding company of a group of investment management companies which hold the reported stock and that Capital Research and Management Company, one of such subsidiaries, is the beneficial owner of 2,609,470 shares. Includes 1,263,830 shares resulting from the assumed conversion of the Company's Convertible Preferred Stock. (6) As reported in a Schedule 13G dated February 10, 1997 and filed with the Commission. Beneficial ownership is disclaimed. (7) Messrs. Lebermann and Dean and Ms. Sartini will not be directors of Station REIT after the Reorganization Transactions but each of the directors listed above will be directors of OpCo. Subsequent to the Distribution and as part of the Offerings, Mr. Frank J. Fertitta III, Mr. Blake L. Sartini and Mr. Lorenzo J. Fertitta and certain of their affiliates expect to sell an aggregate of approximately 2.0 million shares of Common Stock primarily in order to pay taxes incurred in connection with the Reorganization Transactions. Initially, the percentage ownership of OpCo Common Stock and OpCo Preferred Stock held by such persons will be pro rata with their ownership of Common Stock, except that, to obtain certain tax treatment for the Company, OpCo Common Stock held by or on behalf of Mr. Frank J. Fertitta III, Mr. Blake L. Sartini, Mr. Lorenzo J. Fertitta, Ms. Delise F. Sartini and certain of their affiliates will be exchanged for OpCo B Stock. In addition, in order to obtain certain tax treatment for the Company, such persons expect to sell the approximately $4.2 million in liquidation preference of the OpCo Preferred Stock received by them in the Distribution to third parties pursuant to a pre-arranged agreement. 81 MANAGEMENT AFTER THE REORGANIZATION Upon consummation of the Reorganization Transactions, each of Messrs. Christenson, Sartini, and Nielson will resign his positions as an executive officer of Station REIT. Ms. Sartini and Messrs. Dean and Lebermann each will resign their respective positions as a director of Station REIT. The following table sets forth the directors and executive officers who will serve in such capacities for Station REIT and certain of its subsidiaries following the Reorganization Transactions. The directors of Station REIT serve staggered terms. All directors will hold their positions until the annual meeting of stockholders at which their term expires or until their respective successors are elected and qualified. Executive officers will be elected by and serve at the discretion of the Board of Directors until their successors are duly chosen and qualified. A biography for Mr. Frank J. Fertitta III appears above.
EXPIRATION OF TERM AS NAME AGE POSITION DIRECTOR - ---------------------------------- --- ----------------------------------------------------------- ------------- Frank J. Fertitta III............. 35 Chairman of the Board, President and 1999 Chief Executive Officer William W. Warner................. 33 Executive Vice President, Chief Financial Officer and Treasurer Glenn C. Christenson.............. 48 Director 1998 Blake L. Sartini.................. 38 Director 1998 Lorenzo J. Fertitta............... 28 Director 1999 5 Independent Directors*
- ------------------------ * The Board of Directors of Station REIT intends to designate five independent directors. FRANK J. FERTITTA III. Mr. Fertitta has served as Chairman of the Board of the Company since February 1993, Chief Executive Officer since July 1992 and President of the Company since 1989. He has held senior management positions since 1985, when he was named General Manager of PSHC. He was elected a director of the Company in 1986, at which time he was also appointed Executive Vice President and Chief Operating Officer. In 1992, he co-founded Station Casino St. Charles and has served as Chairman of the Board of Directors of that company since that time. WILLIAM WARNER. Mr. Warner will become Executive Vice President, Chief Financial Officer and Treasurer of Station REIT upon the consummation of the Reorganization Transactions. Mr. Warner has served as Vice President of Finance of the Company since August, 1995 and since August 1993 he served as Director of Finance. Prior to his employment by the Company, Mr. Warner served as controller of Kent Co. Capital Corporation from 1991 to 1993 and from 1986 to 1991 he served with the international accounting firm Arthur Andersen LLP, most recently as an Audit Manager. Mr. Warner will not be employed by OpCo. GLENN C. CHRISTENSON. Mr. Christenson has served as Executive Vice President of the Company since February 1994 and Chief Administrative Officer since March 1997. From 1989 to 1993, he served as Vice President. He has served as Chief Financial Officer since 1989, as Treasurer since 1992 and as a director since 1993. Mr. Christenson is a Certified Public Accountant. From 1983 to 1989, he was a partner of the international accounting firm of Deloitte Haskins & Sells (now Deloitte & Touche), where he served as partner-in-charge of audit services for the Nevada practice and National Audit partner for the Hospitality Industry. Mr. Christenson has served on the Board of Directors of the Nevada Resort Association and was Chairman of the Nevada Resort Associations's Internal Revenue Service Liaison Committee. BLAKE L. SARTINI. Mr. Sartini has served as Executive Vice President of the Company since February 1994 and also serves as Chief Operating Officer. From February 1994 to March 1997 he also served as 82 President--Nevada Operations of Station REIT. From 1991 to 1993, he served as Vice President of Gaming Operations. He has served as a director since 1993 and has over 14 years of experience in the hotel and casino industry. From 1985 to 1990, Mr. Sartini held various management positions at the Company and has served as President of Southwest Gaming Services, Inc., a subsidiary of the Company prior to the Reorganization Transactions ("Southwest Gaming"), since January 1993. In 1992, he co-founded Station Casino St. Charles and serves as its Vice President. LORENZO J. FERTITTA. Mr. Fertitta has served as a director of the Company since 1991. He has served as President and Chief Executive Officer of Fertitta Enterprises, Inc. since June 1993, where he is responsible for managing an investment portfolio consisting of marketable securities and real property. From time to time, the investment portfolio contains investments in other gaming operations. Mr. Fertitta was a co-founder of Southwest Gaming in 1990 and of Station Casino St. Charles in 1992 and has served on their respective boards since their inception. From 1991 to 1993, he served as Vice President of the Company. Mr. Fertitta serves as a commissioner on the Nevada State Athletic Commission. OPCO In connection with the formation of OpCo and consummation of the Reorganization Transactions, the current executive officers and directors of the Company will be appointed to positions at OpCo equivalent to those they hold currently at the Company. In addition, the board of directors of OpCo will appoint one new independent director. The board of directors of OpCo will serve staggered terms. Mr. Frank J. Fertitta III, Mr. Glenn C. Christenson and Mr. Blake L. Sartini will serve until 2001. Mr. Lorenzo J. Fertitta, Ms. Delise Sartini and will serve until 2000 and Mr. R. Hal Dean, Mr. Lowell H. Lebermann, Jr. and will serve until 1999. EMPLOYMENT AGREEMENTS Station REIT and each of Frank J. Fertitta III and William W. Warner intend to enter into employment agreements (the "Employment Agreements"). Messrs. Christenson, Nielson and Sartini will no longer be employed by Station REIT after the Distribution and will agree to waive all rights under employment agreements with Station REIT in exchange for substantially similar employment agreements with OpCo (Messrs. Fertitta, Warner, Christenson, Nielson and Sartini; together, the "Executive Officers"). The Employment Agreements provide that the Executive Officers shall devote reasonable time and attention to the business and affairs of Station REIT. The Employment Agreements will be subject to automatic 60-month extensions after completion of their respective terms, unless terminated by Station REIT or the respective Executive Officer. Each Employment Agreement will provide for a base salary (to be reviewed annually for an increase but not a decrease), an annual cash bonus in an amount determined by the Board of Directors as of January 1 of each calendar year, and the inclusion of the Executive Officer in all plans and programs of Station REIT made available to Station REIT's Executive Officers or salaried employees generally. At Station REIT, the Executive Officers' annual base salaries initially will be $500,000 and $225,000 for Messrs. Fertitta and Warner, respectively. At OpCo, the Executive Officers' annual base salaries initially will be $500,000, $535,000, $520,000 and $395,000 for Messrs. Fertitta, Christenson, Sartini and Nielson, respectively. The Executive Officers are also entitled to life insurance and certain other benefits and perquisites. Each of the Executive Officers will be entitled to receive extended or lump-sum payments and other benefits (A) in the event such Executive Officer's employment is terminated (i) by Station REIT other than for Cause (as defined in his Employment Agreement) or (ii) by the Executive Officer for Good Reason (as defined in his Employment Agreement, including Station REIT's failure to perform certain material obligations thereunder, including a material reduction in such Executive Officer's responsibilities, a Change of Control or Station REIT's failure to extend such Executive Officer's initial term of employment) and (B) in the event of a Change of Control (as defined in his Employment Agreement). Such payments and benefits, particularly in connection with a Change of Control, could be substantial and could have the effect of delaying or preventing a Change of Control of Station REIT. 83 DESCRIPTION OF CERTAIN NEW INDEBTEDNESS In addition to existing indebtedness of the Company, Station REIT expects to enter into the Bank Facility. OpCo is also expected to enter into a bank facility. Each of the new bank facilities is described below. See "Station REIT Pro Forma Capitalization" and "OpCo Pro Forma Capitalization." STATION REIT The Company currently has no commitment with respect to the Bank Facility. Based on preliminary discussions, however, the Company expects the Bank Facility to be a senior secured reducing revolving loan facility with a term loan feature providing for borrowings up to an aggregate principal amount of $500 million. The Bank Facility is expected to be secured by substantially all of the assets of Station REIT (including without limitation the Initial Properties and the Leases) and its significant subsidiaries and Station REIT's significant subsidiaries will also guarantee the borrowings under the Bank Facility. Such security arrangements are subject to prior approval of the Nevada Commission. The Company expects borrowings under the Bank Facility to bear interest at a margin above the bank's prime rate or a eurodollar rate, as selected by Station REIT. The margin above such rates, and the fee on the unfunded portions of the Bank Facility is expected to vary quarterly based on a measurement of Station REIT's leverage. The Company expects the Bank Facility to contain certain financial and other covenants, including, a minimum consolidated net worth, limitations on indebtedness, a minimum interest coverage ratio, minimum lease revenue and limitations on capital expenditures and acquisitions. The Company expects the Bank Facility to contain customary events of default and remedies and to be cross-defaulted to Station REIT's Existing Senior Subordinated Notes. There can be no assurance that the Bank Facility will be obtained. OPCO OpCo currently has no commitment with respect to its expected new bank facility. Based on preliminary discussions, however, OpCo expects its bank facility to be a senior secured term loan facility with a revolving loan feature providing for borrowings up to an aggregate principal amount of $150 million. The OpCo bank facility will be secured by substantially all of the assets of OpCo and its significant subsidiaries. OpCo's significant subsidiaries also will guarantee the borrowings under the OpCo bank facility. OpCo expects borrowings under its bank facility to bear interest at a margin above the bank's prime rate or a eurodollar rate, as selected by OpCo. The margin above such rates, and the fee on the unfunded portions of the OpCo bank facility will vary quarterly based on a measurement of OpCo's leverage. OpCo expects the OpCo bank facility to contain certain financial and other covenants, including, a minimum consolidated net worth, a maximum total leverage, a minimum fixed charge coverage ratio, a minimum EBITDA and limitations on capital expenditures and other indebtedness and to certain customary events of defaults and remedies. OpCo's bank facility is expected to contain customary events of default and remedies. There can be no assurance that the OpCo bank facility will be obtained. 84 DESCRIPTION OF CAPITAL STOCK STATION REIT GENERAL If approved by the stockholders as set forth in this Proxy Statement, and subject to certain conditions set forth herein, the Company will adopt the Charter Amendments which will (a) increase the authorized shares of the Company from 95,000,000 shares consisting of 90,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock to 360,000,000 shares consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock; (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock or desirable for the Company to protect its status as a real estate investment trust for federal income tax purposes; and (c) change the name of the Company to "Station Entertainment Properties, Inc." The additional shares of Common Stock are expected to be issued in connection with acquisitions by the Company of hotel/casino properties. Such shares of Common Stock will also be issued pursuant to the Company's stock compensation and other employee benefit programs. It is impracticable to describe the transactions in connection with which such shares will be issued as they are not yet determined. Such issuances will have no effect on the rights of existing security holders unless such issuances are issuance of Preferred Stock in which case the effect will be as set forth in the designation of rights, preferences and privileges passed by the Board of Directors of the Company. TERMS OF CAPITAL STOCK TERMS OF COMMON STOCK GENERALLY The Company is authorized to issue up to 90,000,000 shares of Common Stock, 35,306,657 shares of which were issued and outstanding as of September 30, 1997. Pursuant to this Proxy Statement, the Company is soliciting the consent of its stockholders to increase the number of authorized shares of Common Stock to 300,000,000. Each holder of the Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Holders of the Common Stock have no cumulative voting, conversion, redemption or preemptive rights or other rights to subscribe for additional shares except pursuant to the Rights Plan (as described herein). Subject to any preferences that may be granted to the holders of the Preferred Stock, each holder of Common Stock is entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor as well as any distributions to the stockholders and, in the event of liquidation, dissolution or winding up of the Company, is entitled to share ratably in all assets of the Company remaining after payment of liabilities. In addition, ownership of the Common Stock is subject to regulation by the Nevada Gaming Authorities. See "Regulation and Licensing." RIGHTS PLAN On October 6, 1997, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. The dividend was paid on October 21, 1997. One Right will automatically attach to each share of Common Stock issued thereafter (including the shares to be issued in the Offerings). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock, par value $0.01 per share ("Preferred Shares") of the Company at a price of $40.00 per one one-hundredth of a Preferred Share, subject to adjustment. The Rights will be amended so as not to be exercisable until the earlier of 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 5.5% or more of the outstanding Common Stock ("Acquiring Person") or 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 5.5% or more of the outstanding Common Stock. 85 The Rights will expire on October 21, 2007. Acquiring Persons do not have the same rights to receive Common Stock as other holders upon exercise of the Rights. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, the proper provisions will be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter become void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon exercise thereof, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. Because of the characteristics of the Rights in connection with a person or group of affiliated or associated persons becoming an Acquiring Person, the Rights may have the effect of making an acquisition of the Company more difficult and may discourage such an acquisition. TERMS OF COMMON STOCK AS MODIFIED BY THE CHARTER AMENDMENTS For the Station REIT to qualify as a REIT under the Code, it must meet certain requirements concerning the ownership of its outstanding stock. Specifically, not more than 50% in value of Station REIT's outstanding stock may be owned, actually or constructively under the applicable attribution provisions of the Code, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year, and Station REIT must be beneficially owned by 100 or more persons during at least 335 days of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year. See "Certain Federal Income Tax Considerations--Organizational Requirements." Because the Company expects to qualify as a REIT, the Board of Directors will adopt, and the stockholders will be asked, prior to the Offerings, to approve, the Charter Amendments limiting the acquisition of shares of Station REIT 's capital stock (the "Ownership Limitation Provision"). The Ownership Limitation Provision provides that, subject to certain exceptions specified in the Articles, no person may own, or be deemed to own by virtue of the applicable attribution provisions of the Code, more than 5.5% of any class of Station REIT's outstanding capital stock (the "Ownership Limit"). The Board of Directors may, but in no event will be required to, waive the Ownership Limit if it determines that such ownership will not jeopardize Station REIT's status as a REIT. As a condition of such waiver, the Board of Directors may require opinions of counsel satisfactory to it and undertakings or representations from the applicant with respect to preserving the REIT status of Station REIT. The Ownership Limitation Provision will not apply if the Board of Directors and the holders of at least 66 2/3% of the outstanding shares of capital stock entitled to vote on such matter determine that it is no longer in the best interest of Station REIT to attempt to qualify, or to continue to qualify, as a REIT. Any purported transfer of capital stock of Station REIT and any other event that would otherwise result in any person or entity violating the Ownership Limit will be void and of no force or effect as to that number of shares in excess of the Ownership Limit and the purported transferee (the "Prohibited Transferee") shall acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding record title to any such shares in excess of the Ownership Limit (the "Prohibited Owner") shall cease to own any right or interest) in such excess shares. In addition, if any transfer of capital stock of Station REIT or any other event otherwise would cause Station REIT to become "closely held" under the Code or otherwise to fail to qualify as a REIT under the Code, then any such purported transfer will be void and of no force or effect as to that number of shares in excess of the number that could have been transferred without such result and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner shall cease to 86 own any right or interest) in such excess shares. Also, if any purported transfer of capital stock of Station REIT or any other event would otherwise cause the Company to own, or be deemed to own by virtue of the applicable attribution provisions of the Code, 10% or more of the ownership interests in OpCo or in any sublessee, then any such purported transfer will be void and of no force or effect as to that number of shares in excess of the number that could have been transferred without such result, and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner shall cease to own any right or interest) in such excess shares. Any such excess shares described above will be transferred automatically, by operation of law, to a trust, the beneficiary of which will be a qualified charitable organization selected by Station REIT (the "Beneficiary"). The trustee of the trust who shall be designated by Station REIT and be unaffiliated with Station REIT and any Prohibited Owner, will be empowered to sell such excess shares to a qualified person or entity and distribute to a Prohibited Transferee an amount equal to the lesser of the price paid by the Prohibited Transferee for such excess shares or the sales proceeds received by the trust for such excess shares. In the case of any excess shares resulting from any event other than a transfer, or from a transfer for no consideration, the trustee will be empowered to sell such excess shares to a qualified person or entity and distribute to the Prohibited Owner an amount equal to the lesser of the fair market valve of such excess shares on the date of such event or the sales proceeds received by the trust for such excess shares. Prior to a sale of any such excess shares by the trust, the trustee will be entitled to receive, in trust for the benefit of the Beneficiary, all dividends and other distributions paid by Station REIT with respect to such excess shares, and also will be entitled to exercise all voting rights with respect to such excess shares. Any purported transfer of capital stock of Station REIT that would otherwise cause Station REIT to be beneficially owned by fewer than 100 persons will be null and void in its entirety, and the intended transferee will acquire no rights in such stock. The Ownership Limitation Provision may have the effect of precluding an acquisition of control of the Company without approval of the Board of Directors. TERMS OF PREFERRED STOCK GENERALLY The Company is authorized to issue up to 5,000,000 shares of Preferred Stock. In connection with this Proxy Statement, the Company is soliciting the consent of its stockholders to increase the number of authorized shares of Preferred Stock to 60,000,000. In March 1996, the Company completed an offering of 1,800,000 shares of $3.50 Convertible Preferred Stock (the "Convertible Preferred Stock"). In April 1996, the underwriters exercised the over allotment option of an additional 270,000 shares of the Convertible Preferred Stock. The Board of Directors, without further action by the holders of Common Stock or the Convertible Preferred Stock, may issue shares of Preferred Stock in one or more series and may fix or alter the rights, preferences, privileges and restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation rates, liquidation preferences, conversion rights and the description and number of shares constituting any wholly unissued series of Preferred Stock. Except as described above, the Board of Directors, without further stockholder approval, may issue shares of Preferred Stock with rights that could adversely affect the rights of the holders of Common Stock or the Convertible Preferred Stock. The issuance of shares of Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of the Company or other corporate action. CONVERTIBLE PREFERRED STOCK As of September 30, 1997, the Company has 2,070,000 shares of Convertible Preferred Stock outstanding, each with a liquidation preference of $50.00 per share plus an amount equal to any accumulated and unpaid dividends at the annual rate of $3.50 per share, or 7.0% of such liquidation preference. Such dividends accrue and are cumulative from the date of issuance and are payable quarterly. The Convertible Preferred Stock is convertible at the option of the holder thereof at any time, unless 87 previously redeemed, into shares of Common Stock at an initial conversion price of $15.35, subject to adjustment in certain circumstances. As a result of the Distribution, following the consummation of the Reorganization Transactions, the Convertible Preferred Stock will be adjusted in accordance with its terms, as described below. See "--Treatment of Convertible Preferred Stock in the Distribution." The Company may reduce the conversion price of the Convertible Preferred Stock by any amount for any period of at least 20 days, so long as the decrease is irrevocable during such period. The Convertible Preferred Stock is redeemable, at the option of the Company, in whole or in part, for shares of Common Stock, at any time after March 15, 1999, initially at a price of $52.45 per share of Convertible Preferred Stock, and thereafter at prices decreasing annually to $50.00 per share of Convertible Preferred Stock on and after March 15, 2006, plus accrued and unpaid dividends. The Common Stock to be issued is determined by dividing the redemption price by the lower of the average daily closing price for the Company's Common Stock for the preceding 20 trading days or the closing price of the Company's Common Stock on the first business day preceding the date of the redemption notice. Any fractional shares would be paid in cash. There is no mandatory sinking fund obligation with respect to the Convertible Preferred Stock. The holders of the Convertible Preferred Stock do not have any voting rights, except as required by applicable law and except that, among other things, whenever accrued and unpaid dividends on the Convertible Preferred Stock are equal to or exceed the equivalent of six quarterly dividends payable on the Convertible Preferred Stock, the holders of the Convertible Preferred Stock, voting separately as a class with the holders of any other series of parity stock upon which like voting rights have been conferred and are exercisable, will be entitled to elect two directors to the Board of Directors until dividend arrearage has been paid or amounts have been set apart for such payment. The Convertible Preferred Stock is senior to the Common Stock with respect to dividends and upon liquidation, dissolution or winding-up. TREATMENT OF CONVERTIBLE PREFERRED STOCK IN THE DISTRIBUTION Each holder of Convertible Preferred Stock will have the conversion price for such holder's Convertible Preferred Stock adjusted to reflect the value of assets distributed to holders of Common Stock pursuant to the Distribution. The existing conversion price of $15.35 for the Convertible Preferred Stock will be adjusted by multiplying such conversion price by a fraction (a) the numerator of which is (x) the current market price per share of the Common Stock on the associated record date less (y) the fair market value on such record date of the portion of the assets so distributed to the holder of one share of Common Stock, and (b) the denominator of which is such current market price per share of Common Stock on such record date. The fair market value of the assets distributed in the Distribution will be determined by the Board of Directors. Holders of Convertible Preferred Stock will not receive shares of OpCo Common Stock and OpCo Preferred Stock in the Distribution unless such holders have converted such Convertible Preferred Stock into and are holders of record of Station REIT Common Stock on the record date for the Distribution. OPCO TERMS OF CAPITAL STOCK TERMS OF COMMON STOCK OpCo will be authorized to issue up to an aggregate of 20 million shares of OpCo Common Stock of which approximately two million are expected to be distributed to holders of Station REIT Common Stock pursuant to the Distribution based on the approximately 35.3 million shares of Station REIT Common Stock outstanding as of September 30, 1997 and a distribution ratio of one share of OpCo Common Stock for every 17.5 shares of Station REIT Common Stock. Each holder of the OpCo Common Stock will be entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Holders of the OpCo Common Stock will have no cumulative voting, conversion, redemption or preemptive rights or other rights to subscribe for additional shares. Subject to any preferences that may be granted to the holders of OpCo's preferred stock, each holder of OpCo Common Stock will be entitled to receive 88 ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor as well as any distributions to the stockholders and, in the event of liquidation, dissolution or winding up of OpCo, will be entitled to share ratably in all assets of OpCo remaining after payment of liabilities. In addition, ownership of the OpCo Common Stock is subject to regulation by the Nevada Gaming Authorities. See "Regulation and Licensing." CLASS B COMMON STOCK OpCo will be authorized to issue up to an aggregate of 15,000 shares of OpCo B Stock 7,214 of which are expected to be issued upon the conversion of certain shares of OpCo Common Stock immediately following the Distribution. Holders of the OpCo B Stock, except as described herein, will have no voting rights and no conversion, redemption or preemptive rights or other rights to subscribe for additional shares. Subject to any preferences that may be granted to the holders of OpCo's preferred stock, each holder of OpCo B Stock will be entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor as well as any distributions to the stockholders and, in the event of liquidation, dissolution or winding up of OpCo, will be entitled to share ratably in all assets of OpCo remaining after payment of liabilities, in each case, as if each such holder held 100 shares of OpCo Common Stock for each share of OpCo B Stock held by such holder. The holders of the OpCo B Stock are entitled to receive dividends and other distributions when dividends or other distributions are made to holders of OpCo Common Stock as if each such holder held 100 shares of OpCo Common Stock for each share of OpCo B Stock held by such holder. Each share of OpCo B Stock will automatically convert to 100 shares of OpCo Common Stock upon sale to any stockholder other than the initial holders and their affiliates. If certain stockholders of Station REIT, in combination with their affiliates beneficially own in excess of 9.9% of the outstanding shares of OpCo Common Stock, any and all amounts of OpCo Common Stock held by such stockholders and their affiliates collectively in excess of 9.9% automatically and on a pro-rata basis among all such stockholders and their affiliates will convert into OpCo B Stock on the basis of 100 shares of OpCo Common Stock for each share of OpCo B Stock. In addition, if the number of shares of OpCo Common Stock plus the number of shares of OpCo B Stock beneficially owned by such stockholders and their affiliates exceeds 9.9% of the number of all such shares outstanding, the shares of OpCo Common Stock held by such stockholders and their affiliates automatically and on a pro-rata basis among all such stockholders and their affiliates will convert into OpCo B Stock on the basis of 100 shares of OpCo Common Stock for each share of OpCo B Stock until the number of shares of OpCo Common Stock and OpCo B Stock held by such stockholders and their affiliates is less than 9.9% of the total number of all such shares outstading. In addition, if Station REIT loses it status under federal tax law as a REIT, OpCo B Stock will automatically convert to OpCo Common Stock on the basis of 100 shares of OpCo Common Stock for each share of OpCo B Stock. OPCO RIGHTS PLAN OpCo will have a plan that grants rights substantially similar to the Rights Plan with respect to the Common Stock, except that the relevant beneficial ownership triggers in the OpCo rights plan will be 10% rather than 5.5% as under the Rights Plan. See "Station REIT--Terms of Capital Stock--Rights Plan." TERMS OF PREFERRED STOCK GENERALLY OpCo will be authorized to issue up to 50 million shares of its preferred stock, no par value per share (the "Additional Preferred Stock"). 20 million shares of OpCo Preferred Stock will be issued in connection with the Reorganization Transaction to Station REIT. The Board of Directors, without further action by the holders of OpCo Common Stock or holders of OpCo Preferred Stock may issue shares of Additional Preferred Stock in one or more series and may fix or alter the rights, preferences, privileges and 89 restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation rates, liquidation preferences, conversion rights and the description and number of shares constituting any wholly unissued series of Additional Preferred Stock. Except as described above, the Board of Directors, without further stockholder approval, may issue shares of Additional Preferred Stock with rights that could adversely affect the rights of the holders of OpCo Common Stock. Such additional Preferred Stock will be required to be junior in liquidation and right of payment of dividends to the OpCo Preferred Stock. The issuance of shares of Additional Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of OpCo or other corporate action. OPCO PREFERRED STOCK The following is a summary of the terms of the OpCo Preferred Stock. This description is not intended to be complete and is subject to and qualified in its entirety by reference to the Resolutions Authorizing and Fixing the Terms and Conditions of the Series A % Cumulative Preferred Stock adopted by OpCo. TERM. The OpCo Preferred Stock is mandatorily redeemable on the tenth anniversary of the date of original issuance thereof. LIQUIDATION VALUE AND DIVIDENDS. Each share of OpCo Preferred Stock has a per share liquidation value of $1.00 and the aggregate liquidation value for the OpCo Preferred Stock is $20 million. Subject to the prior rights of holders of Senior Stock (as defined herein), holders of OpCo Preferred Stock are entitled to receive, when declared, cash dividends at a rate of $ per share per year. Such dividends shall be cumulative, shall accrue without interest from the date of issuance and shall be payable quarterly in areas on the first day of each , , and , commencing , 1998. Dividends accrued from the date of issuance to and including , 1998 shall be payable on the first dividend payment date. VOTING. The holders of OpCo Preferred Stock will have no right to vote except (i) as required by Nevada law, (ii) as described in "Ranking" below, and (iii) if OpCo fails to pay dividends equal to two full quarterly dividends, the holders of the OpCo Preferred Stock have the right, voting as a separate class, to elect two new directors to OpCo's Board of Directors, which right shall continue until all outstanding dividends have been declared and paid and quarterly dividends have been declared and paid for four consecutive quarters. In addition, OpCo shall not, without the affirmative vote of a majority of the outstanding shares of OpCo Preferred Stock voting as a single class, (i) amend, alter or repeal any provision of the OpCo Articles or any resolution of the OpCo board of directors, so as to (A) amend or waive any terms of any OpCo Preferred Stock, (B) increase or decrease the number of authorized shares of OpCo Preferred Stock, (C) exchange, reclassify or cancel all or part of the OpCo Preferred Stock, (D) exchange, or create a right of exchange of, shares of another class of stock into OpCo Preferred Stock, (E) change the designations, preferences limitations or relative rights of the shares of OpCo Preferred Stock, (F) change the shares of OpCo Preferred Stock into the same or a different number of shares of OpCo Preferred Stock or of another class of stock, (G) divide the shares of OpCo Preferred Stock into series and fix the designation of such series, and the variations on the relative rights and preferences between the shares of such series, or (H) cancel, reduce or otherwise affect accrued dividends on the OpCo Preferred Stock, (ii) create, authorize or issue, or increase the rights and preferences or authorized amount of any Senior Stock or Parity Stock (as defined herein) or purchase rights for, or securities convertible into, Senior Stock or Parity Stock, or (iii) liquidate, dissolve or wind up, (iv) effect certain extraordinary transactions, or (v) participate in any exchange if the OpCo Preferred Stock will be included in the exchange. REDEMPTION AND REPURCHASE RIGHTS. The redemption price payable upon exercise of the holders' option is the sum of the liquidation value, cumulative and unpaid dividends, and a redemption premium of 90 $ per share. The OpCo Preferred Stock is redeemable, in whole but not in part, at the option of OpCo at any time on or after the fifth anniversary of the date of original issuance of the OpCo Preferred Stock upon not less than 15 nor more than 60 days' prior written notice. The redemption price payable upon the exercise of OpCo's option is the sum of the liquidation value and the cumulative and unpaid dividends. The OpCo Preferred Stock is mandatorily redeemable on the tenth anniversary of the date of the original issuance thereof. In addition, upon an OpCo Change of Control, OpCo is required to offer to repurchase all of the OpCo Preferred Stock for cash for the lesser of and the price that would apply if the shares were redeemed as of such date. For purposes of the foregoing, an "OpCo Change of Control" means that any person or group obtains ownership or control of more than 50% of the voting power of OpCo entitled to vote in the election of directors. RANKING. With respect to dividends and upon liquidation, the OpCo Preferred Stock ranks (i) junior to any series of Additional Preferred Stock the terms of which specifically provide that such series ranks senior to the OpCo Preferred Stock (the "Senior Stock"), (ii) PARI PASSU with each other series of OpCo Preferred Stock and with any other series of Preferred Stock the terms of which specifically provide that such series ranks PARI PASSU with the OpCo Preferred Stock (the "Parity Stock") and (iii) senior to the Common Stock and any other series of Preferred Stock the terms of which specifically provide that such series is junior and subordinate to the OpCo Preferred Stock (the "Junior Stock"). Issuance of Senior Stock, Parity Stock or additional shares of OpCo Preferred Stock require the vote of a majority of holders of the OpCo Preferred Stock voting separately as a class. Unless all dividends on the OpCo Preferred Stock for all past quarterly dividend periods have been paid or declared and a sum sufficient for the payment thereof set apart, no dividends whatsoever, whether in cash or property, will be paid, declared, or set apart for payment, and no distribution will be made on any Junior Stock, other than a dividend or distribution payable in Junior Stock or warrants or other rights to purchase Junior Stock, nor will any shares of any Junior Stock be purchased, redeemed or otherwise acquired for a consideration by OpCo or any subsidiary of OpCo. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of OpCo, before any distribution or payment is made to the holders of Junior Stock, the holders of shares of the OpCo Preferred Stock, subject to the prior rights of the holders of Senior Stock, if any, and the equal rights of holders of Parity Stock, are entitled to be paid first the amount of all accrued and unpaid dividends at the date of such distribution or payment and then an amount equal to $1.00 per share. AMENDMENTS AND WAIVERS. Amendments, waivers and issuances of Senior Stock, Parity Stock or additional shares of OpCo Preferred Stock require the vote of a majority of holders of the OpCo Preferred Stock, voting separately as a class. POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of Station REIT's expected policies with respect to investment, financing, conflicts of interest and certain other activities. The policies with respect to these activities have been determined by the Board of Directors and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the stockholders of Station REIT, except that changes in certain policies with respect to conflicts of interest must be consistent with legal requirements. OpCo will retain substantially the same policies and objectives as the Company has had prior to the Reorganization Transactions. INVESTMENT POLICIES INVESTMENTS IN ACQUIRED OR DEVELOPED REAL ESTATE During the past three years, the Company has acquired interests in or developed real properties and improvements at Sunset Station, Station Casino Kansas City, Texas Station and various properties held for development. Various properties held for development have also been sold during such period. 91 In addition to the Initial Properties, Station REIT intends to acquire or develop equity interests in hotel/casino properties and related properties in Las Vegas and other parts of the United States directly or through entities controlled by Station REIT. Station REIT's investment objective is to maximize its Funds From Operations and enhance stockholder value by acquiring additional hotel/casino properties and, under appropriate circumstances, by developing selected additional hotel/casino properties that meet one or more of Station REIT's investment criteria, by completing various master-planned developments at its hotel/casino properties and by participating in increased revenue from the Initial Properties and any subsequently acquired hotel/casino properties through participating leases. Station REIT will acquire assets primarily for income. Such investments may be financed, in whole or in part, with excess cash flow, borrowings or subsequent issuances of shares of Common Stock or other securities issued by Station REIT or entities controlled by Station REIT or in which Station REIT participates. Station REIT will have no limit on the amount or percentage of assets represented by any specific property. Station REIT and OpCo intend to enter into the Cooperation Agreement whereby each company will agree to grant the other certain rights of first offer. See "Relationship between Station REIT and OpCo-- Cooperation Agreement." INVESTMENTS IN OTHER ENTITIES Station REIT may also participate with other entities in property ownership, through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness that may have priority over the equity interest of Station REIT. INVESTMENTS IN REAL ESTATE MORTGAGES AND SECURITIES OF OTHER ISSUERS While Station REIT will emphasize equity real estate investments, it may, in its discretion, invest in mortgage and other real estate interests, including securities of REITs and other issuers. Station REIT will have no limit on the amount or percentage of assets represented by one investment or investment type. Station REIT does not presently intend to invest in securities of REITs or other issuers. Station REIT may invest in or originate participating or convertible mortgages if it concludes that by doing so it may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation, because they permit the lender to either participate in increasing revenues from the property or convert some or all of the mortgage to equity. FINANCING Prior to the Reorganization Transactions, the Company financed its operations through borrowings under a reducing revolving credit facility and various debt and equity issuances. See "Description of Certain New Indebtedness" and "Description of Capital Stock." Station REIT intends to make additional investments in hotel/casino properties and may incur indebtedness to make such investments or to meet the distribution requirements imposed by the REIT provisions of the Code, to the extent that cash flow from Station REIT's investments and working capital is insufficient for such purposes. Station REIT intends to maintain a ratio of a total debt to market capitalization of less than 50%. The Board of Directors may, however, reevaluate this ratio from time to time and there can be no assurance that Station REIT will retain this policy. To ensure that Station REIT has sufficient liquidity to conduct its operations, including making investments in additional hotel/casino properties, completed master-planned developments, developing additional hotel/casino properties and funding its anticipated distribution obligations and financing costs, Station REIT expects to obtain a commitment for the $500 million Bank Facility. See "Station REIT Pro Forma Capitalization." Station REIT may seek to increase the size of the Bank Facility or to arrange other borrowing to fund investments in additional hotel/casino properties or for other purposes. The Bank Facility will be secured by first mortgage liens on the Initial Properties and a mortgage lien on subsequently acquired properties that are purchased with borrowings under the Bank Facility. Such agreements will be 92 subject to prior approval of the Nevada Commission. Upon completion of the Offerings, Station REIT will have substantial outstanding indebtedness. See "Certain Considerations--Risks of Leverage." If the Board of Directors determines to raise additional equity capital, the Board will have the authority, without stockholder approval, to issue additional shares of Common Stock or other securities in any manner (and on such terms and for such consideration) as it deems appropriate, including in exchange for property. Existing stockholders have no preemptive right to purchase shares issued in any such offering, and any such offering might cause a dilution of a stockholder's investment in Station REIT. Station REIT does not have a policy limiting the number or amount of mortgages that may be placed on any particular property, but mortgage financing instruments may, and usually do, limit additional indebtedness on such properties. In addition, if the Board of Directors determines it to be the most efficient way for Station REIT to meet its obligations, the Board will have the authority, without stockholder approval in most instances, to sell assets of Station REIT. CONFLICTS OF INTEREST POLICIES OpCo and Station REIT will be permitted to pursue business opportunities independently from one another, subject to certain rights of first offer. See "Relationship Between Station REIT and OpCo-- Cooperation Agreement." As a result, the corporate objectives of OpCo and Station REIT may not align and decisions of management at each may be subject to conflicts of interest. In addition, certain business relations between the two companies will be subject to inherent conflicts of interest. See "Certain Considerations--Conflicts of Interest." Station REIT will adopt certain policies to minimize potential conflicts of interest with respect to its Board of Directors and officers. Station REIT's Board of Directors is subject to certain provisions of Nevada law, which are designed to eliminate or minimize certain potential conflicts of interest. There can be no assurance, however, that these policies and provisions always will be successful in eliminating the influence of such conflicts, and as a result most decisions relating to the contractual and other business relationships between Station REIT and OpCo will be subject to conflicts of interest and loyalties. PROVISIONS OF NEVADA LAW Pursuant to Nevada law, each director will be subject to restrictions relating to misappropriation of corporate opportunities by such director or such director's affiliates. Nevada law provides that a transaction with Station REIT in which a director or officer of Station REIT has a direct or indirect interest is not voidable by Station REIT solely because of the director's or officer's interest in the transaction if (i) the material facts of the transaction and the director's or officer's interest are disclosed to or known by the directors or a committee and noted in the minutes, and the transaction is approved, authorized or ratified by the disinterested directors, (ii) the material facts of the transaction and the director's or officers's interest are disclosed to or known by the stockholders entitled to vote and the transaction is approved or ratified by the stockholders, (iii) the material facts are not disclosed or known to the director or officer at the time the transaction is brought before the directors for action, or (iv) the transaction is established to have been fair to Station REIT at the time it was authorized or approved. OTHER POLICIES Station REIT intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. Station REIT does not intend to (i) invest in the securities of other issuers for the purpose of exercising control over such issuers, (ii) underwrite securities of other issuers, (iii) actively trade in loans or other investments or (iv) make loans to third parties, including without limitation officers, directors or other affiliates of Station REIT, other than special purpose investments in mortgages, including participating or convertible mortgages, and other real estate interests. See "--Investments in Real Estate Mortgages and Securities of Other Issuers." Station REIT may, under certain circumstances, purchase its capital stock in the open market or otherwise. Station REIT has no present 93 intention of causing Station REIT to repurchase any shares of its capital stock, and any such action would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a REIT unless, because of changed circumstances or changes in the Code (or in Treasury Regulations), Station REIT's Board of Directors determines that it is no longer in the best interests of Station REIT to qualify as a REIT. Station REIT intends to publish and distribute to stockholders, in accordance with NYSE rules, annual reports containing financial statements prepared in accordance with generally accepted accounting principles and certified by Station REIT's independent public accountants. Station REIT currently intends to make investments and operate its business at all times in such a manner as to be consistent with the requirements of the Code to qualify as a REIT. Future economic, market, legal, tax or other considerations, however, may cause the Board of Directors, to determine that it is in the best interests of Station REIT and its stockholders to revoke its REIT status. WORKING CAPITAL RESERVES Station REIT will maintain working capital reserves in amounts that the Board of Directors determines to be adequate to meet normal contingencies in connection with the operation of Station REIT's business and investments. 94 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations regarding the Reorganization Transactions is based upon current law, is for general information only and is not tax advice. The information set forth below, to the extent that it constitutes summaries of legal matters or legal conclusions, has been reviewed by Milbank, Tweed, Hadley & McCloy, and it is their opinion that such information is accurate in all material respects. The discussion below is based on existing federal income tax law, which is subject to change, with possible retroactive effect. The discussion below does not address all aspects of taxation that may be relevant in the particular circumstances of each stockholder or to certain types of stockholders (including insurance companies, tax-exempt entities, financial institutions or broker- dealers, foreign corporations and persons who are not citizens or residents of the United States, except to the extent discussed) subject to special treatment under the federal income tax laws. STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR INDIVIDUAL TAX ADVISORS CONCERNING THE CONSEQUENCES OF THE OWNERSHIP AND SALE OF COMMON STOCK, OPCO COMMON STOCK AND OPCO PREFERRED STOCK UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, INCLUDING THE EFFECT OF POSSIBLE CHANGES IN TAX LAW. TAXATION OF STATION REIT GENERAL Station REIT will elect to be taxed as a REIT under Sections 856 through 860 of the Code and the applicable Treasury Regulations (the "REIT Requirements"), which are the requirements for qualifying as a REIT, commencing with its taxable year ending December 31, 1998. Station REIT believes that, commencing with its taxable year ending December 31, 1998, it will be owned and organized and will operate in such a manner as to qualify for taxation as a REIT under the Code, and Station REIT intends to continue to operate in such a manner, but no assurance can be given that it will operate in a manner so as to qualify or remain qualified. The REIT Requirements are technical and complex. The following discussion sets forth only the material aspects of those requirements. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. In the opinion of Milbank, Tweed, Hadley & McCloy, commencing with Station REIT's taxable year ending December 31, 1998, Station REIT will be organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion is based on certain factual assumptions relating to the organization and operation of Station REIT and is conditioned upon certain representations made by Station REIT as to factual matters, such as the organization and expected manner of operation of Station REIT. In addition, this opinion is based upon factual assumptions and representations of Station REIT concerning its business and assets. Moreover, such qualification and taxation as a REIT depends upon Station REIT's ability to meet, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code discussed below, the results of which will not be reviewed by Milbank, Tweed, Hadley & McCloy on a continuing basis. Satisfaction of these tests both as an initial and ongoing matter is more complicated in the case of a REIT, such as Station REIT, that owns properties leased to an operating company with which it was historically related and has common stockholders, directors and officers. No assurance can be given that the actual results of Station REIT's operation for any one taxable year will satisfy such requirements. See "--Failure to Qualify." If Station REIT qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on that portion of its ordinary income or capital gain that is currently distributed to stockholders. Such treatment substantially eliminates the federal "double taxation" on earnings (at the corporate and the stockholder levels) that generally results from investment in a corporation. 95 Despite the REIT election, Station REIT may be subject to federal income and excise tax as follows: First, Station REIT will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, Station REIT may be subject to the "alternative minimum tax" on certain of its items of tax preferences, if any. Third, if Station REIT has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying net income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if Station REIT has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property and sales that qualify for a statutory safe harbor), such income will be subject to a 100% tax. Fifth, if Station REIT should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which Station REIT fails the 75% or 95% test, multiplied by a fraction intended to reflect Station REIT's profitability. Sixth, if Station REIT should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, (other than capital gain income Station REIT elects to retain and pay tax on) and (iii) any undistributed taxable income from prior periods, Station REIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if Station REIT should receive rents from OpCo deemed not to be fair market value rents or if Station REIT misvalues its assets, Station REIT may be liable for valuation penalties. Station REIT will own appreciated assets that it held before electing to be treated as a REIT. If such appreciated property is sold within the 10-year period following Station REIT's qualification as a REIT, Station REIT will generally be subject to regular corporate tax on that gain to the extent of the built-in gain in that property at the time Station REIT becomes a REIT. The total amount of gain on which Station REIT can be taxed is limited to its net built-in gain at the time it became a REIT, I.E. the excess of the aggregate fair market value of its assets at the time it became a REIT over the adjusted tax bases of those assets at that time. In certain circumstances, Station REIT may also be subject to tax on the disposition of any appreciated assets that it acquires from a taxable corporation in a transaction in which any gain on the transfer is not fully recognized. Station REIT may have a net operating loss carryover to its first year as a REIT. That carryover may be available to offset recognized net built-in gain. If so, Station REIT will only be able to offset 90% of that gain for alternative minimum tax purposes. ORGANIZATIONAL REQUIREMENTS The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for the REIT Requirements; (iv) that is not a bank, an insurance company or certain other specified types of financial institutions; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include private foundations and certain pension trusts and other entities) at any time during the last half of each taxable year; and (vii) meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) through (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 96 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made to be taxed as a REIT. For purposes of condition (vi), certain tax-exempt entities are generally treated as individuals, and the beneficiaries of a pension trust that qualifies under Section 401(a) of the Code and that holds shares of a REIT will be treated as holding shares of the REIT in proportion to their actuarial interests in the pension trust. See "--Taxation of United States Stockholders--Treatment of Tax-Exempt Stockholders." In addition, if a REIT fails to satisfy condition (vi) for any taxable year, the REIT will nonetheless be deemed to have satisfied the condition if it complied with Treasury regulations requiring the maintenance of records to ascertain ownership and did not know (and would not have known using reasonable diligence) that it was closely held for the year. The Company expects Station REIT will satisfy conditions (v) and (vi). In addition, Station REIT's Articles provide for restrictions preventing any person (other than certain stockholders) from owning more than 5.5% of Station REIT's outstanding capital stock. Ownership by certain of Station REIT's stockholders is restricted to 28.0% of Station REIT's outstanding capital stock. In addition, Station REIT will request on an annual basis of certain stockholders, and those stockholders will be required to provide, information relating to the number of shares actually or constructively owned by the Stockholder. Such transfer restrictions are described in "Description of Capital Stock--REIT Status Restrictions on Transfer." Ownership for purposes of conditions (v) and (vi) is defined using certain constructive ownership rules. As a result, the acquisition of less than 5.5% of Station REIT capital stock by an individual or entity may cause that individual or entity to constructively own more than 5.5% of such stock, thereby triggering the transfer restrictions described above. In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. Although Station REIT's taxable year is not currently the calendar year, Station REIT has made an application to the Service to change its taxable year to the calendar year. Station REIT has no reason to believe that its application will not be granted. Further, in order to be treated as a REIT, a corporation may not have earnings and profits accumulated in periods before it elected REIT status. Station REIT believes that the Reorganization Transactions will cause it to recognize losses and deductions which will eliminate any of its earnings and profits accumulated in pre-REIT periods. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of the REIT Requirements, including satisfying the gross income tests and the assets test. INCOME TESTS In order to maintain qualification as a REIT, Station REIT must annually satisfy two gross income requirements. First, at least 75% of Station REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (such as interest on obligations secured by mortgages on real property, certain "rents from real property" or gain on the sale or exchange of such property and certain fees with respect to agreements to make or acquire mortgage loans), from certain types of temporary investments or certain other types of gross income. Second, at least 95% of Station REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments as aforesaid and from dividends, interest, and gain from the sale or other disposition of stock or securities and certain other types of gross income (or from any combination of the foregoing). In order to qualify as a REIT, the income received by Station REIT pursuant to the Leases must constitute "rents from real property." Pursuant to the Leases, OpCo will lease from Station REIT the Initial Properties for periods of 13 to 15 years, not including certain renewal rights. The Leases provide that OpCo will be obligated to pay to Station REIT (i) the Base Rent plus Percentage Rent (collectively, the "Rents") and (ii) Add-On Rent. Percentage Rent is calculated by multiplying fixed percentages by the 97 excess of gaming gross revenues (the calculation of which will depend on obtaining a ruling from the Service as described below) and other gross receipts over a threshold amount. Both Base Rent and the thresholds in Percentage Rent formulas will be adjusted for inflation. Base Rent accrues and is required to be paid monthly. Percentage Rent is payable quarterly, with annual adjustments based on actual results. Rents received by Station REIT will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the Leases must be respected as true leases for federal income tax purposes and not treated as service contracts, joint ventures or some other type of arrangement. The determination of whether the Leases are true leases depends on an analysis of all the surrounding facts and circumstances. In making such a determination, courts have considered a variety of factors, including the following: (i) the intent of the parties, (ii) form of the agreement, (iii) the degree of control over the property that is retained by the property owner (E.G., whether the lessee has substantial control over the operation of the property or whether the lessee was required to use its best efforts to perform its obligations under the agreement), and (iv) the extent to which the property owner retains the risk of loss with respect to the property (E.G., whether the lessee bears the risk of increases in operating expenses or the risk of damage to the property) or the potential for economic gains (E.G., appreciation) with respect to the property. Milbank, Tweed, Hadley & McCloy is of the opinion that the Leases will be treated as true leases for federal income tax purposes. Such opinion is based, in part, on the following facts: (i) the Leases are styled as leases (E.G., Station REIT holds legal title to the Initial Properties and the Leases give OpCo the right to possession of the Initial Properties) and Station REIT and OpCo have represented that they intend their relationship to be that of a lessor and lessee, (ii) lessor will obtain possession of the Initial Properties for a significant period after the maturity of the Leases, (iii) Station REIT has represented that the Initial Properties will have significant residual value after the expiration of the terms of the Leases, even after there is taken into account all possible renewals, (iv) the Initial Properties do not constitute limited use property, (v) the Leases do not provide OpCo with the right to purchase the Initial Properties at a bargain price, (vi) Station REIT will be entitled to receive significant rental income under the Leases and (vii) the Rents are fair market rents. Investors should be aware that there are no controlling Treasury Regulations, published rulings or judicial decisions involving leases with terms substantially the same as the Leases that discuss whether such leases constitute true leases for federal income tax purposes. Therefore, the opinion of Milbank, Tweed, Hadley & McCloy with respect to the relationship between Station REIT and OpCo is based upon all of the facts and circumstances and upon rulings and judicial decisions involving situations that are considered to be analogous. Opinions of counsel are not binding upon the Service or any court, and there can be no complete assurance that the Service will not successfully assert a contrary position. If the Leases are recharacterized as service contracts or partnership agreements, rather than true leases, part or all of the payments that Station REIT receives from OpCo would not be considered rent or would not otherwise satisfy the various requirements for qualification as "rents from real property." In that case, Station REIT likely would not be able to satisfy either the 75% or 95% gross income tests and, as a result, would lose its REIT status. Another requirement for qualification of the Rents as "rents from real property" is that the Percentage Rent must not be based in whole or in part on the income or profits of any person. The Percentage Rent, however, will qualify as "rents from real property" if it is based on percentages of receipts or sales and the percentages (i) are fixed at the time the Leases are entered into, (ii) are not renegotiated during the term of the Leases in a manner that has the effect of basing Percentage Rent on income or profits and (iii) conform with normal business practice. The Percentage Rent is based on fixed percentages of the gross revenues from the Initial Properties that are established in the Leases. In the case of gaming revenues, gross revenues consists of net "winnings," I.E., the gross amount wagered less casino losses. There is no authority on whether rents based on gross gaming revenues qualify as rents from real property. Station REIT has requested a ruling from the Service that these rents so qualify. Until a ruling is forthcoming, Station REIT will base Percentage Rent on the gross amount wagered at certain games. In 98 either event, Station REIT has represented that the percentages (i) will not be renegotiated during the terms of the Leases in a manner that has the effect of basing the Percentage Rent on income or profits and (ii) while there are few leases providing for Percentage Rents in the gaming industry, the Percentage Rents are consistent with normal business practice. Milbank, Tweed, Hadley & McCloy is of the opinion that the Percentage Rents will constitute rents from real property. Moreover, Station REIT has represented that, with respect to other hotel/casino properties that it acquires in the future, it will not charge rent for any property that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage of gross revenues, as described above). A third requirement for qualification of the Rents as "rents from real property" is that Station REIT must not own, actually or constructively, 10% or more of the total combined voting power of all classes of OpCo stock entitled to vote or 10% or more of the total number of shares of all classes of OpCo stock. The constructive ownership rules generally provide that, if 10% or more in value of the stock of Station REIT is owned, directly or indirectly, by or for any person, Station REIT is considered as owning the stock owned, directly or indirectly, by or for such person. Station REIT initially will not own any stock of OpCo. However, certain stockholders each of whom owns more than 10% in value of shares of Station REIT capital stock also own shares of OpCo capital stock. Under the relevant attribution rules, Station REIT is deemed to own any OpCo stock owned by these stockholders. OpCo has been capitalized using two classes of common (voting and non-voting) and one class of preferred stock (the "Voting Shares" and "Non-Voting Shares") so that none of these stockholders will own more than 10% in voting power of all classes of OpCo shares entitled to vote or more than 10% of the total number of shares of all classes of OpCo capital stock. This capital structure prevents Station REIT from being deemed to own (through attribution from certain 10% or greater stockholders of Station REIT) more than either 10% in voting power or 10% in number of OpCo shares. The Non-Voting Shares can be converted into Voting Shares, but only if Station REIT would not be deemed to own converted shares (E.G., if the shares are transferred to a person not owning 10% or more in value of Station REIT stock). The OpCo Articles of Incorporation will prohibit any person from owning (actually or constructively) either 10% or more of the voting power or 10% in number of OpCo shares if that person's shares are attributable to Station REIT. The Service could refuse to give effect to the use of two classes of common stock or could treat holders of Non-Voting Shares as holding the Voting Shares into which such shares can be converted. Milbank, Tweed, Hadley & McCloy is of the opinion that the use of two classes of common stock represents real differences in economic and voting rights which cannot be ignored and that holders of Non-Voting Shares should not be deemed to own Voting Shares until the condition preventing the conversion of the Non-Voting Shares into Voting Shares has been satisfied and, accordingly, that rents received by Station REIT from OpCo will not be disqualified as rents from real property by reason of a violation of this requirement. However, there can be no absolute assurance that an attempt by the Service to recharacterize the capital structure of OpCo would not be successful. In addition, holders of Non-Voting Shares may be treated as owning Voting Shares as a result of application of the attribution rules. In addition to the above requirements, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property," Station REIT generally must not operate or manage the property or furnish or render services to tenants, other than through an "independent contractor" from whom Station REIT derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by Station REIT are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." Station REIT does not and will not (i) derive rental income attributable to personal property (other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease), or (ii) perform services considered to be rendered to the occupant of the property, other than through an independent contractor from whom Station REIT derives no revenue. 99 If the Lease payments do not represent fair market value rentals and the Service determined that Station REIT and OpCo are under common control, the Service may reallocate income between Station REIT and OpCo. The reallocation could cause all or some of the Lease payments to fail to qualify as "rents from real property" and may cause Station REIT or OpCo to be subject to valuation penalties. Station REIT believes, based on certain appraisals, that the Lease payments represent fair market rentals. RELIEF PROVISIONS If Station REIT fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if certain relief provisions of the Code apply. These relief provisions will be generally apply if Station REIT's failure to meet such tests was due to reasonable cause and not due to willful neglect, Station REIT attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. Under certain circumstances, Station REIT may prefer not to have the relief provisions apply. ASSET TESTS At the close of each quarter of its taxable year, Station REIT must satisfy three tests relating to the nature of its assets. First, at least 75% of the value of Station REIT's total assets must be represented by real estate assets (including stock or debt instruments that do not otherwise qualify as real estate assets and that are not held for not more than one year that were purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of Station REIT), cash, cash items, and government securities. Second, not more than 25% of Station REIT's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by Station REIT may not exceed 5% of the value of Station REIT's total assets and Station REIT may not own more than 10% of any one issuer's outstanding voting securities. After initially meeting the asset tests at the close of any quarter, Station REIT will not lose its status as a REIT if it fails to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. Station REIT intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests, and to take such action within 30 days after the close of any quarter as may be required to cure any noncompliance but no assurance can be given that such asset tests will be met. ANNUAL DISTRIBUTION REQUIREMENTS In order to be treated as a REIT, Station REIT is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (A) the sum of (i) 95% of Station REIT's "REIT taxable income" (computed without regard to the dividends paid deduction and Station REIT's net capital gain) plus (ii) 95% of the net income, if any, from foreclosure property in excess of the special tax on income from foreclosure property, minus (B) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate or in the following taxable year if declared before Station REIT timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that Station REIT does not distribute (or is not treated as having distributed) all of its net capital gain or distributes (or is treated as having distributed) at least 95%, but less than 100% of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. If a REIT so elects, the net capital gain retained by it will be treated having been (i) distributed to its stockholders, (ii) taxed at the stockholder level and (iii) contributed to the REIT in amount equal to the gain less the tax. In such a case, stockholders will receive certain tax credits and basis adjustments reflecting the deemed distribution and deemed payment of taxes by stockholders. The Code also permits a stockholder to elect to be treated for tax purposes as having (i) received a distribution in the amount specified in the election and (ii) contributed the amount thereof to the capital of Station REIT. If Station REIT should fail to distribute 100 during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than capital gain income which Station REIT elects to retain and pay tax on), and (iii) any undistributed taxable income from prior periods, Station REIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Pursuant to recently enacted legislation, Station REIT may elect to retain rather than distribute its net long-term capital gains. The effect of such an election is that (i) Station REIT is required to pay the tax on such gains, (ii) U.S. Stockholders, while required to include their proportionate share of the undistributed long-term capital gain in income, will receive a credit or refund for their share of the tax paid by Station REIT, and (iii) the basis of a U.S. Stockholder's stock would be increased by the amount of the undistributed long-term capital gains (minus the amount of capital gains tax paid by Station REIT) included in the U.S. Stockholder's long-term capital gains. Station REIT intends to make timely distributions sufficient to satisfy the annual distribution requirement. "REIT taxable income" is the taxable income of a REIT, which generally is computed in the same fashion as the taxable income of any corporation, except that (i) certain deductions are not available, such as the deduction for dividends received, (ii) it may deduct dividends paid (or deemed paid) during the taxable year, (iii) net capital gains and losses are excluded, and (iv) certain other adjustments are made. It is possible that, from time to time, Station REIT may not have sufficient cash or other liquid assets to meet the 95% distribution requirement due to timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in calculating the taxable income of Station REIT. In the event that such an insufficiency or such timing differences occur, in order to meet the 95% distribution requirement Station REIT may find it necessary to arrange for borrowings or to pay dividends in the form of taxable stock dividends if it is practicable to do so. Under certain circumstances, Station REIT may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in Station REIT's deduction for dividends paid for the earlier year. Thus, Station REIT may be able to avoid being taxed on amounts distributed as deficiency dividends; however, Station REIT will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. FAILURE TO QUALIFY If Station REIT fails to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, Station REIT will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which Station REIT fails to qualify will not be deductible by Station REIT and they will not be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and subject to certain limitations of the Code, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, Station REIT will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, and will not be permitted to requalify unless it distributes any earnings and profits attributable to the period when it failed to qualify. In addition, it would be subject to tax on any built-in gains on property held during the period during which it did not qualify if it sold such property within 10 years of requalification, to the extent of its net built-in gain at the time of requalification. It is not possible to state whether in all circumstances Station REIT would be entitled to such statutory relief. TAXATION OF UNITED STATES STOCKHOLDERS As used herein, the term "U.S. Stockholder" means a holder of Common Stock that is for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income 101 taxation regardless of its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. DISTRIBUTIONS GENERALLY As long as Station REIT qualifies as a REIT, distributions to a United States Stockholder up to the amount of Station REIT's current or accumulated earnings and profits (and not designated as capital gains dividends) will be taken into account as ordinary income and will not be eligible for the dividends-received deduction for corporations. Distributions that are designated by Station REIT as capital gain dividends will be treated as long-term capital gain (to the extent they do not exceed Station REIT's actual net capital gain) for the taxable year without regard to the period for which the stockholder has held its stock. However, corporate stockholders may be required to treat up to 20% of certain capital gains dividends as ordinary income, pursuant to Section 291(d) of the Code. Individuals are generally subject to differing rates of tax on various transactions giving rise to long-term capital gains or losses. In general, the long-term capital gains rate is (i) 28% on capital gain from the sale or exchange of assets held for more than one year but not more than 18 months, (ii) 20% on capital gain from the sale or exchange of assets held for more than 18 months and (iii) 25% on capital gain from the sale or exchange of certain depreciable real estate eligible for the 20% rate up to the amount of depreciation deductions taken with respect to the real estate. Subject to certain limitations concerning the classification of Station REIT's long-term capital gains, Station REIT may designate a capital gain dividend as a 28% rate distribution, a 25% rate distribution or a 20% rate distribution. If Station REIT elects to retain capital gains rather than distribute them, a U.S. stockholder will be deemed to receive a capital gain dividend equal to the amount of such retained capital gains. Such gains are subject to apportionnment among the three rate groups set forth above. In such a case, a stockholder will receive certain tax credits and basis adjustments reflecting the deemed distribution and deemed payment of taxes by the stockholder. A distribution in excess of current or accumulated earnings and profits will first be treated as a tax-free return of capital, reducing the tax basis in the United States Stockholder's Common Stock, and a distribution in excess of the United States Stockholder's tax basis in its Common Stock will be taxable gain realized from the sale of such shares. Dividends declared by Station REIT in October, November or December of any year payable to a stockholder of record on a specified date in any such month shall be treated as both paid by Station REIT and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by Station REIT during January of the following calendar year. Stockholders may not claim the benefit of any tax losses of Station REIT on their own income tax returns. Station REIT will be treated as having sufficient earnings and profits to treat as a dividend any distribution by Station REIT up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed under "--Taxation of Station REIT--General" and "--Taxation of Station REIT--Annual Distribution Requirements" above. As a result, stockholders may be required to treat as taxable dividends certain distributions that would otherwise result in tax-free returns of capital. Moreover, any "deficiency dividend" will be treated as a "dividend" (an ordinary dividend or a capital gain dividend, as the case may be), regardless of Station REIT's earnings and profits. Losses incurred on the sale or exchange of Common Stock held for less than six months will be deemed a long-term capital loss to the extent of any capital gain dividends received by the selling stockholder with respect to such stock. TREATMENT OF TAX-EXEMPT STOCKHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated businesses taxable income ("UBTI"). While many investments in real estate generate UBTI, the Service has published a ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the 102 REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on this ruling, amounts distributed by Station REIT to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from Station REIT will constitute UBTI pursuant to the "debt financed property" rules. In addition, in certain circumstances, a pension trust that owns more than 10% of Station REIT's stock is required to treat a percentage of the dividends from Station REIT as UBTI. This rule applies to a pension trust holding more than 10% of Station REIT's stock only if (i) the percentage of income of Station REIT that is UBTI (determined as if Station REIT were a pension trust) is at least 5%, (ii) Station REIT qualifies as a REIT by reason of the modification of the 5/50 Rule that allows beneficiaries of the pension trust to be treated as holding shares of Station REIT in proportion to their actuarial interests in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of Station REIT's stock or (B) a group of pension trusts individually holding more than 10% of the value of Station REIT's stock collectively owns more than 50% of the value of Station REIT's stock. TAXATION OF FOREIGN STOCKHOLDERS The rules governing United States income taxation of non-resident alien individuals, foreign corporations, foreign partnerships, and foreign trusts and estates holding common stock (collectively, "Foreign Stockholders") are complex, and no attempt will be made herein to provide more than a summary of such rules. A Foreign Stockholder should consult with its own tax advisor to determine the effect of federal, state, and local and country of tax residence income tax laws on an investment in Station REIT, including any reporting requirements. In general, a Foreign Stockholder will be subject to regular United States income tax to the same extent as a United States Stockholder with respect to income or gain derived from its investment in Station REIT if under all facts and circumstances such income or gain is "effectively connected" with such stockholder's conduct of a trade or business in the United States. In general, a Foreign stockholder will not be considered engaged in a United States trade or business solely as a result of its ownership of the Common Stock. See "Certain Federal Income Tax Considerations--Taxation of United States Stockholders." A corporate Foreign Stockholder that receives income that is effectively connected with a United States trade or business may also be subject to the branch profits tax under Section 884 of the Code, which is payable in addition to the regular United States corporate income tax. The following discussion will apply to a Foreign Stockholder whose income or gain derived from investment in Station REIT, is in light of the facts and circumstances, not so effectively connected. The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") significantly affects the federal income tax treatment of the sale or exchange of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss realized on the sale or exchange of a "United States real property interest" ("USRPI") by a foreign taxpayer is treated by statute as effectively connected with a U.S. trade or business as a matter of law, without regard to the particular facts and circumstances. A distribution of cash to a Foreign Stockholder that is not attributable to gain from sales or exchanges by Station REIT of USRPIs and not designated by Station REIT as a capital gain dividend is not subject to FIRPTA but generally will be subject to the withholding of United States federal income tax at a rate of 30%, unless (i) a lower treaty rate applies or (ii) the Foreign Stockholder files an IRS Form 4224 with the withholding agent certifying that the investment to which the distribution relates is effectively connected to a United States trade or business of such Foreign Stockholder. A Foreign Stockholder who receives a distribution that has been subject to such withholding tax may file a claim for refund to the extent the withholding has been imposed on a portion of such distributions representing amounts in excess of current and accumulated earnings and profits. Under FIRPTA, distributions of proceeds attributable to gain from Station REIT's sale or exchange of a USRPI are subject to income tax at the normal capital gains rates applicable to United States stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual). Also, these distributions may be subject to a 30% branch profits tax 103 in the hands of a corporate Foreign Stockholder not entitled to a treaty exemption or reduced rate of tax. Treasury Regulations require the withholding of 35% of any distribution that could be designated by Station REIT as a capital gain dividend. This amount is creditable against the Foreign Stockholder's tax liability. It should be noted that the 35% withholding tax rate on capital gain dividends is higher than the maximum rate (which may be 20%, 25% or 28% on capital gains of individuals depending on all the facts and circumstances) on long-term capital gains of individuals. Capital gain dividends not attributable to gain on the sale or exchange of USRPIs are not subject to United States taxation if there is no requirement of withholding. If Station REIT is a "domestically-controlled REIT," a sale of Common Stock by a Foreign Stockholder generally will not be subject to United States taxation. A domestically-controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly, under Code attribution rules, by Foreign Stockholders. It is currently anticipated that Station REIT will be a domestically-controlled REIT and, therefore, the sale of the Common Stock will not be subject to taxation under FIRPTA. However, no assurance can be given that Station REIT will be a domestically-controlled REIT and, even if it is, that it will be able so to demonstrate. If Station REIT is not a domestically-controlled REIT, a sale of Common Stock will be subject to tax under FIRPTA as a sale of a USRPI. Gain or loss from the sale is deemed effectively connected with a United States trade or business unless (i) the Common Stock is "regularly traded" (as defined by applicable Treasury Regulations) on an established securities market during the quarter in which the Common Stock was sold and the selling stockholder holds, directly or indirectly, 5% or less of the Common Stock during the five-year period ending on the date of disposition. The applicable Treasury Regulations that define "regularly traded" for this purpose may be interpreted to provide that a security will not be "regularly traded" for any calendar quarter during which 100 or fewer persons (treating related persons as one person) in the aggregate own 50% or more of such security or the quarterly trading volume is less than 7.5% of the average number of the issued and outstanding shares of such security (2.5% if there are 2,500 or more stockholders of record). In the event that the Common Stock is not "regularly traded" and Station REIT did not at that time constitute a domestically-controlled REIT, a Foreign Stockholder (without regard to its ownership percentage of Common Stock) must treat as effectively connected with a United States trade or business any gain or loss on any sale or other disposition of Common Stock that occurs within a calendar quarter during which the Common Stock was not "regularly traded" and the shares were a USRPI. If the gain on the sale of Station REIT's Common Stock were subject to taxation under FIRPTA, the Foreign Stockholder would be subject to the same treatment as a United States Stockholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual). Notwithstanding the foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA will nonetheless be taxable to a Foreign Stockholder who is an individual (under rules generally applicable to United States Stockholders) if such person is in the United States for 183 days or more during the taxable year of disposition and certain other conditions apply. In any event, a purchaser of Common Stock from a Foreign Stockholder will not be required under FIRPTA to withhold on the purchase price if the purchased Common Stock is "regularly traded" on an established securities market or if Station REIT is a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser of Common Stock may be required to withhold 10% of the purchase price and remit such amount to the Service. Shares of Station REIT owned by a nonresident alien decedent are subject to United States federal estate tax (which is imposed at rates up to 55%) unless an estate tax treaty binding upon the United States provides otherwise. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX Station REIT will report to its stockholders and the Service the amount of dividends paid or deemed paid during each calendar year, and the amount of tax withheld, if any. 104 UNITED STATES STOCKHOLDERS Under certain circumstances, a United States Stockholder may be subject to backup withholding at a rate of 31% on payments made with respect to, or cash proceeds of a sale or exchange of, Common Stock. Backup withholding will apply only if the holder (i) fails to furnish the person required to withhold with its Taxpayer Identification Number ("TIN") which, for an individual, would be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified by the Service that it has failed properly to report payments of interest and dividends, or (iv) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the Service that it is subject to backup withholding for failure to report interest and dividend payments. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. A United States Stockholder should consult with a tax advisor regarding qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a United States Stockholder will be allowed as a credit against such United States Stockholder's United States federal income tax liability and may entitle such United States Stockholder to a refund, provided that the required information is furnished to the Service. FOREIGN STOCKHOLDERS Additional issues may arise pertaining to information reporting and backup withholding with respect to Foreign Stockholders, and a Foreign Stockholder should consult with a tax advisor with respect to any such information reporting and backup withholding requirements. Backup withholding with respect to a Foreign Stockholder is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a Foreign Stockholder will be allowed as a credit against any United States federal income tax liability of such Foreign Stockholder. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the Service. ORDINARY DIVIDEND DISTRIBUTIONS Distributions by Station REIT that constitute dividends from ordinary income are subject to a U.S. withholding tax of 30% which may be reduced by tax treaty. Recently, the United States has announced an objective of excluding REIT dividends from the withholding tax rate reductions contained in tax treaties and has announced that it will endeavor to renegotiate several recently renegotiated treaties. To the extent the dividend distribution is not made from earnings and profits and the stockholder has sufficient basis in the shares, it is a return of capital that is not subject to tax, although it is subject to the 30% withholding tax (or withholding at the applicable treaty rate), which may, upon application, be refunded. The amount received as a return of capital will be applied to reduce the stockholder's basis in its stock. Once basis is reduced to zero, any additional amounts distributed represent capital gains, which are deemed income that is effectively connected to a U.S. trade or business and taxed as discussed above. OTHER TAX CONSEQUENCES Station REIT and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of Station REIT and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in Station REIT. THE DISTRIBUTION A Company stockholder will include the fair market value of shares of OpCo Common Stock and OpCo Preferred Stock (the "Distributed Shares") received pursuant to the Distribution in gross income as 105 ordinary dividend income only to the extent of the stockholder's share of the current or accumulated tax earnings and profits of the Company, as determined for United States federal income tax purposes. Because the Company will recognize substantial losses for tax purposes upon its transfer of the Transferred Assets to OpCo, the Company does not currently expect to have current or accumulated tax earnings and profits. Consequently, a Company stockholder will not have dividend income but will be required to reduce its basis in its shares of the Company Common Stock by the excess value of the Distributed Shares. A stockholder whose basis in its shares of the Company stock is thereby reduced to zero will recognize capital gain in the amount of any remaining value of Distributed Shares received. See "--Ownership and Disposition of Distributed Shares." Although the matter is not free from doubt, a participant in the odd-lot program in connection with the Distribution (the "Odd-Lot Program") (or a recipient of cash in lieu of fractional shares) will generally be treated as if it received the Distributed Shares pursuant to the Distribution and then sold such Distributed Shares. Accordingly, such a stockholder will recognize capital gain to the extent that the fair market value of the Distributed Shares being sold on its behalf exceeds its basis in its shares of Common Stock in respect of which it receives the Distributed Shares as described above. A participant in the Odd-Lot Program (or a recipient of cash in lieu of fractional shares) will be deemed to receive a basis in the Distributed Shares deemed received by it equal to the fair market value of the shares. In addition, such participant might have to recognize gain or loss upon the sale of the Dstributed Shares by the distribution agent. If the value of the Distributed Shares on the Distribution Date varies from the amount received by the Distribution Agent, stockholders participating in the Odd-Lot Program (or a recipient of cash in lieu of fractional shares) are advised to consult their own tax advisors regardng the United States federal income tax consequences to that of the Distribution. A Company stockholder that is a corporation will generally be entitled to a dividends received deduction in amount equal to 70 percent (80 percent if it owns at least 20 percent in vote and value of all shares of the Company stock) of the amount of the Distribution received by it that is a dividend. The Company does not expect to have current or accumulated earnings and profits; therefore no part of the Distribution should be treated as a dividend. OWNERSHIP AND DISPOSITION OF DISTRIBUTED SHARES TAXATION OF DIVIDENDS AND STOCK DISTRIBUTIONS. Holders of Distributed Shares generally will treat the gross amount of any cash dividends paid by OpCo as dividend income for United States federal income tax purposes to the extent of OpCo's then current or accumulated tax earnings and profits. The amount of a distribution that exceeds OpCo's current or accumulated tax earnings and profits will reduce a holder's basis in its Distributed Shares to the extent of such basis, and any amount of a distribution in excess of such holder's basis will be capital gain to the holder. Corporate holders of Distributed Shares will generally be entitled to a dividends received deduction with respect to any such dividends as described above in the immediately preceding paragraph. Dividends paid to foreign stockholders will be subject to a 30% withholding tax. The rate of tax may be reduced by applicable treaties. SALE OR OTHER DISPOSITION. The sale or other disposition (including, in some cases, redemption) of the Distributed Shares generally will result in the recognition of capital gain or loss to the holder in an amount equal to the difference between the amount realized and the holder's adjusted basis in the Distributed Shares. A holder's adjusted basis in Distributed Shares generally will be the fair market value of such shares as of the date of the Distribution, reduced (but not below zero) by the amount of any distributions received with respect to such shares that are not treated as dividends. If the holder has held its Distributed Shares for more than one year, such capital gain or loss will be long-term capital gain or loss. Individual holders are subject to a 28 percent tax on long-term capital gains, but are subject to only a maximum 20 percent tax on such gain if they have held the Distributed Shares for more than 18 months. Corporate holders are subject to a 35 percent tax on all capital gain, regardless of the period they hold Distributed 106 Shares. A holder's holding period for Distributed Shares acquired in the Distribution will begin on the date of the Distribution. Capital losses are generally deductible to the extent of capital gains. Non-corporate taxpayers may deduct the excess of capital losses over capital gains, whether long-term or short-term, in an amount up to $3,000 a year ($1,500 in the case of a married individual filing separately). Non-corporate taxpayers may carry forward unused capital losses indefinitely. Unused capital losses of a corporation may be carried back three years and carried forward five years. Shares of the Company owned by a nonresident alien decedent are subject to United States federal estate tax (which is imposed at rates up to 55%) unless an estate tax treaty binding upon the United States provides otherwise. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX The Company will report to its stockholders and the Service the amount of dividends paid or deemed paid during each calendar year, and the amount of tax withheld, if any. UNITED STATES STOCKHOLDERS Under certain circumstances, a United States Stockholder may be subject to backup withholding at a rate of 31% on payments made with respect to, or cash proceeds of a sale or exchange of, Common Stock. Backup withholding will apply only if the holder (i) fails to furnish the person required to withhold with its Taxpayer Identification Number ("TIN") which, for an individual, would be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified by the Service that it has failed properly to report payments of interest and dividends, or (iv) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the Service that it is subject to backup withholding for failure to report interest and dividend payments. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. A United States Stockholder should consult with a tax advisor regarding qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a United States Stockholder will be allowed as a credit against such United States Stockholder's United States federal income tax liability and may entitle such United States Stockholder to a refund, provided that the required information is furnished to the Service. FOREIGN STOCKHOLDERS Additional issues may arise pertaining to information reporting and backup withholding with respect to Foreign Stockholders, and a Foreign Stockholder should consult with a tax advisor with respect to any such information reporting and backup withholding requirements. Backup withholding with respect to a Foreign Stockholder is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a Foreign Stockholder will be allowed as a credit against any United States federal income tax liability of such Foreign Stockholder. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the Service. OTHER TAX CONSEQUENCES The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company. 107 OTHER MATTERS The Board of Directors is not aware of any other matters to be presented at the meeting. If any other matters should properly come before the meeting, the persons named in the proxy will vote the proxies according to their best judgment. STOCKHOLDER PROPOSALS Stockholder proposals, if any, that may be considered for inclusion in the Company's proxy materials for the 1998 Annual Meeting must be received by the Company at its offices at 2411 West Sahara Avenue, Las Vegas, Nevada 89102 not later than March 3, 1998. ADDITIONAL INFORMATION The Company is subject to the informational reporting requirements of the Exchange Act and in accordance therewith, files reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information may be inspected and copied at the public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, 14th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Commission by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a website (http:/www.sec.gov) that contains such reports, proxy statements and other information filed by the Company. Information filed by the Company can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Information may be obtained from the Company at 2411 West Sahara Avenue, Las Vegas, Nevada 89102, Attention: Investor Relations, telephone (702) 367-2411. Following the Distribution, OpCo will be required to comply with the reporting requirements of the Exchange Act and, in accordance therewith, to file annual and quarterly reports, proxy statements and other information with the SEC. Additionally, OpCo will be required to provide annual reports containing audited financial statements to its stockholders in connection with its annual meetings of stockholders. After the Distribution, such reports, proxy statements and other information will be available to be inspected and copied at the public reference facilities of the SEC or obtained by mail or over the internet from the SEC, as described above. 108 GLOSSARY Unless the context otherwise requires, the following capitalized terms will have the meanings set forth below for the purposes of this Proxy Statement: "Boulder Station" means Boulder Station Hotel & Casino, the casino and hotel operated by BSI. "BSI" means Boulder Station Inc., a Nevada corporation. "Cash Available for Distribution" means Funds From Operations adjusted for certain non-cash items, less reserves for capital expenditures. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the common stock, par value $.01 per share, of the Company. "Company" means Station Casinos, Inc. as it exists prior to the consummation of the Reorganization Transactions. "Convertible Preferred Stock" means shares of the Series A Preferred Stock, par value $.01 per share, of the Company. "Current Bank Facility" means the Amended and Restated Reducing Revolving Loan Agreement dated as of March 19, 1996, as amended, among PSHC, BSI, TSI, SCRSI, KCSC, the Banks and the other lenders party thereto. "Distribution" means the distribution by the Company of the common stock of OpCo to the Company's stockholders as a dividend. "Existing Indentures" means the indentures governing the Existing Senior Subordinated Notes. "Existing Senior Subordinated Notes" means collectively the Company's $193 million aggregate principal amount of 9 5/8% Senior Subordinated Notes, $198 million aggregate principal amount 10 1/8% Senior Subordinated Notes and $150 million aggregate principal amount 9 3/4% Senior Subordinated Notes. "FF&E" means furniture, fixtures and equipment. "Funds From Operations" means net income (loss) computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring or sales of property, plus depreciation and amortization on real estate assets and after adjustments for unconsolidated partnerships and joint ventures. "Gaming Licenses" means collectively the various registrations, findings of suitability, approvals, permits and licenses required in order to have an interest in gaming activities in Nevada. "head lease" means a ground lease from the fee owner of the referenced property. "Initial Properties" means substantially all of the real property assets, including land, buildings, structures and other improvements on the land, easements and similar appurtenances to the land and improvements and permanently fixed equipment, machinery and improvements and other fixtures, and certain other assets of the six casino properties owned and operated by the Company prior to the Reorganization Transactions. "Leases" means the participating leases between OpCo and Station REIT regarding the Initial Properties. "OpCo" means Station Operating Company, Inc., a Nevada corporation. 109 "Ownership Limit" means that the limit specified in the Articles, that no person may own, or be deemed to own by virtue of the applicable attribution provisions of the Code, more than 5.0% of any class of Station REIT's outstanding capital stock. "Palace Station" means Palace Station Hotel & Casino the hotel and casino operated by PSHC. "Percentage Rent" has the meaning ascribed to that term in the Section entitled "Revenue Growth From Existing Property." "Preferred Stock" means the preferred stock, par value $.01 per share of the Company. "PSHC" means Palace Station Hotel & Casino, Inc., a Nevada corporation. "REIT" means a real estate investment trust as defined in Section 856 of the Code. "Reorganization Transaction" means the transaction described in the Section entitled "Summary-- Reorganization Transactions." "Service" means the Internal Revenue Service. "SSI" means Sunset Station, Inc., a Nevada corporation. "Station Casino Kansas City" means the a riverboat-themed dockside gaming and entertainment complex operated by KCSC. "Station Casino St. Charles" means Station Casino St. Charles a riverboat-themed dockside gaming and entertainment complex operated by SCRSI. "Station REIT" means Station Casinos, Inc., a Nevada corporation and its subsidiaries, collectively as it exists immediately after the Reorganization Transactions at which time such entity will be renamed "Station Entertainment Properties, Inc." "Sunset Station" means Sunset Station Hotel and Casino, the hotel and casino operated by SSI. "Transferred Assets" means the assets and liabilities transferred to certain subsidiaries of OpCo as described in the section entitled "Summary--The Reorganization Transactions." "TSI" means Texas Station, Inc., a Nevada corporation. "Texas Station" means Texas Station Gambling Hall & Hotel, the hotel and gambling hall operated by TSI. 110 INDEX TO FINANCIAL STATEMENTS Station Casinos, Inc. Unaudited Pro Forma Consolidated Balance Sheet................. F-3 Station Casinos, Inc. Unaudited Pro Forma Consolidated Statements of Operations...... F-5 Report of Independent Public Accountants............................................. F-8 Station Casinos, Inc. Consolidated Balance Sheets.................................... F-9 Station Casinos, Inc. Consolidated Statements of Operations.......................... F-10 Station Casinos, Inc. Consolidated Statements of Stockholders' Equity................ F-11 Station Casinos, Inc. Consolidated Statements of Cash Flows.......................... F-12 Station Casinos, Inc. Notes to Consolidated Financial Statements..................... F-13 Station Operating Company Unaudited Pro Forma Combined Balance Sheet................. F-33 Station Operating Company Unaudited Pro Forma Combined Statements of Operations...... F-35 Report of Independent Public Accountants............................................. F-38 Station Operating Company Combined Balance Sheets.................................... F-39 Station Operating Company Combined Statements of Operations.......................... F-40 Station Operating Company Combined Statements of Cash Flows.......................... F-41 Station Operating Company Notes to Combined Financial Statements..................... F-42
F-1 STATION CASINOS, INC. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Unaudited Pro Forma Consolidated Financial Statements make adjustments to the historical statements of operations of Station Casinos, Inc. (the "Company") as if the Reorganization Transactions had occurred on April 1, 1996 and make adjustments to the Company's historical balance sheet as if the Reorganization Transactions had occurred on September 30, 1997. The Unaudited Pro Forma Consolidated Financial Statements are provided for comparative purposes only and do not purport to be indicative of the results which actually would have been obtained if the Reorganization Transactions had been effected on the dates indicated or the results which may be obtained in the future. No commitments are currently in place with respect to any of the financing anticipated to be required by the Company in connection with the Reorganization Transactions. The Unaudited Pro Forma Consolidated Financial Statements do not make adjustments for certain non-recurring costs expected to be incurred to implement the Reorganization Transactions. F-2 STATION CASINOS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ----------- (AMOUNTS IN THOUSANDS) Cash and cash equivalents........................................... $ 43,923 $ (43,923)(1) $ 28,272 28,272(2) Accounts receivable................................................. 12,487 (12,487)(1) -- Income tax refund receivable........................................ -- 18,850(3) 18,850 Inventories......................................................... 4,360 (4,360)(1) -- Prepaid gaming taxes................................................ 6,657 (6,657)(1) -- Prepaid expenses and other.......................................... 14,920 (14,920)(1) -- ---------- ----------- ----------- Total current assets.............................................. 82,347 (35,225) 47,122 Property and equipment, net......................................... 1,138,825 (447,485)(4) 691,340 Land held for development........................................... 26,449 (7,599)(1) 18,850 Other assets, net................................................... 61,054 (44,060)(1) 19,994 3,000(5) ---------- ----------- ----------- Total assets...................................................... $1,308,675 $(531,369) $777,306 ---------- ----------- ----------- ---------- ----------- ----------- Current portion of long-term debt................................... $ 14,302 $ (14,195)(1) $ 107 Accounts payable.................................................... 16,383 (16,383)(1) -- Accrued payroll and related......................................... 16,015 (16,015)(1) -- Construction contracts payable...................................... 19,931 (12,698)(1) 7,233 Accrued interest payable............................................ 18,932 (4,714)(5) 14,218 Accrued expenses and other.......................................... 31,000 (30,686)(1) 314 ---------- ----------- ----------- Total current liabilities......................................... 116,563 (94,691) 21,872 Long-term debt, less current portion................................ 885,692 (354,369)(6) 531,323 Deferred income taxes, net.......................................... 16,919 (12,218)(4) 4,701 ---------- ----------- ----------- Total liabilities................................................. 1,019,174 (461,278) 557,896 Preferred stock..................................................... 103,500 -- 103,500 Common stock........................................................ 353 290(2) 643 Additional paid-in capital.......................................... 167,154 324,960(2) 492,114 Deferred compensation............................................... (774) -- (774) Retained earnings (deficit)......................................... 19,268 (395,341)(7) (376,073) ---------- ----------- ----------- Total stockholders' equity........................................ 289,501 (70,091) 219,410 ---------- ----------- ----------- Total liabilities and stockholders' equity........................ $1,308,675 $(531,369) $777,306 ---------- ----------- ----------- ---------- ----------- -----------
F-3 STATION CASINOS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (1) Represents the contribution to OpCo of the Transferred Assets, other than property and equipment. (2) Represents the unused portion of the net proceeds to Station REIT from the issuance of 29.0 million shares of common stock in the Offerings. (3) Represents the estimated income tax refund of $18.9 million that results from the Company's carryback generated from the Reorganization Transactions. A valuation allowance has been established to reserve the remaining deferred tax asset of approximately $35.8 million. (4) Represents the contribution to OpCo of the Transferred Assets comprising property and equipment. (5) Represents deferred financing fees, net of amortization, with respect to the anticipated Bank Facility. (6) Represents the repayment of the Current Bank Facility ($214.0 million at September 30, 1997), the Sunset Loan Agreement ($103.0 million at September 30, 1997) and certain obligations that are not assumed by OpCo ($51.6 million at September 30, 1997), and the related accrued interest payable. (7) Principally represents the elimination of Station REIT's equity investment in OpCo as a result of the Reorganization Transactions. F-4 STATION CASINOS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues: Casino......................................................... $ 282,700 $(282,700)(1) $ -- Food and beverage.............................................. 63,577 (63,577)(1) -- Room........................................................... 17,218 (17,218)(1) -- Other.......................................................... 28,676 (28,676)(1) -- Rental income.................................................. -- 57,375(2) 57,375 2,610(3) 2,610 ---------- ----------- ----------- Gross revenues................................................... 392,171 (332,186) 59,985 Promotional allowances........................................... (24,558) 24,558(1) -- ---------- ----------- ----------- Net revenues..................................................... 367,613 (307,628) 59,985 ---------- ----------- ----------- Operating costs and expenses: Casino......................................................... 137,592 (137,592)(1) -- Food and beverage.............................................. 44,862 (44,862)(1) -- Room........................................................... 6,481 (6,481)(1) -- Other.......................................................... 13,481 (13,481)(1) -- Selling, general and administrative............................ 81,896 (81,896)(1) -- 2,610(3) 2,610 Corporate expense.............................................. 7,644 (6,144)(4) 1,500 Development expenses........................................... 104 (104)(1) -- Depreciation and amortization.................................. 33,169 (26,927)(5) 6,242 Preopening expenses............................................ 10,866 (10,866)(1) -- ---------- ----------- ----------- Total costs and expenses......................................... 336,095 (325,743) 10,352 ---------- ----------- ----------- Operating income................................................. 31,518 18,115 49,633 Interest expense, net............................................ (35,713) 16,754(6) (18,959) Other income (expense), net...................................... (4,996) 4,996(1) -- ---------- ----------- ----------- Income (loss) before income taxes................................ (9,191) 39,865 30,674 Income tax (provision) benefit................................... 3,258 (3,258)(1) -- ---------- ----------- ----------- Net (loss) income................................................ (5,933) 36,607 30,674 Preferred stock dividends........................................ (3,622) -- (3,622) ---------- ----------- ----------- Net (loss) income applicable to common stock..................... $ (9,555) $ 36,607 $ 27,052 ---------- ----------- ----------- ---------- ----------- ----------- Net (loss) income per share of common stock...................... $ (0.27) $ 1.26 $ 0.42(7) ---------- ----------- ----------- ---------- ----------- ----------- Weighted average shares outstanding.............................. 35,310 29,000 64,310 ---------- ----------- ----------- ---------- ----------- -----------
F-5 STATION CASINOS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues: Casino......................................................... $ 450,013 (450,013)(1) $ -- Food and beverage.............................................. 92,220 (92,220)(1) -- Room........................................................... 27,420 (27,420)(1) -- Other.......................................................... 48,957 (48,957)(1) -- Rental income.................................................. -- 88,708(2) 88,708 3,525(3) 3,525 ---------- ----------- ----------- Gross revenues................................................... 618,610 (526,377) 92,233 Promotional allowances........................................... (35,095) 35,095(1) -- ---------- ----------- ----------- Net revenues..................................................... 583,515 (491,282) 92,233 ---------- ----------- ----------- Operating costs and expenses: Casino......................................................... 203,857 (203,857)(1) -- Food and beverage.............................................. 68,994 (68,994)(1) -- Room........................................................... 10,318 (10,318)(1) -- Other.......................................................... 23,927 (23,927)(1) -- Selling, general and administrative............................ 120,285 (120,285)(1) 3,525 3,525(3) Corporate expense.............................................. 18,284 (15,284)(4) 3,000 Restructuring charge........................................... 2,016 (2,016)(1) -- Development expenses........................................... 1,302 (1,302)(1) -- Depreciation and amortization.................................. 44,589 (36,619)(5) 7,970 Preopening expenses............................................ 31,820 (31,820)(1) -- ---------- ----------- ----------- Total costs and expenses......................................... 525,392 (510,897) 14,495 ---------- ----------- ----------- Operating income................................................. 58,123 19,615 77,738 Interest expense, net............................................ (36,698) 16,435(6) (20,263) Other income (expense), net...................................... (47) 47(1) -- ---------- ----------- ----------- Income before income taxes....................................... 21,378 36,097 57,475 Income tax (provision) benefit................................... (7,615) 7,615(1) -- ---------- ----------- ----------- Net income....................................................... 13,763 43,712 57,475 Preferred stock dividends........................................ (7,245) -- (7,245) ---------- ----------- ----------- Net income applicable to common stock............................ $ 6,518 $ 43,712 $ 50,230 ---------- ----------- ----------- ---------- ----------- ----------- Net income per share of common stock............................. $ 0.18 $ 1.51 $ 0.78(7) ---------- ----------- ----------- ---------- ----------- ----------- Weighted average shares outstanding.............................. 35,316 29,000 64,316 ---------- ----------- ----------- ---------- ----------- -----------
F-6 STATION CASINOS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED MARCH 31, 1997 (1) Represents the adjustments to remove the revenues and expenses related to conducting the operations of the Initial Properties. (2) Represents pro forma lease revenues which would have been generated during the respective periods pursuant to the Leases between Station REIT and OpCo. Station Casino Kansas City and Sunset Station commenced operations on January 16, 1997 and June 10, 1997, respectively. The annual lease revenues contemplated by the Leases have been prorated accordingly. (3) Represents pass-through rents with respect to head leases on the Initial Properties. (4) Represents the decrease in corporate expenses of the Company as a result of the Reorganization Transactions. Pro forma corporate expenses for Station REIT for the periods presented includes the estimated service fees payable to OpCo under the Transition Services Agreement. There can be no assurance that the actual level of corporate expenses experienced by Station REIT in the future will not be higher. (5) Represents the reduction in depreciation expense resulting from the transfer of the Transferred Assets. (6) Represents the adjustment to interest expense for (a) the repayment of the indebtedness and other obligations reflected in note (6) of Notes to Unaudited Pro Forma Consolidated Balance Sheet and (b) amortization of deferred financing fees with respect to the anticipated Bank Facility. It does not reflect non-recurring costs of approximately $10.4 million related to the write-off of debt issuance costs. (7) Net income per common share is based on earnings divided by the weighted average number of common shares outstanding (exclusive of shares underlying convertible securities) and 29.0 million common shares estimated to be issued with the Offerings. F-7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Station Casinos, Inc.: We have audited the accompanying consolidated balance sheets of Station Casinos, Inc. (a Nevada corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Station Casinos, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Las Vegas, Nevada April 23, 1997 (except for Note 5 as to which the date is June 27, 1997 and Note 14 as to which the date is November 24, 1997) F-8 STATION CASINOS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, ------------------------ 1997 1996 ------------ ---------- SEPTEMBER 30, 1997 ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents............................................. $ 42,522 $ 114,868 $ 43,923 Accounts and notes receivable, net.................................... 7,852 5,151 12,487 Inventories........................................................... 3,473 2,299 4,360 Prepaid gaming taxes.................................................. 4,291 3,726 6,657 Prepaid expenses and other............................................ 11,231 7,395 14,920 ------------ ---------- ------------- Total current assets................................................ 69,369 133,439 82,347 Property and equipment, net........................................... 1,069,052 616,211 1,138,825 Land held for development............................................. 26,354 28,934 26,449 Other assets, net..................................................... 69,343 48,730 61,054 ------------ ---------- ------------- Total assets........................................................ $ 1,234,118 $ 827,314 $ 1,308,675 ------------ ---------- ------------- ------------ ---------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt..................................... $ 18,807 $ 23,256 $ 14,302 Accounts payable...................................................... 21,106 11,091 16,383 Accrued payroll and related........................................... 13,460 11,519 16,015 Construction contracts payable........................................ 94,835 27,879 19,931 Accrued interest payable.............................................. 10,625 6,875 18,932 Accrued expenses and other current liabilities........................ 26,433 16,706 31,000 ------------ ---------- ------------- Total current liabilities........................................... 185,266 97,326 116,563 Long-term debt, less current portion.................................... 742,156 441,742 885,692 Deferred income taxes, net.............................................. 7,848 9,776 16,919 ------------ ---------- ------------- Total liabilities................................................... 935,270 548,844 1,019,174 ------------ ---------- ------------- Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock, par value $.01; authorized 5,000,000 shares; 2,070,000, 1,800,000 and 2,070,000 convertible preferred shares issued and outstanding.............................................. 103,500 90,000 103,500 Common stock, par value $.01; authorized 90,000,000 shares; 35,318,057, 35,303,346 and 35,306,657 shares issued and outstanding......................................................... 353 353 353 Additional paid-in capital............................................ 167,397 167,623 167,154 Deferred compensation--restricted stock............................... (1,225) (1,811) (774) Retained earnings..................................................... 28,823 22,305 19,268 ------------ ---------- ------------- Total stockholders' equity.......................................... 298,848 278,470 289,501 ------------ ---------- ------------- Total liabilities and stockholders' equity.......................... $ 1,234,118 $ 827,314 $ 1,308,675 ------------ ---------- ------------- ------------ ---------- -------------
The accompanying notes are an integral part of these consolidated statements. F-9 STATION CASINOS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER FOR THE YEARS ENDED MARCH 31, 30, ------------------------------------------- ---------------------------- 1997 1996 1995 1997 1996 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Operating revenues: Casino............................. $ 450,013 $ 358,495 $ 210,534 $ 282,700 $ 212,072 Food and beverage.................. 92,220 73,057 43,208 63,577 42,626 Room............................... 27,420 23,614 17,690 17,218 12,658 Other.............................. 48,957 39,099 36,561 28,676 22,752 ------------- ------------- ------------- ------------- ------------- Gross revenues................... 618,610 494,265 307,993 392,171 290,108 Promotional allowances............. (35,095) (27,408) (17,715) (24,558) (16,634) ------------- ------------- ------------- ------------- ------------- Net revenues..................... 583,515 466,857 290,278 367,613 273,474 ------------- ------------- ------------- ------------- ------------- Operating costs and expenses: Casino............................. 203,857 150,805 92,812 137,592 93,278 Food and beverage.................. 68,994 57,659 34,045 44,862 32,275 Room............................... 10,318 9,147 7,014 6,481 5,097 Other.............................. 23,927 24,902 27,270 13,481 11,260 Selling, general and administrative................... 120,285 97,466 60,810 81,896 55,606 Corporate expense.................. 18,284 15,979 13,141 7,644 8,642 Restructuring charge............... 2,016 -- -- -- -- Development expenses............... 1,302 3,960 7,200 104 602 Depreciation and amortization...... 44,589 35,039 22,220 33,169 20,092 Preopening expenses................ 31,820 2,436 19,378 10,866 -- ------------- ------------- ------------- ------------- ------------- 525,392 397,393 283,890 336,095 226,852 ------------- ------------- ------------- ------------- ------------- Operating income..................... 58,123 69,464 6,388 31,518 46,622 Other income (expense): Interest expense, net.............. (36,698) (30,563) (19,967) (35,713) (16,260) Other.............................. (47) 1,150 2,160 (4,996) 66 ------------- ------------- ------------- ------------- ------------- (36,745) (29,413) (17,807) (40,709) (16,194) ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes.... 21,378 40,051 (11,419) (9,191) 30,428 Income tax (provision) benefit....... (7,615) (14,579) 3,477 3,258 (10,851) ------------- ------------- ------------- ------------- ------------- Net income (loss).................... 13,763 25,472 (7,942) (5,933) 19,577 Preferred stock dividends............ (7,245) (53) -- (3,622) (3,622) ------------- ------------- ------------- ------------- ------------- Net income (loss) applicable to common stock....................... $ 6,518 $ 25,419 $ (7,942) $ (9,555) $ 15,955 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Earnings (loss) per common share..... $ 0.18 $ 0.75 $ (0.26) $ (0.27) $ 0.45 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common shares outstanding........................ 35,316,077 33,917,646 30,112,851 35,310,457 35,314,107 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated statements. F-10 STATION CASINOS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED RETAINED ADDITIONAL COMPENSATION- EARNINGS TOTAL PREFERRED COMMON PAID-IN RESTRICTED (ACCUMULATED STOCKHOLDERS' STOCK STOCK CAPITAL STOCK DEFICIT) EQUITY ---------- ----------- ---------- ------------- ------------ ------------ (AMOUNTS IN THOUSANDS) Balances, March 31, 1994............ $ -- $ 300 $ 90,663 -- $ 4,828 $ 95,791 Restricted stock grant (Note 9)..... -- 1 2,929 (2,930) -- -- Amortization of deferred compensation...................... -- -- -- 37 -- 37 Net loss............................ -- -- -- -- (7,942) (7,942) ---------- ----- ---------- ------------- ------------ ------------ Balances, March 31, 1995............ -- 301 93,592 (2,893) (3,114) 87,886 Issuance of common stock (Note 7)... -- 52 77,309 -- -- 77,361 Issuance of preferred stock (Note 7)................................ 90,000 -- (3,278) -- -- 86,722 Amortization of deferred compensation...................... -- -- -- 1,082 -- 1,082 Preferred stock dividends........... -- -- -- -- (53) (53) Net income.......................... -- -- -- -- 25,472 25,472 ---------- ----- ---------- ------------- ------------ ------------ Balances March 31, 1996............. 90,000 353 167,623 (1,811) 22,305 278,470 Issuance of preferred stock (Note 7)................................ 13,500 -- (405) -- -- 13,095 Exercise of stock options........... -- -- 179 -- -- 179 Amortization of deferred compensation...................... -- -- -- 586 -- 586 Preferred stock dividends........... -- -- -- -- (7,245) (7,245) Net income.......................... -- -- -- -- 13,763 13,763 ---------- ----- ---------- ------------- ------------ ------------ Balances March 31, 1997............. 103,500 353 167,397 (1,225) 28,823 298,848 Amortization of deferred compensation (unaudited).......... -- -- -- 208 -- 208 Cancellation of restricted stock options (unaudited)............... -- -- (243) 243 -- -- Preferred stock dividends (unaudited)....................... -- -- -- -- (3,622) (3,622) Net loss (unaudited)................ -- -- -- -- (5,933) (5,933) ---------- ----- ---------- ------------- ------------ ------------ Balances September 30, 1997 (unaudited)....................... $ 103,500 $ 353 $ 167,154 $ (774) $ 19,268 $ 289,501 ---------- ----- ---------- ------------- ------------ ------------ ---------- ----- ---------- ------------- ------------ ------------
The accompanying notes are an integral part of these consolidated statements. F-11 STATION CASINOS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FOR THE YEARS ENDED MARCH 31, SEPTEMBER 30, ------------------------------- -------------------- 1997 1996 1995 1997 1996 --------- --------- --------- --------- --------- (UNAUDITED) (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net income(loss).......................................... $ 13,763 $ 25,472 $ (7,942) $ (5,933) $ 19,577 --------- --------- --------- --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 44,589 35,039 22,220 33,169 20,092 Amortization of debt discount and issuance costs........ 5,279 3,141 1,211 3,282 2,439 Preopening expenses..................................... 31,820 2,436 19,378 10,866 -- (Decrease) increase in deferred income taxes............ (3,752) 8,995 (5,449) 7,290 4,621 Changes in assets and liabilities: Increase in accounts and notes receivable, net........ (1,151) (522) (955) (4,635) (1,392) Increase in inventories and prepaid expenses and other............................................... (3,751) (2,428) (3,152) (5,161) (3,377) (Decrease) increase in accounts payable............... 10,015 (2,710) 10,547 (4,723) 6,481 Increase in accrued expenses and other current liabilities......................................... 13,723 4,822 12,041 13,896 3,006 Other, net.............................................. 1,268 3,708 595 6,593 730 --------- --------- --------- --------- --------- Total adjustments................................... 98,040 52,481 56,436 60,577 32,600 --------- --------- --------- --------- --------- Net cash provided by operating activities........... 111,803 77,953 48,494 54,644 52,177 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures.................................... (505,735) (279,340) (141,165) (100,029) (218,436) Proceeds from sale of land, property and equipment...... 8,900 6,578 12,483 2,399 -- Land held for development............................... (36) (5,018) (5,507) (95) -- Other long-term assets.................................. (15,772) (1,638) (2,489) -- -- Refund on land held for development..................... -- -- 9,500 -- -- Increase (decrease) in construction contracts payable... 66,956 21,460 (10,337) (74,904) 27,193 Preopening expenses..................................... (31,820) (2,436) (19,378) (8,550) -- Other, net.............................................. (1,501) (6,541) (692) (1,779) (4,610) --------- --------- --------- --------- --------- Net cash used in investing activities............... (479,008) (266,935) (157,585) (182,958) (195,853) --------- --------- --------- --------- --------- Cash flows from financing activities: Borrowings (payments) under bank facility, net.......... 277,000 (65,000) 37,000 (63,000) 73,000 Borrowings under Sunset loan agreement.................. 46,000 -- -- 57,000 -- Proceeds from notes payable............................. 2,250 42,438 13,757 15,730 -- Principal payments on notes payable..................... (30,444) (34,958) (8,195) (19,631) (19,482) Proceeds from the issuance of common stock.............. -- 78,246 -- -- -- Proceeds from the issuance of senior subordinated notes................................................. -- 191,292 72,091 144,287 -- Proceeds from the issuance of preferred stock........... 13,095 87,300 -- -- 13,095 Distributions paid to stockholders...................... -- -- (4,014) -- -- Dividends paid on preferred stock....................... (6,985) -- -- (3,622) (3,362) Debt issuance costs and other, net...................... (6,057) (12,429) (746) (1,049) (3,819) --------- --------- --------- --------- --------- Net cash provided by financing activities........... 294,859 286,889 109,893 129,715 59,432 --------- --------- --------- --------- --------- Cash and cash equivalents: (Decrease) increase in cash and cash equivalents........ (72,346) 97,907 802 1,401 (84,244) Balance, beginning of year.............................. 114,868 16,961 16,159 42,522 114,868 --------- --------- --------- --------- --------- Balance, end of year.................................... $ 42,522 $ 114,868 $ 16,961 $ 43,923 $ 30,624 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental cash flow disclosures: Cash paid for interest, net of amounts capitalized...... $ 28,577 $ 27,817 $ 17,021 $ 24,510 $ 13,832 Cash paid for income taxes, net......................... $ 9,250 $ 8,668 $ 1,303 $ -- $ 4,450 Property and equipment purchases financed by debt....... $ 361 $ 28,405 $ 22,719 $ 3,532 $ 361 Assets sold for note receivable......................... $ 1,550 $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated statements. F-12 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION BASIS OF PRESENTATION AND ORGANIZATION Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an established multi-jurisdictional gaming enterprise that currently owns and operates four hotel/casino properties in Las Vegas, Nevada, a gaming and entertainment complex in St. Charles, Missouri and a gaming and entertainment complex in Kansas City, Missouri. The Company also owns and provides slot route management services in Southern Nevada and Louisiana. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Palace Station Hotel & Casino, Inc. ("Palace Station"), Boulder Station, Inc. ("Boulder Station"), Texas Station, Inc. ("Texas Station"), Sunset Station, Inc. ("Sunset Station"), St. Charles Riverfront Station, Inc. ("Station Casino St. Charles"), Kansas City Station Corporation ("Station Casino Kansas City"), and Southwest Gaming Services, Inc. ("SGSI"). The Company owns a 50% interest in Town Center Amusements, Inc. d.b.a. Barley's Casino & Brewing Company. The Company accounts for this investment using the equity method of accounting. All significant intercompany balances and transactions have been eliminated. INTERIM PERIODS The Consolidated Financial Statements for the six months ended September 30, 1997 and 1996 and related amounts in the Notes to the Consolidated Financial Statements are unaudited, but in the opinion of management reflect all normal and recurring adjustments necessary for a fair presentation of the results of those periods. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include investments purchased with an original maturity of 90 days or less. INVENTORIES Inventories are stated at the lower of cost or market; cost being determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the capitalized lease, whichever is less. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. F-13 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (CONTINUED) CAPITALIZATION OF INTEREST The Company capitalizes interest costs associated with debt incurred in connection with major construction projects. Interest capitalization ceases once the project is complete. When no debt is specifically identified as being incurred in connection with such construction projects, the Company capitalizes interest on amounts expended on the project at the Company's average cost of borrowed money. Interest capitalized for the fiscal years ended March 31, 1997, 1996 and 1995 and the six months ended September 30, 1997 and 1996 was approximately $21.1 million, $6.1 million, $6.0 million, $9.1 million and $9.0 million, respectively. DEBT ISSUANCE COSTS Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of the related debt agreements. DEVELOPMENT ACTIVITIES The Company expenses all internal salaries and related expenses with respect to development activities. Other development costs, including legal, lobbying, and consulting are expensed, until such time as the jurisdiction has approved gaming and the Company has a specific site identified. Costs incurred subsequent to these criteria being met are capitalized. At March 31, 1997 and 1996 and September 30, 1997, the Company had capitalized costs of $0.7 million, $1.3 million and $0 million, respectively, related to various development projects. These costs are included in other assets, net in the accompanying consolidated balance sheets. PREOPENING EXPENSES Prior to the opening of a facility, all operating expenses, including incremental salaries and wages, related thereto are capitalized as preopening expenses. At March 31, 1997, $2.4 million of preopening expenses related to a new hotel/casino under construction known as Sunset Station had been capitalized and are included in other assets, net in the accompanying consolidated balance sheets. The Company expenses preopening expenses upon the opening of the related facility. During the fiscal year ended March 31, 1995, the Company incurred preopening expenses of $7.5 million and $11.9 million related to Boulder Station and Station Casino St. Charles, respectively. During the fiscal year ended March 31, 1996, the Company incurred preopening expenses of $2.4 million related to new projects for Texas Station and Barley's Casino & Brewing Company and expansion projects at Boulder Station and Station Casino St. Charles. During the fiscal year ended March 31, 1997, the Company incurred preopening expenses of $31.8 million substantially related to the opening of Station Casino Kansas City. During the six months ended September 30, 1997, the Company incurred preopening expenses of $10.9 million substantially related to the opening of Sunset Station. REVENUES AND PROMOTIONAL ALLOWANCES In accordance with industry practice, the Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. All other revenues are recognized as the service is provided. Revenues include the retail value of accommodations and food and beverage provided on a complimentary basis to customers. The estimated departmental costs of providing F-14 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (CONTINUED) such promotional allowances are included in casino costs and expenses and consist of the following (amounts in thousands):
FOR THE SIX MONTHS FOR THE YEARS ENDED ENDED MARCH 31, SEPTEMBER 30, ------------------------------- -------------------- 1997 1996 1995 1997 1996 --------- --------- --------- --------- --------- (UNAUDITED) Food and beverage...................... $ 27,418 $ 23,483 $ 14,276 $ 18,387 $ 13,964 Room................................... 1,439 1,203 874 1,073 561 Other.................................. 1,263 653 313 1,483 649 --------- --------- --------- --------- --------- Total.............................. $ 30,120 $ 25,339 $ 15,463 $ 20,943 $ 15,174 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per common share is computed by dividing net income (loss) applicable to common stock by the weighted average common shares outstanding during the period. Earnings per share assuming full dilution is not presented because the exercise of stock options and the conversion of the convertible preferred stock does not have a dilutive effect on the per share amounts. The Financial Accounting Standards Board has issued Statement on Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which is effective for fiscal years ending after December 15, 1997. This statement replaces primary earnings per share ("EPS") with basic EPS. No dilution for potentially dilutive securities is included in basic EPS. This statement also requires, when applying the treasury stock method for diluted EPS to compute dilution for options and warrants, to use average share price for the period, rather than the more dilutive greater of the average share price or end-of-period share price. The Company will adopt SFAS No. 128 in the fiscal year ending March 31, 1998. Management believes the adoption of SFAS No. 128 will have no impact on the Company's previously reported earnings per share. 2. ACCOUNTS AND NOTES RECEIVABLE Components of accounts and notes receivable are as follows (amounts in thousands):
MARCH 31, -------------------- 1997 1996 --------- --------- SEPTEMBER 30, 1997 ------------- (UNAUDITED) Casino................................................... $ 3,698 $ 2,569 $ 5,697 Hotel.................................................... 1,331 1,144 1,575 Other.................................................... 3,876 2,082 7,175 --------- --------- ------------- 8,905 5,795 14,447 Allowance for doubtful accounts.......................... (1,053) (644) (1,960) --------- --------- ------------- Accounts and notes receivable, net................... $ 7,852 $ 5,151 $ 12,487 --------- --------- ------------- --------- --------- -------------
F-15 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following (amounts in thousands):
ESTIMATED LIFE MARCH 31, MARCH 31, SEPTEMBER 30, (YEARS) 1997 1996 1997 --------------- ------------ ----------- ------------- (UNAUDITED) Land................................ -- $ 27,718 $ 16,962 $ 35,800 Land leases acquired................ 48-52 4,395 4,395 4,427 Buildings and leasehold improvements...................... 31-45 554,294 285,558 721,167 Boats and barges.................... 20-45 123,774 81,463 123,774 Furniture, fixtures and equipment... 3-7 192,546 163,580 208,762 Construction in progress............ -- 273,188 165,513 181,380 ------------ ----------- ------------- 1,175,915 717,471 1,275,310 Accumulated depreciation and amortization...................... (106,863) (101,260) (136,485) ------------ ----------- ------------- Property and equipment, net......... $ 1,069,052 $ 616,211 $ 1,138,825 ------------ ----------- ------------- ------------ ----------- -------------
At March 31, 1997 and 1996 and September 30, 1997, substantially all property and equipment of the Company is pledged as collateral for long-term debt. 4. LAND HELD FOR DEVELOPMENT The Company has acquired several parcels of land in various jurisdictions as part of the Company's development activities. The Company's decision whether to proceed with any new gaming opportunity is dependent upon future economic and regulatory factors, the availability of financing and competitive and strategic considerations. As many of these considerations are beyond the Company's control, no assurances can be made that the Company will be able to obtain appropriate licensing or be able to secure additional, acceptable financing in order to proceed with any particular project. At March 31, 1997 and 1996 and September 30, 1997, $22.6 million, $22.7 million and $22.6 million, respectively, of land had been acquired for potential gaming projects in jurisdictions where gaming has been approved. In addition, at March 31, 1997 and 1996 and September 30, 1997, $3.7 million, $6.2 million and $3.7 million, respectively, of land had been acquired in certain jurisdictions where gaming has not yet been approved. No assurances can be made that these jurisdictions will approve gaming in the future. The Company has entered into various purchase agreements whereby the Company has the option to acquire or lease land for development of potential new gaming projects totaling $31.3 million and $34.2 million at March 31, 1997 and 1996, respectively. In consideration for these options, the Company has paid or placed in escrow $6.0 million and $2.4 million at March 31, 1997 and 1996, respectively. Should the Company not exercise its option to acquire or lease the land, it would forfeit all amounts paid or placed in escrow as of March 31, 1997. In June 1997, $5 million of expired option payments were expensed. Such amounts are included in other income/expense in the accompanying consolidated statements of operations. As of March 31, 1997 and 1996 these option payments are included in other assets, net in the accompanying consolidated balance sheets. F-16 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT Long-term debt consists of the following (amounts in thousands):
MARCH 31, MARCH 31, SEPTEMBER 30, 1997 1996 1997 ---------- ---------- ------------- (UNAUDITED) STATION CASINOS, INC. (EXCLUDING SUNSET STATION): Reducing revolving credit facility, secured by substantially all of the assets of Palace Station, Boulder Station, Texas Station, Station Casino St. Charles and Station Casino Kansas City, $368 million limit at March 31, 1997, reducing quarterly by varying amounts until September 2000 when the remaining principal balance is due, interest at a margin above the bank's prime rate or the Eurodollar Rate (7.89% at March 31, 1997)................................................................... $ 277,000 $ -- $ 214,000 9 5/8% senior subordinated notes, payable interest only semi-annually, principal due June 1, 2003, net of unamortized discount of $6.8 million at March 31, 1997....................................................... 186,248 185,531 186,638 9 3/4% senior subordinated notes, payable interest only semi-annually, principal due April 15, 2007, net of unamortized discount of $5.5 million at September 30, 1997........................................... -- -- 144,452 10 1/8% senior subordinated notes, payable interest only semi-annually, principal due March 15, 2006, net of unamortized discount of $1.2 million at March 31, 1997............................................... 196,818 196,737 196,862 Notes payable to banks and others, collateralized by slot machines and related equipment, monthly installments including interest ranging from 7.47% to 7.94%.......................................................... 15,952 24,726 32,717 Capital lease obligations, collateralized by furniture and equipment...... 7,703 12,171 5,096 Other long-term debt...................................................... 31,242 45,833 17,229 ---------- ---------- ------------- Sub-total............................................................. 714,963 464,998 796,994 SUNSET STATION, INC.: $110 million Sunset Station first mortgage construction/term loan agreement, secured by substantially all of the assets of Sunset Station, interest at a margin of 375 basis points above the Eurodollar Rate (9.37% at March 31, 1997), due September 2000........................... 46,000 -- 103,000 ---------- ---------- ------------- Total long-term debt.................................................. 760,963 464,998 899,994 Current portion of long-term debt......................................... (18,807) (23,256) (14,302) ---------- ---------- ------------- Total long-term debt, less current portion............................ $ 742,156 $ 441,742 $ 885,692 ---------- ---------- ------------- ---------- ---------- -------------
In June 1993, the Company completed an offering at par of $110 million in 9 5/8% senior subordinated notes due in June 2003. In May 1994, the Company completed an offering of $83 million in senior subordinated notes that rank PARI PASSU with the existing $110 million senior subordinated notes, and have identical maturities and covenants as the original issue. The $83 million senior subordinated notes have a coupon rate of 9 5/8% and were priced to yield 11.5% to maturity. The discount on the $83 million senior F-17 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) subordinated notes has been recorded as a reduction to long-term debt in the accompanying consolidated balance sheets. In March 1996, the Company completed an offering of $198 million of senior subordinated notes due in March 2006, that rank PARI PASSU with the existing $193 million of senior subordinated notes. The $198 million senior subordinated notes have a coupon rate of 10 1/8% and were priced to yield 10.24% to maturity. The discount on the $198 million senior subordinated notes has been recorded as a reduction to long-term debt in the accompanying consolidated balance sheets. In April 1997, the Company completed an offering of $150 million of senior subordinated notes due in April 2007, that rank PARI PASSU with the Company's existing senior subordinated notes. The $150 million senior subordinated notes have a coupon rate of 9 3/4% and were priced to yield 10.37% to maturity. The discount on the $150 million senior subordinated notes is recorded as a reduction to long-term debt. Proceeds from the offering were used to pay down amounts outstanding under the reducing revolving credit facility. The indentures governing the Company's senior subordinated notes ("the Indentures") contain certain customary financial and other covenants, which among other things, govern the Company and certain of its subsidiaries ability to incur indebtedness (except, as specifically allowed) unless after giving effect thereto, a 2.0 to 1.0 pro forma Consolidated Coverage Ratio (as defined in the Indentures) has been met. As of March 31, 1997 and September 30, 1997, the Company's Consolidated Coverage Ratio was 2.66 to 1.00 and 2.17 to 1.00, respectively. On July 5, 1995, the Company obtained a $275 million reducing revolving credit facility. On March 25, 1996, the Company amended and restated this bank facility, providing for borrowings up to an aggregate principal amount of $400 million. On March 21, 1997 and June 27, 1997, the Company obtained certain amendments to the reducing revolving bank credit facility in order to enhance its borrowing capacity (the "Bank Facility"). The Bank Facility is secured by substantially all the assets of Palace Station, Boulder Station, Texas Station, Station Casino St. Charles and Station Casino Kansas City (collectively, the "Borrowers"). The Company and SGSI guarantee the borrowings under the Bank Facility (collectively, the "Guarantors"). The Bank Facility matures on September 30, 2000 and reduces quarterly by varying amounts (including $8 million for the fiscal quarter ending on June 30, 1997 and $10 million for each quarter ending September 30, 1997, December 31, 1997 and March 31, 1998). Borrowings under the Bank Facility bear interest at a margin above the bank's prime rate or LIBOR, as selected by the Company. The margin above such rates, and the fee on the unfunded portions of the Bank Facility, will vary quarterly based on the combined Borrower's and the Company's consolidated ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Bank Facility contains certain financial and other covenants. These include a maximum funded debt to EBITDA ratio for the Borrowers combined of 3.00 to 1.00 for each fiscal quarter through June 30, 1997, 2.75 to 1.00 for each fiscal quarter through June 30, 1998, and 2.50 to 1.00 for each fiscal quarter thereafter, a minimum fixed charge coverage ratio for the preceding four quarters for the Borrowers combined of 1.35 to 1.00 for periods March 31, 1996 through June 30, 1998, and 1.50 to 1.00 for periods thereafter, a limitation on indebtedness, and limitations on capital expenditures. As of March 31, 1997 and September 30, 1997, the Borrowers funded debt to EBITDA ratio was 1.97 to 1.00 and 1.95 to 1.00, respectively, and the fixed charge coverage ratio for the proceeding four quarters ended March 31, 1997 and September 30, 1997 was 2.54 to 1.00 and 1.57 to 1.00, respectively. A tranche of the Bank Facility F-18 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) contains a minimum tangible net worth requirement for Palace Station (as defined) and certain restrictions on distributions of cash from Palace Station to the Company. As of March 31, 1997 and September 30, 1997, Palace Station's tangible net worth exceeded the requirement by approximately $7 million and $7.7 million, respectively. These covenants limit Palace Station's ability to make payments to the Company, a significant source of anticipated cash for the Company. In addition, the Bank Facility has financial covenants relating to the Company. These include prohibitions on dividends on or redemptions of the Company's common stock, restrictions on repayment of any subordinated debt, limitations on indebtedness beyond existing indebtedness, the Company's senior subordinated notes and up to $25 million of purchase money indebtedness, minimum consolidated net worth requirements for the Company of $165 million plus post October 1, 1995 preopening expenses, 95% of post October 1, 1995 net income (not reduced by net losses) and 100% of net equity offering proceeds, and limitations on capital expenditures. As of March 31, 1997 and September 30, 1997, the Company's consolidated net worth exceeded the requirement by approximately $20 million and $18 million, respectively. The Bank Facility also includes a maximum funded debt to EBITDA (adjusted for preopening expenses) ratio including annualized EBITDA (adjusted for preopening expenses) for any new venture, as defined, open less than a year for the Company on a consolidated basis of 5.00 to 1.00 for the fiscal quarter ended March 31, 1997, 5.25 to 1.00 for each fiscal quarter through December 31, 1997, 5.00 to 1.00 for each fiscal quarter through June 30, 1998, 4.75 to 1.00 for the fiscal quarter ending September 30, 1998, 4.50 to 1.00 for the fiscal quarter ending December 31, 1998, 4.25 to 1.00 for each fiscal quarter through June 30, 1999, 4.00 to 1.00 for the fiscal quarter ending September 30, 1999 and 3.75 to 1.00 thereafter. As previously discussed, in June 1997, the Company obtained an amendment to the Bank Facility. This amendment modified the covenant restricting the maximum consolidated funded debt to EBITDA ratio as follows: 5.75 to 1.00 for the fiscal quarter ended June 30, 1997, 5.85 to 1.00 for the fiscal quarter ended September 30, 1997, 5.75 to 1.00 for the fiscal quarters ending December 31, 1997 and March 31, 1998, 5.00 to 1.00 for the fiscal quarter ending June 30, 1998, 4.75 to 1.00 for the fiscal quarter ending September 30, 1998, 4.50 to 1.00 for the fiscal quarter ending December 31, 1998, 4.25 to 1.00 for each fiscal quarter through June 30, 1999, 4.00 to 1.00 for the fiscal quarter ending September 30, 1999 and 3.75 to 1.00 thereafter. In addition, in July 1997, the Company reduced the total amount available under the Bank Facility by $30 million. As a result, no additional reductions are required until June 30, 1998, at which time the Bank Facility will reduce by $22.4 million each fiscal quarter through March 31, 2000. As of March 31, 1997 and September 30, 1997, the Company's funded debt to EBITDA ratio was 4.54 to 1.00. and 5.74 to 1.00, respectively. Such consolidated calculations for the Company do not include Sunset Station (see below). In addition, the Bank Facility prohibits the Company from holding cash and cash equivalents in excess of the sum of the amounts necessary to make the next scheduled interest or dividend payments on the Company's senior subordinated notes and the Convertible Preferred Stock (see Note 7), the amounts necessary to fund casino bankroll in the ordinary course of business, and $2,000,000. The Guarantors waive certain defenses and rights including rights of subrogation and reimbursement. The Bank Facility contains customary events of default and remedies and is cross-defaulted to the Company's senior subordinated notes and the Change of Control Triggering Event as defined in the Indentures. On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan Agreement") with Bank of America National Trust and Savings Association, Bank of Scotland, Societe Generale and each of the other lenders party to such agreement, pursuant to which Sunset Station received a commitment for $110 million to finance the remaining development and construction costs of Sunset Station. The Company also entered into an F-19 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) operating lease for certain furniture, fixtures and equipment with a cost of $40 million to be subleased to Sunset Station as part of the Sunset Station Project (See Note 6). The Sunset Loan Agreement includes a first mortgage term note in the amount of $110 million (the "Sunset Note") which is non-recourse to the Company, except as to certain construction matters pursuant to a completion guarantee dated as of September 25, 1996, executed by the Company on behalf of Sunset Station and except that the Company has pledged all of the stock of Sunset Station as security for the Sunset Loan Agreement. The Sunset Note is to reduce $1.8 million for each fiscal quarter ending March 1998 through December 1998, $2.3 million for each fiscal quarter ending March 1999 through December 1999, and $2.0 million for the fiscal quarters ending March 2000 and June 2000 and matures in September 2000. In addition, the Sunset Note is subject to prepayment subsequent to July 1998 by an amount equal to a specified percentage of Excess Cash Flow, as defined. The Sunset Note carries an interest rate of 375 basis points above the Eurodollar Rate (as defined in the Sunset Loan Agreement). The Sunset Note is secured by substantially all of the assets of Sunset Station, including a deed of trust with respect to the real property on which Sunset Station is being constructed, a portion of which is subject to a lease from the Company to Sunset Station, and the remainder of which property is owned by Sunset Station and a security agreement as to all tangible and intangible personal property including Sunset Station's rights under an operating lease for certain furniture, fixtures and equipment to be used by Sunset Station. The Sunset Loan Agreement contains certain customary financial and other covenants (related exclusively to Sunset Station) including a minimum fixed charge coverage ratio as of the last day of any quarter after the opening of Sunset Station of not less than 1.10 to 1.00, a maximum senior funded debt to EBITDA (adjusted for certain cash contributions or advances by the Company) ratio after opening of 4.50 to 1.00 for the first full quarter, reducing by 0.25 on certain quarters thereafter to 3.25 to 1.00 for the tenth quarter and each quarter thereafter, and a minimum net worth as of any quarter end after opening of not less than $52 million plus 80% of net income (not reduced by net losses) for each quarter after opening, plus 100% of certain additional equity contributions by the Company and Supplemental Loans, as defined. As of September 30, 1997, Sunset Station's fixed charge coverage ratio was 4.55 to 1.00 and the funded debt to EBITDA ratio was 3.50 to 1.00. As of September 30, 1997, Sunset Station's net worth exceeded the minimum requirement by approximately $8 million. In addition, the agreement places restrictions on indebtedness and guarantees, dividends, stock redemptions, mergers, acquisitions, sale of assets or sale of stock in subsidiaries and limitations on capital expenditures. In addition, the Company has provided a funding commitment to Sunset Station of up to an additional $25 million pursuant to a supplemental loan agreement (the "Supplemental Loan Agreement"). The Sunset Loan Agreement requires Sunset Station to draw amounts under the Supplemental Loan Agreement in the event of the failure of certain financial covenants under the Sunset Loan Agreement. Loans under this funding commitment may be drawn down beginning on the last day of the first full calendar quarter ending after Sunset Station opens for business in the amount of up to $10 million during the first year after such date, up to $10 million during the second year after such date and up to $5 million during the third year after such date. The Supplemental Loan Agreement also provides for an additional, separate funding commitment up to $40 million in connection with a purchase option for certain furniture, fixtures and equipment under the Sunset Operating Lease. Sunset Station will pay interest at a rate per annum equal to the three-month Eurodollar Rate, the interest being payable solely in the form of commensurate additions to the principal of the Supplemental Loans. The Supplemental Loan Agreement expires in F-20 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) September 2001. The funding commitments under the Supplemental Loan Agreement are subject to limitations imposed by the indentures governing the Company's existing senior subordinated notes and the Bank Facility. In order to manage the interest rate risk associated with the Sunset Note, Sunset Station entered into an interest rate swap agreement with Bank of America National Trust and Savings Association. This agreement swaps the variable rate interest pursuant to the Sunset Note to a fixed rate of 9.58% on $35 million notional amount as of January 1997 increasing to $60 million at March 1997, $90 million at June 1997, $100 million at September 1997 and then decreasing to $95 million at June 1998. The agreement expires in December 1998. The difference paid or received pursuant to the swap agreement is accrued as interest rates change and recognized as an adjustment to interest expense on the Sunset Note. Sunset Station is exposed to credit risk in the event of non-performance by the counterparty to the agreement. The Company believes the risk of non-performance by the counterparty is minimal. As of March 31, 1997, the market value of this interest rate swap was $1.0 million. The estimated fair value of the Company's long-term debt at March 31, 1997 was approximately $755.6 million, compared to its book value of approximately $761.0 million. The estimated fair value amounts were based on quoted market prices on or about March 31, 1997 for the Company's debt securities that are publicly traded. For debt securities that are not publicly traded, fair value was estimated based on the quoted market prices for similar issues or the current rates offered to the Company for debt having the same remaining maturities. Scheduled maturities of long-term debt are as follows (amounts in thousands):
MARCH 31, ---------- 1998.............................................................................. $ 18,807 1999.............................................................................. 12,948 2000.............................................................................. 11,141 2001.............................................................................. 333,373 2002.............................................................................. 1,288 Thereafter........................................................................ 383,406 ---------- Total......................................................................... $ 760,963 ---------- ----------
6. COMMITMENTS AND CONTINGENCIES STATION CASINO ST. CHARLES In September 1994, Station Casino St. Charles entered into an agreement for property acquisitions with the City of St. Charles, Missouri which allows for the acquisition by the Company of property within a designated 107-acre Redevelopment Project Area, a portion of which is adjacent to Station Casino St. Charles. This land is being acquired for the construction of a mixed use development which may include retail space, a hotel, office space, convention space or restaurants. The Company has a right to terminate the agreement if all related acquisition costs exceed $13.7 million. As of March 31, 1997, the Company has incurred $3.4 million of acquisition costs included in property and equipment, net in the accompanying consolidated balance sheets. F-21 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) BOULDER STATION LEASE The Company entered into a ground lease for 27 acres of land on which Boulder Station is located. The Company leases this land from a trust pursuant to a long-term ground lease. The trustee of this trust is Bank of America NT&SA, the beneficiary of which is KB Enterprises, an affiliated company owned by Frank J. Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the parents of Frank J. Fertitta III, Chairman of the Board and Chief Executive Officer of the Company. The lease has a term of 65 years with monthly payments of $125,000 through June 1998. In June 1998, and every ten years thereafter, the rent will be adjusted to the product of the fair market value of the land and the greater of (i) the then prevailing annual rate of return for comparably situated property or (ii) 8% per year. The rent will be further adjusted in June 2003, and every ten years thereafter by a cost of living factor. In no event will the rent for any period be less than the immediately prior period. Pursuant to the ground lease, the Company has an option, exercisable at five-year intervals beginning in June 1998, to purchase the land at fair market value. The Company's leasehold interest in the property is subject to a lien to secure borrowings under the Bank Facility. TEXAS STATION LEASE The Company entered into a ground lease for 47 acres of land on which Texas Station is located. The Company leases this land from a trust pursuant to a long-term ground lease. The trustee of this trust is Bank of America NT&SA, the beneficiary of which is Texas Gambling Hall & Hotel, Inc. an affiliate company of the Related Lessor. The lease has a term of 65 years with monthly rental payments of $150,000 through July 2000. In July 2000, and every ten years thereafter, the rent will be adjusted to the product of the fair market value of the land and the greater of (i) the then prevailing annual rate of return being realized for owners of comparable land in Clark County or (ii) 8% per year. The rent will be further adjusted by a cost of living factor after the first ten years and every ten years thereafter. In no event will the rent for any period be less than the immediately prior period. Pursuant to the ground lease, the Company will have an option, exercisable at five-year intervals beginning in May 2000, to purchase the land at fair market value. The Company's leasehold interest in the property is subject to a lien to secure borrowings under the Bank Facility. SUNSET STATION LEASE In June 1994, the Company entered into a lease agreement for approximately 47.5 acres of land in the Southeast area of Las Vegas on which Sunset Station is being developed. The lease has a term of 65 years with monthly rental payments of $120,000, adjusted on each subsequent five-year anniversary by a cost of living factor. On the seventh anniversary of the lease, the Company has an option to purchase this land for $23.8 million. Additionally, on the seventh anniversary of the lease, the lessor has an option to sell this land to the Company for $21.8 million. STATION CASINO KANSAS CITY LEASE The Company has entered into a joint venture which owns the land on which Station Casino Kansas City is located. At March 31, 1997 and September 30, 1997, $3.5 million related to this investment is included in other assets, net in the accompanying consolidated balance sheets. F-22 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) In April 1994, Station Casino Kansas City entered into an agreement with the joint venture to lease this land. The agreement requires monthly payments of $85,000 through March 31, 1997 and $90,000 through the remainder of the lease term. The lease expires March 31, 2006, with an option to extend the lease for up to eight renewal periods of ten years each, plus one additional seven year period. Commencing April 1, 1998 and every anniversary thereafter, the rent shall be adjusted by a cost of living factor. In connection with the joint venture agreement, the Company received an option providing for the right to acquire the joint venture partner's interest in this joint venture. The Company has the option to acquire this interest at any time after April 1, 2002 through April 1, 2011 for $11.7 million, however, commencing April 1, 1998 the purchase price will be adjusted by a cost of living factor of not more than 5% or less than 2% per annum. At March 31, 1997 and September 30, 1997, $2.6 million paid by the Company in consideration for this option is included in other assets, net in the accompanying consolidated balance sheets. SOUTHERN FLORIDA In October 1994, the Company entered into an agreement to form a limited partnership with the existing operator of a pari-mutuel facility in Southern Florida. In the event casino gaming is approved by the voters of Florida by October 2000 and in the event the site is licensed by the state, the Company will be obligated to make capital contributions to the partnership totaling $35 million, reduced by credits for amounts previously contributed to any Florida gaming referendum campaign. OPERATING LEASES The Company leases several parcels of land and equipment used in operations at Palace Station, Boulder Station, Texas Station, Station Casino St. Charles and Station Casino Kansas City and for land on which Sunset Station is being developed. Leases on various parcels ranging from 13 acres to 171 acres have terms expiring between March 2006 and July 2060. Future minimum lease payments required under these operating leases and other noncancelable operating leases are as follows for the years ending (amounts in thousands):
FUTURE MINIMUM LEASE PAYMENTS MARCH 31, - ---------------------------------------------------------------------------------- ---------- 1998.............................................................................. $ 6,423 1999.............................................................................. 6,296 2000.............................................................................. 5,932 2001.............................................................................. 5,932 2002.............................................................................. 5,932 Thereafter........................................................................ 280,479 ---------- Total......................................................................... $ 310,994 ---------- ----------
Rent expense totaled approximately $5.4 million, $6.5 million and $4.9 million for the years ended March 31, 1997, 1996 and 1995, respectively. Rents of $2.2 million and $2.1 million were capitalized in connection with the construction of Station Casino Kansas City and Sunset Station for the fiscal years ended March 31, 1997 and 1996, respectively. F-23 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) During fiscal 1995, the Company sold approximately $13.0 million of equipment and leased it back under lease agreements ranging from three to seven years. The transactions produced gains of approximately $665,000 which have been deferred and are being amortized against lease expense over the remaining lease terms. EQUIPMENT LEASE In connection with the Sunset Loan Agreement, the Company entered into an operating lease for furniture, fixtures and equipment (the "Equipment") with a cost of $40 million, dated as of September 25, 1996 (the "Sunset Operating Lease") with First Security Trust Company of Nevada. The Sunset Operating Lease expires in October 2000 and carries a lease rate of 225 basis points above the Eurodollar Rate. The Company has entered into a sublease with Sunset Station for the Equipment pursuant to an operating lease with financial terms substantially similar to the Sunset Operating Lease. As of September 30, 1997 $35.7 million of equipment had been leased and no further draw on this facility will be made. In the event that Sunset Station elects to purchase the Equipment, the Company has provided a funding commitment up to the amount necessary for such purchase pursuant to the Supplemental Loan Agreement (subject to the limitations on funding contained in the Supplemental Loan Agreement) (See Note 5). In connection with the Sunset Operating Lease, the Company also entered into a participation agreement, dated as of September 25, 1996 (the "Participation Agreement") with the trustee, as lessor under the Sunset Operating Lease, and holders of beneficial interests in the Lessor Trust (the "Holders"). Pursuant to the Participation Agreement, the Holders will advance funds to the trustee for the purchase by the trustee of, or to reimburse the Company for, the purchase of the Equipment, which will then be leased to the Company, and in turn subleased to Sunset Station. Pursuant to the Participation Agreement, the Company also agreed to indemnify the Lessor and the Holders against certain liabilities. LEGAL MATTERS The Company is a litigant in legal matters arising in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse effect on the financial position or the results of operations of the Company. 7. STOCKHOLDER'S EQUITY In July 1995, the Company completed a public offering of 5,175,000 shares of common stock at $16 per share generating net proceeds of approximately $78.2 million, before deducting $0.8 million of offering costs paid by the Company. The proceeds from this offering were primarily used to acquire the assets of Texas Station located in North Las Vegas, which commenced operations July 12, 1995. The seller of the assets is a wholly-owned subsidiary of a trust of which the Related Lessor is the sole trustee (the "Seller"). The purchase price of such assets was an amount equal to the Seller's out-of-pocket costs incurred in connection with the financing, development and construction of the hotel/casino through the closing date. At closing, the Company paid $62.8 million to the Seller and assumed various liabilities and contracts to complete construction of the facility. The total cost of the property was approximately $84.9 million. The land on which the Texas Station facility is situated is being leased to the Company by the Seller pursuant to a long-term ground lease (See Note 6). In March 1996, the Company completed a public offering of 1,800,000 shares of convertible preferred stock (the "Convertible Preferred Stock") at $50.00 per share generating net proceeds of approximately F-24 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDER'S EQUITY (CONTINUED) $87.3 million, before deducting $0.6 million of offering costs paid by the Company. In April 1996, the underwriters exercised their option to purchase an additional 270,000 shares of the Convertible Preferred Stock generating net proceeds to the Company of approximately $13.1 million. The Convertible Preferred Stock is convertible at an initial conversion rate of 3.2573 shares of common stock for each share of Convertible Preferred Stock. The Convertible Preferred Stock is redeemable, at the option of the Company in whole or in part, for shares of the Company's common stock at any time after March 15, 1999, initially at a redemption price of $52.45 per share and thereafter at prices decreasing annually to $50.00 per share of Convertible Preferred Stock on and after March 15, 2006, plus accrued and unpaid dividends. The common shares to be issued is determined by dividing the redemption price by the lower of the average daily closing price for the Company's common stock for the preceding 20 trading days or the closing price of the Company's common stock on the first business day preceding the date of the redemption notice. Any fractional shares would be paid in cash. Dividends on the Convertible Preferred Stock of $3.50 per share annually, accrue and are cumulative from the date of issuance. The Convertible Preferred Stock has a liquidation preference of $50.00 per share, plus accrued and unpaid dividends. 8. RELATED PARTIES The Company has employed McNabb/McNabb/DeSoto/Salter & Co. ("MMDS") to provide advertising and marketing research services. Certain stockholders of the Company own a 50% interest in MMDS. During the fiscal years ended March 31, 1997, 1996 and 1995 the Company paid MMDS $27.2 million, $17.4 million and $12.7 million respectively, for advertising, market research and other costs related to these activities. In management's opinion, these transactions were conducted with terms as fair to the Company as could have been obtained from unaffiliated companies. In April 1997, the Company purchased the assets of MMDS for approximately $0.8 million. 9. BENEFIT PLANS STOCK COMPENSATION PROGRAM The Company has adopted a Stock Compensation Program (the "Program") which includes (i) an Incentive Stock Option Plan for the grant of incentive stock options, (ii) a Compensatory Stock Option Plan providing for the grant of non-qualified stock options, and (iii) a Restricted Shares Plan providing for the grant of restricted shares of common stock. Officers, key employees, directors (whether employee directors or non-employee directors) and independent contractors or agents of the Company and its subsidiaries are eligible to participate in the program. However, only employees of the Company and its subsidiaries are eligible to receive incentive stock options. A maximum of 6,307,000 shares of common stock have been reserved for issuance under the Program. Options are granted at the current market price at the date of grant. The plan provides for a variety of vesting schedules, ranging from immediate to twenty percent a year for five years, to be determined at the time of grant. All options have an exercise period of ten years from the date of grant. F-25 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BENEFIT PLANS (CONTINUED) The Program will terminate ten years from the date of adoption, unless terminated earlier by the Board of Directors, and no options or restricted shares may be granted under the Program after such date. Summarized information for the Program is as follows:
1997 1996 1995 ----------------------- ------------------------ ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ----------- ----------- ----------- ---------- ----------- Outstanding Beginning of the Year......... 2,697,012 $ 16.24 2,372,100 $ 19.05 1,943,725 $ 20.09 Granted................................. 2,160,822 $ 14.01 1,593,305 $ 13.42 541,750 $ 15.50 Exercised............................... (14,711) $ 12.16 (46) $ 12.00 -- $ -- Cancelled............................... (410,941) $ 15.70 (1,268,347) $ 17.95 (113,375) $ 19.89 ---------- ----------- ---------- Outstanding End of the Year............... 4,432,182 $ 15.22 2,697,012 $ 16.24 2,372,100 $ 19.05 ---------- ----------- ---------- ---------- ----------- ---------- Restricted Stock Grants................... -- -- 170,500 ---------- ----------- ---------- ---------- ----------- ---------- Exercisable at End of Year................ 1,408,893 $ 16.50 993,032 $ 16.67 721,200 $ 20.06 ---------- ----------- ---------- ---------- ----------- ---------- Options Available for Grant............... 1,689,561 649,942 479,910 ---------- ----------- ---------- ---------- ----------- ----------
The following table summarizes information about the options outstanding at March 31, 1997:
OPTIONS OUTSTANDING -------------------------------------------- OPTIONS EXERCISABLE WEIGHTED --------------------------- AVERAGE WEIGHTED NUMBER WEIGHTED NUMBER REMAINING AVERAGE EXCERCISABLE AVERAGE OUTSTANDING AT CONTRACTUAL EXERCISE AT MARCH 31, EXERCISE RANGE OF EXERCISE PRICES MARCH 31, 1997 LIFE PRICE 1997 PRICE - ---------------------------------------------- -------------- --------------- ----------- -------------- ----------- $ 9.38 - $ 9.88............................... 228,000 9.9 $ 9.50 -- $ -- $11.63 - $13.75............................... 890,081 7.3 $ 12.07 549,284 $ 12.04 $14.38 - $15.00............................... 2,149,101 8.9 $ 14.59 100,709 $ 14.44 $18.00 - $20.00............................... 1,075,000 6.3 $ 19.72 695,900 $ 19.83 $22.00 - $22.00............................... 90,000 2.8 $ 22.00 63,000 $ 22.00 -- -------------- ----------- -------------- ----------- 4,432,182 7.9 $ 15.22 1,408,893 $ 16.50 -- -- -------------- ----------- -------------- ----------- -------------- ----------- -------------- -----------
Restricted stock grants in the amount of 170,500 shares were issued during the fiscal year ended March 31, 1995. The effect of these grants is to increase the issued and outstanding shares of the Company's common stock and decrease the number of shares available for grant in the plan. Deferred compensation is recorded for the restricted stock grants equal to the market value of the Company's common stock on the date of grant. The deferred compensation is amortized over the period the restricted stock vests and recorded as compensation expense in selling, general, and administrative expense in the accompanying consolidated statements of operations. The Company applies APB Opinion No. 25 and related interpretations in accounting for the Program. Accordingly, compensation expense recognized was different than what would have been otherwise recognized under the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation". Had compensation expense for the plans been determined in accordance with SFAS F-26 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BENEFIT PLANS (CONTINUED) No. 123, the effect on the Company's net income applicable to common stock and earnings per common share would have been as follows (amounts in thousands, except per share data):
YEAR ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Net income applicable to common stock: As reported......................................................... $ 6,518 $ 25,419 Proforma............................................................ $ 3,640 $ 23,562 Earnings per common share: As reported......................................................... $ 0.18 $ 0.75 Proforma............................................................ $ 0.10 $ 0.69
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing method with the following assumptions: (i) no dividends, (ii) expected volatility for both years of 45.5%, (iii) risk free interest rate of 6.46% for 1997 and 6.04% for 1996, and (iv) the expected average life of 3.92 years for 1997 and 3.05 years for 1996. The weighted average fair value of options granted in 1997 and 1996 were $5.64 and $4.91, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma net income may not be representative of that to be expected in future years. In May 1995, the Board of Directors of the Company authorized the repricing of 1,156,900 options with option prices ranging from $13.00 to $20.00. Options held by certain members of the Company's Board of Directors, including the Chairman and Chief Executive Officer of the Company were not repriced. The effect of the repricing of all the subject options was the cancellation of 1,116,500 options and the reissuance of 872,680 options ("replacement options") with a price of $12.00 (market value at date of the repricing) which are included in granted and canceled options in the table above. The number of replacement options was determined, based upon a valuation model, so that the value of the replacement options was equivalent to the value of the options originally granted. 401(K) PLANS The Company has a defined contribution 401(k) plan, which covers all employees who meet certain age and length of service requirements and allows an employer contribution up to 25 percent of the first four percent of each participating employee's compensation. Plan participants can elect to defer before tax compensation through payroll deductions. These deferrals are regulated under Section 401(k) of the Internal Revenue Code. The Company's matching contribution was $442,000, $293,000, and $203,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. 10. EXECUTIVE COMPENSATION PLANS The Company has employment agreements with certain of its executive officers. These contracts provide for, among other things, an annual base salary with annual adjustments and an annual cash bonus equal to at least 5 percent of the executive's base salary, and supplemental long-term disability and supplemental life insurance benefits in excess of the Company's normal coverage for employees. The Company elected to self-insure with respect to the long-term disability benefits. In addition, the Company F-27 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EXECUTIVE COMPENSATION PLANS (CONTINUED) has adopted a Supplemental Executive Retirement Plan for its Chief Executive Officer and a Supplemental Management Retirement Plan for certain key executives as selected by the Human Resources Committee of the Company's Board of Directors. Other executive plans include a Deferred Compensation Plan and a Long-Term Stay-On Performance Incentive Plan. The expenses related to these plans are included in corporate expenses in the accompanying consolidated statements of operations. 11. RESTRUCTURING CHARGE In March 1997, the Company introduced a plan designed to reduce costs and improve efficiency of operations. This plan resulted in a one-time charge to earnings in the fourth quarter of fiscal 1997 totaling $2,016,000, primarily related to employee severance payments. 12. INCOME TAXES The Company files a consolidated federal income tax return. The provision (benefit) for income taxes consists of the following (amounts in thousands):
MARCH 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Current: Federal..................................................... $ 7,708 $ 4,784 $ 721 State....................................................... (1,834) 374 (1,053) --------- --------- --------- 5,874 5,158 (332) Deferred...................................................... 1,741 9,421 (3,145) --------- --------- --------- Total income taxes........................................ $ 7,615 $ 14,579 $ (3,477) --------- --------- --------- --------- --------- ---------
The income tax provision (benefit) differs from that computed at the federal statutory corporate tax rate as follows:
MARCH 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Federal statutory rate........................................... 35.0% 35.0% (35.0)% State income taxes, net of federal benefit....................... (5.5) 0.6 (6.0) Meals and entertainment.......................................... 0.2 0.6 4.1 Other, net....................................................... 5.9 0.2 6.5 --- --- --------- Effective tax rate............................................... 35.6% 36.4% (30.4)% --- --- --------- --- --- ---------
F-28 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES (CONTINUED) The tax effects of significant temporary differences representing net deferred tax assets and liabilities are as follows (amounts in thousands):
MARCH 31, ---------------------- 1997 1996 ---------- ---------- Deferred tax assets: Current: Accrued vacation, bonuses and group insurance......................................... $ 2,981 $ 2,119 Prepaid gaming taxes.................................................................. (1,341) (1,177) Other................................................................................. 2,261 1,135 ---------- ---------- Total current......................................................................... 3,901 2,077 ---------- ---------- Long-term: Preopening and other costs, net of amortization..................................... 15,077 4,485 State deferred taxes................................................................ 1,907 462 Alternative minimum tax credits..................................................... 9,000 4,600 ---------- ---------- Total long-term....................................................................... 25,984 9,547 ---------- ---------- Total deferred tax assets............................................................. 29,885 11,624 ---------- ---------- Deferred tax liabilities: Long-term: Temporary differences related to property and equipment............................. (32,583) (18,201) Other............................................................................... (1,249) (1,122) ---------- ---------- Total deferred tax liabilities........................................................ (33,832) (19,323) ---------- ---------- Net................................................................................... $ (3,947) $ (7,699) ---------- ---------- ---------- ----------
The excess of the alternative minimum tax over the regular Federal income tax is a tax credit which can be carried forward indefinitely to reduce future regular Federal income tax liabilities. The Company did not record a valuation allowance at March 31, 1997 relating to recorded tax benefits because all benefits are likely to be realized. F-29 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
INCOME NET INCOME (LOSS) (LOSS) EARNINGS OPERATING BEFORE APPLICABLE (LOSS) PER NET INCOME INCOME TO COMMON COMMON REVENUES (LOSS) TAXES STOCK SHARE ---------- ---------- ---------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED MARCH 31, 1997 First quarter.......................................... $ 135,440 $ 22,813 $ 14,581 $ 7,648 $ 0.22 Second quarter......................................... $ 138,034 $ 23,809 $ 15,847 $ 8,307 $ 0.24 Third quarter.......................................... $ 133,767 $ 21,536 $ 13,789 $ 6,944 $ 0.20 Fourth quarter......................................... $ 176,274 $ (10,035) $ (22,839) $ (16,381) $ (0.46) YEAR ENDED MARCH 31, 1996 First quarter.......................................... $ 94,145 $ 13,043 $ 5,530 $ 3,511 $ 0.12 Second quarter......................................... $ 119,850 $ 17,666 $ 11,459 $ 7,257 $ 0.21 Third quarter.......................................... $ 122,929 $ 18,969 $ 11,509 $ 7,360 $ 0.21 Fourth quarter......................................... $ 129,933 $ 19,786 $ 11,553 $ 7,291 $ 0.21 YEAR ENDED MARCH 31, 1995 First quarter.......................................... $ 47,672 $ (8,361) $ (11,055) $ (7,399) $ (0.25) Second quarter......................................... $ 62,384 $ (6,962) $ (11,428) $ (7,379) $ (0.25) Third quarter.......................................... $ 83,641 $ 6,295 $ 807 $ 483 $ 0.02 Fourth quarter......................................... $ 96,581 $ 15,416 $ 10,257 $ 6,353 $ 0.22
14. SUBSEQUENT EVENT On January 16, 1997, the Company's gaming license in Kansas City was formally issued for its facility which is located in a man-made basin filled with water piped in from the surface of the Missouri River. In reliance on numerous approvals from the Missouri Gaming Commission specific to the configuration and granted prior to the formal issuance of its gaming license, the Company built and opened the Station Casino Kansas City facility. The license issued to the Company and the resolutions related thereto specifically acknowledge that the Missouri Gaming Commission had reviewed and approved this configuration. On November 24, 1997, the Supreme Court of Missouri, in a case challenging the gaming licenses issued to certain competing operators of Station Casino St. Charles located in Maryland Heights, Missouri, ruled that gaming may occur only in artificial spaces that are contiguous to the surface stream of the Missouri and Mississippi Rivers. AKIN V. MISSOURI GAMING COMMISSION, Case No. 79594, Missouri Supreme Court (November 1997). The case was remanded to the trial court for a factual determination as to whether such competing facilities meet this standard. The Missouri Gaming Commission may also have the right to review the validity of Station Casino Kansas City's current configuration in connection with the Company's relicensing hearing scheduled to occur in January 1998. Because of the uncertainties caused by the Missouri Supreme Court's decision, and because the Company is not subject to any claim with regard to this matter at this time, the Company cannot predict what effect the Missouri Supreme Court ruling or Missouri Gaming Commission actions at such relicensing hearing will have on operations at Station Casino Kansas City. At this time, based on discussions with Missouri legal counsel, management believes that it has potentially meritorious defenses if a lawsuit or F-30 STATION CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENT (CONTINUED) administrative action based on this ruling were to be brought. In addition, based on its current understanding of the ruling, management believes that if it were to be required to take remedial action with respect to Station Casino Kansas City, such remediation could be completed at a cost that would not have a material adverse effect on the Company's financial condition. However, management cannot provide any assurance as to whether the Station Casino Kansas City facility would be found to comply with the guidelines described in the Missouri Supreme Court ruling, whether it would be permitted to modify the facility to comply with such standards or whether the Company's legal defenses, legislative avenues or other means available to permit continued use of its current configuraton would succeed. Further, it is unclear, in the event of a determination of non-compliance, what penalty or sanction, if any, including a possible temporary or permanent closure, could be imposed on Station Casino Kansas City. The Company and its Missouri legal counsel do not believe the court ruling will have an adverse impact on the Station Casino St. Charles operations. F-31 STATION OPERATING COMPANY PRO FORMA COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Combined Financial Statements make adjustments to the historical statements of operations of OpCo as if the Reorganization Transactions had occurred on April 1, 1996 and make adjustments to the OpCo's historical balance sheet as if the Reorganization Transactions had occurred on September 30, 1997. The Unaudited Pro Forma Combined Financial Statements are provided for comparative purposes only and do not purport to be indicative of the results which actually would have been obtained if the Reorganization Transactions had been effected on the dates indicated or the results which may be obtained in the future. No commitments are currently in place with respect to any of the financing anticipated to be required by Station REIT in connection with the Reorganization Transactions. The Unaudited Pro Forma Combined Financial Statements do not make adjustments for certain non-recurring costs expected to be incurred to implement the Reorganization Transactions. F-32 STATION OPERATING COMPANY UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- ----------- Cash and cash equivalents............................................... $ 43,923 $ -- $ 43,923 Accounts receivable..................................................... 12,487 -- 12,487 Inventories............................................................. 4,360 -- 4,360 Prepaid gaming taxes.................................................... 6,657 -- 6,657 Prepaid expenses and other.............................................. 14,920 -- 14,920 ---------- ----------- ----------- Total current assets.................................................. 82,347 -- 82,347 Property and equipment, net............................................. 447,485 -- 447,485 Land held for development............................................... 7,599 -- 7,599 Other assets, net....................................................... 43,426 (7,765)(1) 35,661 ---------- ----------- ----------- Total assets.......................................................... $ 580,857 $ (7,765) $ 573,092 ---------- ----------- ----------- ---------- ----------- ----------- Current portion of long-term debt....................................... $ 14,195 $ (14,195)(2) $ -- Accounts payable........................................................ 16,383 -- 16,383 Accrued payroll and related............................................. 16,015 -- 16,015 Construction contracts payable.......................................... 12,698 -- 12,698 Accrued expenses and other current liabilities.......................... 32,998 (2,312)(2) 30,686 ---------- ----------- ----------- Total current liabilities............................................. 92,289 (16,507) 75,782 Long-term debt, less current portion.................................... 354,369 (354,369)(2) -- 105,000(3) 105,000 Deferred income taxes, net.............................................. 21,850 41,956(4) 63,806 ---------- ----------- ----------- Total liabilities..................................................... 468,508 (223,920) 244,588 Mandatory redeemable preferred stock.................................... -- 20,000(5) 20,000 Investment by Station Casinos, Inc...................................... 112,349 (112,349)(6) -- Common stock............................................................ -- -- -- Additional paid-in capital.............................................. -- 308,504(6) 308,504 ---------- ----------- ----------- Total liabilities and Investment by Station Casinos, Inc./ Stockholders' equity................................................................ $ 580,857 $ (7,765) $ 573,092 ---------- ----------- ----------- ---------- ----------- -----------
F-33 STATION OPERATING COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (1) Represents deferred financing fees with respect to the expected OpCo Bank Facility and the elimination of deferred financing fees related to Station REIT's Current Bank Facility and the Sunset Note. (2) Represents Station REIT's repayment of the Current Bank Facility, the Sunset Note, certain other obligations, and the related accrued interest with proceeds from the expected Station REIT common stock offering. (3) Represents borrowings under the expected OpCo Bank Facility, which would be applied to repay the Intermediate Note. (4) The Transferred Assets recorded in OpCo's financial statements will be recorded at their historical book value. For tax purposes, the Transferred Assets will be recorded by OpCo at a new tax basis equal to the estimated aggregate fair market value of OpCo's Common Stock, OpCo Preferred Stock and Intermediate Note issued to Station REIT. The change in tax basis in comparison to the historical book value of the Transferred Assets recorded in the historical financial statements creates a deferred tax liability under Statement of Financial Accounting Standards No. 109--"Accounting for Income Taxes." (5) Represents 20 million shares of OpCo Preferred Stock issued to Station REIT with an aggregate liquidation value of $20.0 million. (6) Represents the recapitalization of OpCo as a result of the Reorganization Transaction and the consideration given to Station REIT for the Transferred Assets. F-34 STATION OPERATING COMPANY UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
PRO FORMA HISTORICAL ADJUSTMENTS ADJUSTED ---------- ----------- ----------- Operating revenues: Casino.................................................................... $ 282,700 $ -- $ 282,700 Food and beverage......................................................... 63,577 -- 63,577 Room...................................................................... 17,218 -- 17,218 Other..................................................................... 28,676 -- 28,676 ---------- ----------- ----------- Gross revenues.............................................................. 392,171 -- 392,171 Promotional allowances...................................................... (24,558) -- (24,558) ---------- ----------- ----------- Net revenues................................................................ 367,613 -- 367,613 ---------- ----------- ----------- Operating costs and expenses: Casino.................................................................... 137,592 -- 137,592 Food and beverage......................................................... 44,862 -- 44,862 Room...................................................................... 6,481 -- 6,481 Other..................................................................... 13,481 -- 13,481 Lease expense............................................................. -- 57,375(1) 57,375 Selling, general and administrative....................................... 81,896 -- 81,896 Corporate expense......................................................... 7,644 -- 7,644 Development expenses...................................................... 104 -- 104 Intercompany expense...................................................... 6,242 (6,242)(2) -- Depreciation and amortization............................................. 26,927 26,927 Preopening expenses....................................................... 10,866 -- 10,866 ---------- ----------- ----------- Total costs and expenses.................................................... 336,095 51,133 387,228 ---------- ----------- ----------- Operating income (loss)..................................................... 31,518 (51,133) (19,615) Interest expense, net....................................................... (6,172) 1,377(3) (4,795) Other income (expense), net................................................. (4,996) -- (4,996) ---------- ----------- ----------- Income (loss) before income taxes........................................... 20,350 (49,756) (29,406) Income tax (provision) benefit.............................................. (6,830) 17,414(4) 10,584 ---------- ----------- ----------- Net income (loss)........................................................... 13,520 (32,342) (18,822) Preferred stock dividends................................................... -- (1,200)(6) (1,200) ---------- ----------- ----------- Net income (loss) applicable to common stock................................ $ 13,520 $ (33,542) $ (20,022) ---------- ----------- ----------- ---------- ----------- ----------- Net loss per common share................................................... $ (10.01)(6) ----------- ----------- Weighted average shares outstanding......................................... 2,000 ----------- -----------
F-35 STATION OPERATING COMPANY UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
PRO FORMA HISTORICAL ADJUSTMENTS ADJUSTED ---------- ----------- ----------- Operating revenues: Casino................................................................. $ 450,013 -- $ 450,013 Food and beverage...................................................... 92,220 -- 92,220 Room................................................................... 27,420 -- 27,420 Other.................................................................. 48,957 -- 48,957 ---------- ----------- ----------- Gross revenues........................................................... 618,610 -- 618,610 Promotional allowances................................................... (35,095) -- (35,095) ---------- ----------- ----------- Net revenues............................................................. 583,515 -- 583,515 ---------- ----------- ----------- Operating costs and expenses: Casino................................................................. 203,857 -- 203,857 Food and beverage...................................................... 68,994 -- 68,994 Room................................................................... 10,318 -- 10,318 Other.................................................................. 23,927 -- 23,927 Lease expense.......................................................... -- 88,708(1) 88,708 Selling, general and administrative.................................... 120,285 -- 120,285 Corporate expense...................................................... 18,284 -- 18,284 Restructuring charge................................................... 2,016 -- 2,016 Development expenses................................................... 1,302 -- 1,302 Intercompany expense................................................... 7,970 (7,970)(2) -- Depreciation and amortization.......................................... 36,619 -- 36,619 Preopening expenses.................................................... 31,820 -- 31,820 ---------- ----------- ----------- Total costs and expenses................................................. 525,392 80,738 606,130 ---------- ----------- ----------- Operating income (loss).................................................. 58,123 (80,738) (22,615) Interest expense, net.................................................... (7,413) (2,179)(3) (9,592) Other income (expense), net.............................................. (47) -- (47) ---------- ----------- ----------- Income (loss) before income taxes........................................ 50,663 (82,917) (32,254) Income tax (provision) benefit........................................... (17,121) 29,021(4) 11,900 ---------- ----------- ----------- Net income (loss)........................................................ 33,542 (53,896) (20,354) Preferred stock dividends................................................ -- (2,400)(5) (2,400) ---------- ----------- ----------- Net income (loss) applicable to common stock............................. $ 33,542 $ (56,296) $ (22,754) ---------- ----------- ----------- ---------- ----------- ----------- Net (loss) per common share.............................................. $ (11.38)(6) ----------- ----------- Weighted average shares outstanding...................................... 2,000 ----------- -----------
F-36 STATION OPERATING COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED MARCH 31, 1997 (1) Represents pro forma lease expense which will have been incurred during the respective periods pursuant to the Leases between OpCo and Station REIT. Station Casino Kansas City and Sunset Station commenced operations on January 16, 1997 and June 10, 1997 respectively. The annual lease expenses have been prorated accordingly. (2) Represents the adjustment to eliminate the intercompany expense related to depreciation on real estate assets held by Station REIT which OpCo has historically utilized in conducting its hotel/casino operations. (3) Represents the adjustment to eliminate interest expense related to Station REIT's Current Bank Facility and the Sunset Note, and record interest expense at an assumed rate of 8.5% per annum (actual rate may vary) on $105.0 million of expected borrowings under OpCo's Bank Facility needed to repay the Intermediate Note and the related amortization of debt financing fees. (4) Represents the adjustment to the tax provision (benefit) due to the net effect of the pro forma adjustments on the respective statements of operations. The statutory rate of 35% has been used. (5) Represents the dividends on the OpCo Preferred Stock issued as partial consideration for the Transferred Assets for which OpCo issued to Station REIT of its Preferred Stock with an aggregate liquidation value of $20.0 million. (6) Net loss per common share is based on earnings after assumed OpCo Preferred Stock dividend requirements ($2.4 million for the year ended March 31, 1997 and $1.2 million for the six months ended September 30, 1997) divided by the weighted average number of common shares outstanding during the periods (assumed to be 2 million shares during all periods based on the issuance of one share of OpCo Common Stock for every 17.5 shares of Station REIT Common Stock outstanding as of the Record Date). F-37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of Station Operating Company: We have audited the accompanying combined balance sheets of Station Operating Company (a Nevada corporation and wholly owned subsidiary of Station Casinos, Inc.) and subsidiaries as of March 31, 1997 and 1996, and the related combined statements of operations and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Station Operating Company as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Las Vegas, Nevada November 21, 1997 (except for Note 13 as to which the date is November 24, 1997) F-38 STATION OPERATING COMPANY COMBINED BALANCE SHEETS
MARCH 31, ------------------------ 1997 1996 ------------ ---------- SEPTEMBER 30, 1997 ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............................................. $ 42,522 $ 114,868 $ 43,923 Accounts and notes receivable, net.................................... 7,852 5,151 12,487 Inventories........................................................... 3,473 2,299 4,360 Prepaid gaming taxes.................................................. 4,291 3,726 6,657 Prepaid expenses and other............................................ 11,231 7,395 14,920 ------------ ---------- ------------- Total current assets................................................ 69,369 133,439 82,347 Property and equipment, net........................................... 431,324 225,223 447,485 Land held for development............................................. 7,599 10,082 7,599 Other assets, net..................................................... 49,021 29,347 43,426 ------------ ---------- ------------- $ 557,313 $ 398,091 $ 580,857 ------------ ---------- ------------- ------------ ---------- ------------- LIABILITIES AND INVESTMENT BY STATION CASINOS, INC. Current liabilities: Current portion of long-term debt..................................... $ 18,807 $ 23,256 $ 14,195 Accounts payable...................................................... 21,106 11,091 16,383 Accrued payroll and related........................................... 13,460 11,519 16,015 Construction contracts payable........................................ 7,941 2,116 12,698 Accrued expenses and other current liabilities........................ 27,110 17,093 32,998 ------------ ---------- ------------- Total current liabilities........................................... 88,424 65,075 92,289 Long-term debt, less current portion.................................... 359,090 53,324 354,369 Deferred income taxes, net.............................................. 14,183 10,240 21,850 ------------ ---------- ------------- Total liabilities................................................... 461,697 128,639 468,508 ------------ ---------- ------------- Commitments and contingencies (Note 7) Investment by Station Casino, Inc....................................... 95,616 269,452 112,349 ------------ ---------- ------------- $ 557,313 $ 398,091 $ 580,857 ------------ ---------- ------------- ------------ ---------- -------------
The accompanying notes are an integral part of these combined statements. F-39 STATION OPERATING COMPANY COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED FOR THE YEARS ENDED MARCH 31, SEPTEMBER 30, ------------------------------------------- ---------------------- 1997 1996 1995 1997 1996 ------------- ------------- ------------- ---------- ---------- (AMOUNTS IN THOUSANDS) (UNAUDITED) Operating revenues: Casino................................... $ 450,013 $ 358,495 $ 210,534 $ 282,700 $ 212,072 Food and beverage........................ 92,220 73,057 43,208 63,577 42,626 Room..................................... 27,420 23,614 17,690 17,218 12,658 Other.................................... 48,957 39,099 36,561 28,676 22,752 ------------- ------------- ------------- ---------- ---------- Gross revenues......................... 618,610 494,265 307,993 392,171 290,108 Promotional allowances................... (35,095) (27,408) (17,715) (24,558) (16,634) ------------- ------------- ------------- ---------- ---------- Net revenues........................... 583,515 466,857 290,278 367,613 273,474 ------------- ------------- ------------- ---------- ---------- Operating costs and expenses: Casino................................... 203,857 150,805 92,812 137,592 93,278 Food and beverage........................ 68,994 57,659 34,045 44,862 32,275 Room..................................... 10,318 9,147 7,014 6,481 5,097 Other.................................... 23,927 24,902 27,270 13,481 11,260 Selling, general and administrative...... 120,285 97,466 60,810 81,896 55,606 Corporate expenses....................... 18,284 15,979 13,141 7,644 8,642 Restructuring charge..................... 2,016 -- -- -- -- Development expenses..................... 1,302 3,960 7,200 104 602 Intercompany expense..................... 7,970 5,202 3,333 6,242 3,655 Depreciation and amortization............ 36,619 29,837 18,887 26,927 16,437 Preopening expenses...................... 31,820 2,436 19,378 10,866 -- ------------- ------------- ------------- ---------- ---------- 525,392 397,393 283,890 336,095 226,852 ------------- ------------- ------------- ---------- ---------- Operating income........................... 58,123 69,464 6,388 31,518 46,622 Other income (expense): Interest expense, net.................... (7,413) (10,546) (6,980) (6,172) (3,479) Other.................................... (47) 1,150 2,160 (4,996) 67 ------------- ------------- ------------- ---------- ---------- (7,460) (9,396) (4,820) (11,168) (3,412) ------------- ------------- ------------- ---------- ---------- Income before income taxes................. 50,663 60,068 1,568 20,350 43,210 Income tax provision....................... (17,121) (21,596) (812) (6,830) (15,152) ------------- ------------- ------------- ---------- ---------- Net income................................. $ 33,542 $ 38,472 $ 756 $ 13,520 $ 28,058 ------------- ------------- ------------- ---------- ---------- ------------- ------------- ------------- ---------- ----------
SIX MONTHS YEAR ENDED ENDED MARCH 31, SEPTEMBER 30, ----------- ------------- 1997 1997 ----------- ------------- Supplemental Pro Forma Presentation (unaudited) Net income:...................................................... $ 33,542 $ 13,520 ----------- ------------- ----------- ------------- Pro forma adjustment to intercompany, interest expense and lease expense Intercompany expense............................................. 7,970 6,242 Interest expense................................................. (2,179) 1,377 Lease expense.................................................... (88,708) (57,375) Related income taxes............................................. 29,021 17,414 ----------- ------------- Pro forma net loss after intercompany expense, interest expense and lease expense.................................................... $ (20,354) $ (18,822) ----------- ------------- ----------- -------------
The accompanying notes are an integral part of these combined statements. F-40 STATION OPERATING COMPANY COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FOR THE YEARS ENDED MARCH 31, SEPTEMBER 30, ------------------------------- -------------------- 1997 1996 1995 1997 1996 --------- --------- --------- --------- --------- (UNAUDITED) (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 33,542 $ 38,472 $ 756 $ 13,520 $ 28,058 --------- --------- --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Intercompany expense.................................... 7,970 5,202 3,333 6,242 3,655 Depreciation and amortization........................... 36,619 29,837 18,887 26,927 16,437 Preopening expenses..................................... 31,820 2,436 19,378 10,866 -- (Decrease) increase in deferred income taxes............ 2,118 10,847 (5,916) 5,886 5,018 Changes in assets and liabilities: Increase in accounts and notes receivable, net........ (1,151) (522) (955) (4,635) (1,393) Increase in inventories and prepaid expenses and other............................................... (3,750) (2,430) (3,335) (5,161) (3,376) (Decrease) increase in accounts payable............... 10,015 (2,710) 8,332 (4,723) 6,481 Increase (decrease) in accrued expenses and other current liabilities................................. 10,523 4,474 10,577 6,911 (64) Other, net.............................................. 107 2,873 7,200 6,200 472 --------- --------- --------- --------- --------- Total adjustments................................... 94,271 50,007 57,501 48,513 27,230 --------- --------- --------- --------- --------- Net cash provided by operating activities........... 127,813 88,479 58,257 62,033 55,288 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures.................................... (251,025) (64,616) (121,905) (43,707) (34,891) Proceeds from sale of land, property and equipment...... 8,900 6,578 12,483 2,399 8,227 Land held for development............................... (119) (354) (5,978) -- (111) Other long-term assets.................................. (15,410) (4,818) 3,553 (4,616) (5,587) Increase (decrease) in construction contracts payable... 5,825 (2,427) (1,490) 4,757 3,917 Preopening expenses..................................... (31,820) (2,436) (19,378) (8,550) (6,620) Other, net.............................................. (1,459) (6,560) 342 930 (2,160) --------- --------- --------- --------- --------- Net cash used in investing activities............... (285,108) (74,633) (132,373) (48,787) (37,225) --------- --------- --------- --------- --------- Cash flows from financing activities: Borrowings (payments) under bank facility, net.......... 277,000 (65,000) 37,000 (63,000) 73,000 Borrowings under Sunset loan agreement.................. 46,000 -- -- 57,000 -- Proceeds from notes payable............................. 2,250 42,438 13,757 15,730 -- Principal payments on notes payable..................... (24,294) (34,958) (8,195) (19,577) (13,332) Investment by Station Casinos, Inc...................... (215,348) 142,283 31,759 (3,029) (161,975) Other net............................................... (659) (702) 597 1,031 -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities........................................ 84,949 84,061 74,918 (11,845) (102,307) --------- --------- --------- --------- --------- Cash and cash equivalents: (Decrease) increase in cash and cash equivalents........ (72,346) 97,907 802 1,401 (84,244) Balance, beginning of year.............................. 114,868 16,961 16,159 42,522 114,868 --------- --------- --------- --------- --------- Balance, end of year.................................... $ 42,522 $ 114,868 $ 16,961 $ 43,923 $ 30,624 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental cash flow disclosures: Cash paid for interest, net of amounts capitalized...... $ 7,665 $ 9,498 $ 6,170 $ 5,792 $ 3,928 Property and equipment purchases financed by debt....... $ 361 $ 21,164 $ 22,719 $ -- $ 361
The accompanying notes are an integral part of these combined statements. F-41 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS 1. FORMATION OF STATION OPERATING COMPANY AND BASIS OF PRESENTATION Station Casinos, Inc. ("STN") is an established multi-jurisdictional gaming enterprise that currently owns and operates four hotel/casino properties in Las Vegas, Nevada, a gaming and entertainment complex in St. Charles, Missouri and a gaming and entertainment complex in Kansas City, Missouri. STN also owns and provides slot route management services in Southern Nevada and Louisiana. STN's wholly-owned subsidiaries include: Palace Station Hotel & Casino, Inc. ("Palace Station"), Boulder Station, Inc. ("Boulder Station"), Texas Station, Inc. ("Texas Station"), Sunset Station, Inc. ("Sunset Station"), St. Charles Riverfront Station, Inc. ("Station Casino St. Charles"), Kansas City Station Corporation ("Station Casino Kansas City"), and Southwest Gaming Services, Inc. ("SGSI") (collectively, the "Casino Properties"). STN owns a 50% interest in Town Center Amusements, Inc. d.b.a. Barley's Casino & Brewing Company. This investment is accounted for using the equity method of accounting. On November 24, 1997, the Board of Directors of STN approved in principle, subject to formal declaration of a dividend, a plan for the distribution (the "Distribution") to holders of STN common stock (on a one share for 17.5 shares basis) of all outstanding shares of common stock of Station Operating Company, a Nevada Corporation and a wholly-owned subsidiary of Station Casinos, Inc., (the "Company" or "OpCo"). For purposes of these combined financial statements, all references to "OpCo" shall mean certain real estate and substantially all non-real estate assets and liabilities ("Transferred Assets and Liabilities") associated with managing the gaming operations related to STN that will be transferred to OpCo prior to the Distribution. STN will retain substantially all the real estate assets and certain bank and public debt and convert to a real estate investment trust for federal income tax purposes. OpCo will operate the gaming business. Under the proposed plan, OpCo will become a publicly traded company that will include all of STN's current hotel/casino operations. These combined financial statements present the financial position, results of operations and cash flows of OpCo as if it were a separate entity for all periods presented. STN's historical basis in the Transferred Assets and Liabilities of OpCo has been carried over. All material intercompany transactions and balances between OpCo, its subsidiaries and the combined affiliates which include the Transferred Assets and Liabilities have been eliminated in combination. Changes in the Investment by Station Casinos, Inc. reflected in the accompanying combined financial statements represent the net income of OpCo plus the net change in cash transferred between OpCo and STN and certain non-cash items. The accompanying combined financial statements assume that OpCo has operated as a unit of STN for all periods presented, utilizing STN's centralized systems for cash management, employee benefit plans, insurance and administrative services. As a result, substantially all cash received by OpCo is reflected as deposited in and commingled with STN's corporate funds. Similarly, operating expenses, capital expenditures and other cash requirements of OpCo are reflected as paid by STN and charged directly or allocated to OpCo. In the opinion of management, STN's methods for allocating costs are believed to be reasonable. However, such costs are not necessarily indicative of the costs that would have been incurred if OpCo had been operated as an unaffiliated entity. It is not practicable to estimate those costs on a stand-alone basis. For purposes of governing certain of the ongoing relationships between OpCo and STN after the Distribution and to provide for an orderly transition, OpCo and STN will enter into various agreements including a Distribution Agreement, Post-Distribution Tax Allocation Agreement, Post-Distribution Transition Services Agreement, Post-Distribution Employee Benefits Agreement, Post-Distribution Intellectual Property Agreement and various real estate lease agreements. Effective as of the Distribution date, these agreements will provide, among other things that (i) in consideration for the Transferred Assets and Liabilities, OpCo will issue to STN an intermediate note, OpCo common stock and OpCo mandatory redeemable preferred stock; (ii) OpCo will lease from STN certain real estate assets on which STN's F-42 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. FORMATION OF STATION OPERATING COMPANY AND BASIS OF PRESENTATION (CONTINUED) gaming operations are currently operated and OpCo will operate and manage such real estate as gaming facilities; (iii) OpCo will enter into sub-leases with STN to lease real and personal property necessary to the operation of the Casino Properties that contain terms that are similar to those entered into by STN with the respective existing lessors (See Note 7); and (iv) establish employee benefit plans similar to STN's current plans. INTERIM PERIODS The combined financial statements for the six months ended September 30, 1997 and 1996 and related amounts in the notes to the combined financial statements are unaudited, but in the opinion of management, reflect all normal and recurring adjustments necessary for a fair presentation of the results of these interim periods. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents include investments purchased with an original maturity of 90 days or less. INVENTORIES Inventories are stated at the lower of cost or market; cost being determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the capitalized lease, whichever is less. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. CAPITALIZATION OF INTEREST Interest cost associated with debt incurred in connection with major construction projects is capitalized. Interest capitalization ceases once the project is complete. When no debt is specifically identified as being incurred in connection with such construction projects, interest on amounts expended on the project is capitalized based on the average cost of borrowings. Interest cost associated with STN's debt that was incurred in connection with the construction of OpCo's assets has been reflected in the Investment by STN caption in the accompanying combined balance sheets. Interest capitalized for the fiscal years ended March 31, 1997, 1996, and 1995, and for the six months ended September 30, 1997 and 1996, was approximately $1.9 million, $0, $0, $2.5 million and $650,000, respectively. DEBT ISSUANCE COSTS Debt issuance costs incurred in connection with borrowings are capitalized and amortized to interest expense over the terms of the related debt agreements, using the effective interest method or method which approximates the effective interest method. F-43 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEVELOPMENT ACTIVITIES All internal salaries and related expenses with respect to development activities are expensed as incurred. Other development costs, including legal, lobbying, and consulting are expensed, until such time as the jurisdiction has approved gaming and a specific site has been identified. Costs incurred subsequent to these criteria being met are capitalized. At March 31, 1997 and 1996 and September 30, 1997, capitalized costs of $0.7 million, $1.3 million and $0 million, respectively, related to various development projects are included in other assets, net in the accompanying combined balance sheets. PREOPENING EXPENSES Prior to the opening of a facility, all operating expenses, including incremental salaries and wages related thereto are capitalized as preopening expenses. At March 31, 1997, $2.4 million of preopening expenses related to Sunset Station had been capitalized and are included in other assets, net in the accompanying combined balance sheets. Upon the opening of the related facility, preopening costs are expensed. During the fiscal year ended March 31, 1995, the Company incurred preopening expenses of $7.5 million and $11.9 million related to Boulder Station and Station Casino St. Charles, respectively. During the fiscal year ended March 31, 1996, preopening expenses of $2.4 million related to new projects for Texas Station and Barley's Casino & Brewing Company and expansion projects at Boulder Station and Station Casino St. Charles were incurred. During the fiscal year ended March 31, 1997, preopening expenses of $31.8 million substantially related to the opening of Station Casino Kansas City were incurred. During the six months ended September 30, 1997, preopening expenses of $10.9 million substantially related to the opening of Sunset Station were incurred. REVENUES AND PROMOTIONAL ALLOWANCES In accordance with industry practice, casino revenues represent the net win from gaming activities, which is the difference between gaming wins and losses. All other revenues are recognized as the service is provided. Revenues include the retail value of accommodations and food and beverage provided on a complimentary basis to customers. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses and consist of the following (amounts in thousands):
FOR THE YEARS ENDED FOR THE SIX MONTHS MARCH 31, ENDED SEPTEMBER 30, 1997 1996 1995 1997 1996 --------- --------- --------- --------- --------- (UNAUDITED) -------------------- Food and beverage................................ $ 27,418 $ 23,483 $ 14,276 $ 18,387 $ 13,964 Room............................................. 1,439 1,203 874 1,073 561 Other............................................ 1,263 653 313 1,483 649 --------- --------- --------- --------- --------- Total...................................... $ 30,120 $ 25,339 $ 15,463 $ 20,943 $ 15,174 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME TAXES OpCo has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in financial statements or tax returns. In addition, SFAS No. 109 requires an allocation of current and deferred tax expense for those entities of a group that file a consolidated tax return that are issuing separate financial statements as if the entity had computed such amounts on a stand-alone basis. Neither OpCo nor the Casino Properties have a formal tax F-44 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) sharing agreement with STN. The taxable income or loss from the activities of OpCo have been included in the consolidated tax return of STN for the periods presented in the accompanying combined financial statements. Effective the date of Distribution, OpCo will become a stand-alone tax paying entity. INTERCOMPANY EXPENSE Intercompany expense represents depreciation on real estate assets held by STN which OpCo has historically utilized in conducting its hotel/casino operations. Such real estate assets will be leased by OpCo from STN commencing on the date of Distribution. EARNINGS (LOSS) PER COMMON SHARE Given OpCo's lack of a capital structure separate from STN and the changes to be effected by the Distribution, historical earnings per share amounts are not presented in the accompanying combined financial statements as they are not considered to be meaningful. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which is effective for fiscal years ending after December 15, 1997. This statement replaces primary earnings per share ("EPS") with basic EPS. No dilution for potentially dilutive securities is included in basic EPS. This statement also requires when applying the treasury stock method for diluted EPS to compute dilution for options and warrants, to use average share price for the period, rather than the more dilutive greater of the average share price or end-of-period share price. OpCo will adopt SFAS No. 128 subsequent to the Distribution. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. SUPPLEMENTAL PRO-FORMA PRESENTATION (UNAUDITED) The supplemental pro-forma presentation is presented as if the Distribution had been completed as of the beginning of the fiscal year ended March 31, 1997 and as of the beginning of the six-month period ended September 30, 1997 to reflect the lease payments to STN, remove the intercompany expense related to depreciation described above and interest expense related to debt that will not exist subsequent to the date of Distribution and reflect the interest expense related to OpCo's proposed borrowings. This supplemental pro-forma presentation is necessary to assess the financial impact of the Distribution. 3. ACCOUNTS AND NOTES RECEIVABLE Components of accounts and notes receivable are as follows (amounts in thousands):
MARCH 31, SEPTEMBER 30, 1997 1996 1997 --------- --------- ------------- (UNAUDITED) Casino.............................................................. $ 3,698 $ 2,569 $ 5,697 Hotel............................................................... 1,331 1,144 1,575 Other............................................................... 3,876 2,082 7,175 --------- --------- ------------- 8,905 5,795 14,447 Allowance for doubtful accounts..................................... (1,053) (644) (1,960) --------- --------- ------------- Accounts and notes receivable, net.......................... $ 7,852 $ 5,151 $ 12,487 --------- --------- ------------- --------- --------- -------------
F-45 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following (amounts in thousands):
ESTIMATED LIFE MARCH 31, SEPTEMBER 30, (YEARS) 1997 1996 1997 --------------- ---------- ---------- ------------- (UNAUDITED) Boats and barges................................ 20-45 $ 123,774 $ 81,463 $ 123,774 Furniture, fixtures and equipment............... 3-7 320,871 202,975 338,388 Construction in progress........................ -- 54,062 12,231 77,108 ---------- ---------- ------------- 498,707 296,669 539,270 Accumulated depreciation and amortization.................................. (67,383) (71,446) (91,785) ---------- ---------- ------------- Property and equipment, net............. $ 431,324 $ 225,223 $ 447,485 ---------- ---------- ------------- ---------- ---------- -------------
5. LAND HELD FOR DEVELOPMENT STN has acquired several parcels of land in various jurisdictions as part of its development activities which are included in the accompanying combined balance sheets. A decision whether to proceed with any new gaming opportunity is dependent upon future economic and regulatory factors, the availability of financing and competitive and strategic considerations. No assurances can be made that appropriate licensing or acceptable financing can be obtained in order to proceed with any particular project. Included in the accompanying combined balance sheets at March 31, 1997 and 1996 and September 30, 1997, is $6.2 million, $6.4 million and $6.3 million, respectively, of land which had been acquired for potential gaming projects in jurisdictions where gaming has been approved. In addition, included in the accompanying combined balance sheets of OpCo at March 31, 1997 and 1996 and September 30, 1997, is $1.3 million, $3.7 million and $1.2 million, respectively, of land that has been acquired in certain jurisdictions where gaming has not yet been approved. No assurances can be made that these jurisdictions will approve gaming in the future. STN also entered into various purchase agreements whereby it has the option to acquire or lease land for development of potential new gaming projects totaling $31.3 million and $34.2 million at March 31, 1997 and 1996, respectively. In consideration for these options, STN paid or placed in escrow $6.0 million and $2.4 million at March 31, 1997 and 1996, respectively. Such option payments are included in other assets, net in the accompanying combined balance sheets of OpCo. If the options to acquire or lease the land are not exercised, all amounts paid or placed in escrow are forfeited. In June 1997, $5 million of expired option payments were expensed and are included in other income/expense in the accompanying combined statements of operations. F-46 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT In addition to obligations directly owed by OpCo, certain of its subsidiaries have extended certain guarantees, and pledged substantially all of their assets to secure STN's reducing revolving credit facility. Long-term debt of OpCo therefore consists of the following (amounts in thousands):
MARCH 31, MARCH 31, OpCo (excluding Sunset Station) 1997 1996 ----------- ---------- SEPTEMBER 30, 1997 ------------- (UNAUDITED) STN's reducing revolving credit facility, secured by substantially all of the assets of Palace Station, Boulder Station, Texas Station, Station Casino St. Charles and Station Casino Kansas City, $368 million limit at March 31, 1997, reducing quarterly by varying amounts until September 2000 when the remaining principal balance is due, interest at a margin above the bank's prime rate or the Eurodollar Rate (7.89% at March 31, 1997).................................................................... $ 277,000 $ $ 214,000 Term loan agreement, collateralized by a preferred ship mortgage, quarterly payments of $800,000 plus interest at LIBOR plus 4.25% to 4.75% (10.36% at March 31, 1997) with the remaining principal due May 2000..... $ 9,400 $ 12,600 $ 7,800 Term loan agreement, collateralized by a preferred ship mortgage, monthly payments of $100,000 plus interest at LIBOR plus 2.00% (7.81% at March 31, 1997) with the remaining principal due October 2001.................. 5,600 5,750 5,000 Note payable, collateralized by land and buildings, monthly payments of $46,000 plus interest at bank's prime rate (8.50% at March 31, 1997), with the remaining principal due September 1999.......................... 4,171 4,675 -- Note payable, collateralized by furniture and equipment, quarterly payments of $262,500 plus interest at LIBOR plus 2.25% (7.72% at March 31, 1997) with the remaining principal due November 2000................. 6,188 7,238 5,663 Notes payable to banks and others, collateralized by slot machines and related equipment, monthly payments including interest ranging from 7.47% to 7.94%................................................................. 21,376 31,877 27,054 Capital lease obligations, collateralized by furniture and equipment...... 7,703 12,171 5,096 Other long-term debt...................................................... 459 2,269 951 ----------- ---------- ------------- Subtotal................................................................ 331,897 76,580 265,564
F-47 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT (CONTINUED) Sunset Station $110 million Sunset Station first mortgage construction/term loan agreement, secured by substantially all of the assets of Sunset Station, interest at a margin of 375 basis points above the Eurodollar Rate (9.37% at March 31, 1997), due September 2000................................... 46,000 103,000 ----------- ---------- ------------- Total long-term debt.................................................... 377,897 76,580 368,564 Current portion of long-term debt......................................... (18,807) (23,256) (14,195) ----------- ---------- ------------- Total long-term debt, less current portion.............................. $ 359,090 $ 53,324 $ 354,369 ----------- ---------- ------------- ----------- ---------- -------------
The estimated fair value of OpCo's long-term debt at March 31, 1997 was the same as the book value. Fair value was estimated based on the current rates offered to OpCo for debt having the same remaining maturities. Scheduled maturities of long-term debt are as follows (amounts in thousands):
MARCH 31, ---------- 1998.............................................................................. $ 18,807 1999.............................................................................. 12,948 2000.............................................................................. 11,141 2001.............................................................................. 333,373 2002.............................................................................. 1,288 Thereafter........................................................................ 340 ---------- Total........................................................................... $ 377,897 ---------- ----------
On July 5, 1995, STN obtained a $275 million reducing revolving credit facility. On March 25, 1996, the STN amended and restated this bank facility, providing for borrowings up to an aggregate principal amount of $400 million. On March 21, 1997 and June 27, 1997, the STN obtained certain amendments to the reducing revolving bank credit facility in order to enhance its borrowing capacity (the "Bank Facility"). The Bank Facility is secured by substantially all the assets of STN and OpCo. In addition, the Bank Facility is guaranteed by STN and a subsidiary of OpCo. The Bank Facility matures on September 30, 2000 and reduces quarterly by varying amounts (including $8 million for the fiscal quarter ending on June 30, 1997 and $10 million for each quarter ending September 30, 1997, December 31, 1997 and March 31, 1998). Borrowings under the Bank Facility bear interest at a margin above the bank's prime rate or LIBOR, as selected by STN. The margin above such rates, and the fee on the unfunded portions of the Bank Facility, will vary quarterly based on the combined Borrower's, as defined, and STN's consolidated ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Bank Facility contains certain financial and other covenants that apply to OpCo. These covenants include a maximum funded debt to EBITDA ratio, limitations on indebtedness, as well as limitations on capital expenditures, payments of dividends and minimum consolidated net worth of STN. In September 1996, Sunset Station entered into a Construction/Term Loan Agreement (the "Sunset Loan Agreement") to finance the remaining development and construction costs of Sunset Station. The Sunset Loan Agreement includes a first mortgage term note in the amount of $110 million (the "Sunset Note") which is secured by substantially all of the assets of Sunset Station, including a deed of trust with F-48 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT (CONTINUED) respect to the real property related to the Sunset Station operations. A portion of the real property is subject to a lease between STN and Sunset Station. The remainder is owned by Sunset Station. In addition, the Sunset Note is collateralized by a security agreement as to all tangible and intangible personal property including Sunset Station's rights under an operating lease for certain furniture, fixtures and equipment to be used by Sunset Station. The Sunset Loan Agreement contains certain financial covenants including a minimum fixed charge coverage ratio and minimum net worth calculation, as well as limitations on indebtedness, guarantees, dividends, stock redemptions, mergers, acquisitions, sale of assets or sale of stock in STN subsidiaries and limitations on capital expenditures. STN also entered into an operating lease for certain furniture, fixtures and equipment with a cost of $40 million which in turn was subleased to Sunset Station (see Note 7). In addition, STN has provided a funding commitment to Sunset Station of up to an additional $25 million pursuant to a supplemental loan agreement (the "Supplemental Loan Agreement"). The Sunset Loan Agreement requires Sunset Station to draw amounts under the Supplemental Loan Agreement in the event of the failure of certain financial covenants under the Sunset Loan Agreement. Loans under this funding commitment could be drawn down starting September 30, 1997 in an amount of up to $10 million during the first year after such date, up to $10 million during the second year after such date and up to $5 million during the third year after such date. The Supplemental Loan Agreement also provides for an additional, separate funding commitment of up to $40 million in connection with a purchase option for certain furniture, fixtures and equipment under the Sunset Operating Lease (see Note 7). Sunset Station will pay interest at a rate per annum equal to the three-month Eurodollar Rate, the interest being solely in the form of commensurate additions to the principal of the Supplemental Loans. The Supplemental Loan Agreement expires in September 2001. The funding commitments under the Supplemental Loan Agreement are subject to limitations imposed by the indentures governing STN's existing senior subordinated notes and the Bank Facility. As of March 31, 1997 and September 30, 1997 (unaudited) no amounts have been borrowed under the Supplemental Loan Agreement. In order to manage the interest rate risk associated with the Sunset Note, Sunset Station entered into an interest rate swap agreement with Bank of America National Trust and Savings Association. This agreement swaps the variable rate interest pursuant to the Sunset Note to a fixed rate of 9.58% on $35 million notional amount as of January 1997 increasing to $60 million at March 1997, $90 million at June 1997, $100 million at September 1997 and then decreasing to $95 million at June 1998. The agreement expires in December 1998. The difference paid or received pursuant to the swap agreement is accrued as interest rates change and recognized as an adjustment to interest expense on the Sunset Note. Sunset Station is exposed to credit risk in the event of non-performance by the counterparty to the agreement. The Company believes the risk of non-performance by the counterparty is minimal. As of March 31, 1997, the market value of this interest rate swap was $1.0 million. 7. COMMITMENTS AND CONTINGENCIES As indicated in Note 1, upon completion of the Distribution, OpCo will enter into subleases with STN to lease real and personal property necessary to the operation of the Casino Properties. It is anticipated that the subleases will contain terms that are substantially similar to those described below between STN and the existing lessor. F-49 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) BOULDER STATION LEASE STN entered into a ground lease for 27 acres of land on which Boulder Station is located. STN leases this land from a trust pursuant to a long-term ground lease. The trustee of this trust is Bank of America NT&SA, the beneficiary of which is KB Enterprises, an affiliated company owned by Frank J. Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the parents of Frank J. Fertitta III, Chairman of the Board and Chief Executive Officer of STN. The lease has a term of 65 years with monthly payments of $125,000 through June 1998. In June 1998, and every ten years thereafter, the rent will be adjusted to the product of the fair market value of the land and the greater of (i) the then prevailing annual rate of return for comparably situated property or (ii) 8% per year. The rent will be further adjusted in June 2003 and every ten years thereafter by a cost of living factor. In no event will the rent for any period be less than the immediately prior period. Pursuant to the ground lease, STN has an option, exercisable at five-year intervals beginning in June 1998, to purchase the land at fair market value. STN's leasehold interest in the property is subject to a lien to secure borrowings under STN's Bank Facility. TEXAS STATION LEASE STN entered into a ground lease for 47 acres of land on which Texas Station is located. STN leases this land from a trust pursuant to a long-term ground lease. The trustee of this trust is Bank of America NT&SA, the beneficiary of which is Texas Gambling Hall & Hotel, Inc. an affiliate company of the Related Lessor. The lease has a term of 65 years with monthly rental payments of $150,000 through July 2000. In July 2000, and every ten years thereafter, the rent will be adjusted to the product of the fair market value of the land and the greater of (i) the then prevailing annual rate of return being realized for owners of comparable land in Clark County, Nevada 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 immediate prior period. Pursuant to the ground lease, STN will have an option, exercisable at five-year intervals beginning in May 2000, to purchase the land at fair market value. STN's leasehold interest in the property is subject to a lien to secure borrowings under STN's Bank Facility. SUNSET STATION LEASES In June 1994, STN entered into a lease agreement for approximately 47.5 acres of land in the Southeast area of Las Vegas on which Sunset Station is located. The lease has a term of 65 years with monthly rental payments of $120,000, adjusted on each subsequent five-year anniversary by a cost of living factor. On the seventh anniversary of the lease, STN has an option to purchase this land for $23.8 million. Additionally, on the seventh anniversary of the lease, the lessor has an option to sell this land to STN for $21.8 million. STN entered into an operating lease for furniture, fixtures and equipment (the "Equipment") with a cost of $40 million, dated as of September 25, 1996 (the "Sunset Operating Lease") with First Security Trust Company of Nevada. The Sunset Operating Lease expires in October 2000 and carries a lease rate of 225 basis points above the Eurodollar Rate. STN has entered into a sublease with Sunset Station for the Equipment pursuant to an operating lease with financial terms substantially similar to the Sunset Operating Lease. As of September 30, 1997, $35.7 million of equipment had been leased. In the event that Sunset Station elects to purchase the Equipment, STN has provided a funding commitment of up to the amount necessary for such purchase pursuant to the Supplemental Loan Agreement (subject to the limitations on funding contained in the Supplemental Loan Agreement) (See Note 6). In connection with F-50 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) the Sunset Operating Lease, STN also entered into a Participation Agreement, dated as of September 25, 1996 (the "Participation Agreement") with the trustee, as lessor under the Sunset Operating Lease, and holders of beneficial interests in the Lessor Trust (the "Holders"). Pursuant to the Participation Agreement, the Holders advanced funds to the trustee for the purchase by the trustee of, or to reimburse STN for, the purchase of the Equipment, which then will be leased to STN, and in turn subleased to Sunset Station. Pursuant to the Participation Agreement, STN also agreed to indemnify the Lessor and the Holders against certain liabilities. STATION CASINO ST. CHARLES In September 1994, Station Casino St. Charles entered into an agreement for property acquisitions with the City of St. Charles, Missouri, which allows for the acquisition by STN of property within a designated 107-acre Redevelopment Project Area, a portion of which is adjacent to Station Casino St. Charles. This land is being acquired for the construction of a mixed-use development, which may include retail space, a hotel, office space, convention space or restaurants. The Company has a right to terminate the agreement if all related acquisition costs exceed $13.7 million. As of March 31, 1997, OpCo has incurred $3.4 million of acquisition costs which are included in property and equipment, net in the accompanying combined balance sheets. STATION CASINO KANSAS CITY LEASE STN has invested in a joint venture, which owns the land on which Station Casino Kansas City is located. At March 31, 1997 and September 30, 1997, $3.5 million related to this investment is included in other assets, net in the accompanying combined balance sheets. In April 1994, Station Casino Kansas City entered into an agreement with the joint venture to lease this land. The agreement requires monthly payments of $85,000 through March 31, 1997 and $90,000 through the remainder of the lease term. The lease expires March 31, 2006, with an option to extend the lease for up to eight renewal periods of ten years each, plus one additional seven-year period. Commencing April 1, 1998 and every anniversary thereafter, the rent shall be adjusted by a cost of living factor. In connection with the joint venture agreement, STN received an option providing for the right to acquire the joint venture partner's interest in this joint venture. STN has the option to acquire this interest at any time after April 1, 2002 through April 1, 2011 for $11.7 million, however, commencing April 1, 1998 the purchase price will be adjusted by a cost of living factor of not more than 5% or less than 2% per annum. At March 31, 1997 and September 30, 1997, $2.6 million paid by STN in consideration for this option is included in other assets, net in the accompanying combined balance sheets. SOUTHERN FLORIDA In October 1994, STN entered into an agreement to form a limited partnership with the existing operator of a pari-mutuel facility in Southern Florida. In the event the voters of Florida approve casino gaming by October 2000 and in the event the pari-mutuel facility site is licensed by the state, STN will be obligated to make capital contributions to the partnership totaling $35 million, reduced by credits for amounts previously contributed to any Florida gaming referendum campaign. F-51 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) OPERATING LEASES STN leases several parcels of land and equipment used in operations at Palace Station, Boulder Station, Texas Station, Sunset Station, Station Casino St. Charles and Station Casino Kansas City. Leases on various parcels ranging from 13 acres to 171 acres have terms expiring between March 2006 and July 2060. Future minimum lease payments required under these operating leases and other noncancellable operating leases are as follows for the years ending (amounts in thousands):
FUTURE MINIMUM LEASE PAYMENTS MARCH 31, - ------------------------------------------------------------------------ ---------- 1998.................................................................... $ 6,423 1999.................................................................... 6,296 2000.................................................................... 5,932 2001.................................................................... 5,932 2002.................................................................... 5,932 Thereafter.............................................................. 280,479 ---------- Total............................................................. $ 310,994 ---------- ----------
Rent expense totaled approximately $5.4 million, $6.5 million, $4.9 million for the years ended March 31, 1997, 1996 and 1995, respectively. Rents of $2.2 million and $2.1 million were capitalized in connection with the construction of Station Casino Kansas City and Sunset Station for the fiscal years ended March 31, 1997 and 1996, respectively. During fiscal 1995, STN sold approximately $13.0 million of equipment related to the Casino Properties and leased it back under lease agreements ranging from three to seven years. The transactions produced gains of approximately $665,000, which have been deferred and are being amortized against lease expense over the remaining lease terms in the accompanying combined financial statements. LEGAL MATTERS STN is a party in legal matters arising in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse effect on the financial position or the results of operations of OpCo as presented in the accompanying combined financial statements. 8. RELATED PARTIES STN has employed McNabb/McNabb/DeSoto/Salter & Co. ("MMDS") to provide advertising and marketing research services. Certain stockholders of STN own a 50% interest in MMDS. During the fiscal years ended March 31, 1997, 1996 and 1995 STN paid MMDS $27.2 million, $17.4 million and $12.7 million respectively, for advertising, market research and other costs related to the Casino Properties. In management's opinion, these transactions were conducted with terms as fair to OpCo as could have been obtained from unaffiliated companies. In April 1997, STN purchased the assets of MMDS for approximately $0.8 million. 9. BENEFIT PLANS As discussed in Note 1, upon completion of the Distribution, OpCo anticipates establishing employee benefit plans similar to STN's current plans described below. F-52 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. BENEFIT PLANS (CONTINUED) STOCK COMPENSATION PROGRAM STN maintains a Stock Compensation Program (the "Program") which includes (i) an Incentive Stock Option Plan for the grant of incentive stock options, (ii) a Compensatory Stock Option Plan providing for the grant of non-qualified stock options, and (iii) a Restricted Shares Plan providing for the grant of restricted shares of common stock. Officers, key employees, directors (whether employee directors or non-employee directors) and independent contractors or agents of STN and its subsidiaries are eligible to participate in the program. However, only employees of STN and its subsidiaries are eligible to receive incentive stock options. OpCo anticipates establishing its own stock option plan following the Distribution. Each employee of OpCo on the day following the Distribution who holds options issued pursuant to the Program noted above will receive an option to purchase OpCo common stock in substitution for and cancellation of the STN option. The number of OpCo shares to be acquired and the price of such option will be determined pursuant to the following formula: (i) the number of shares of OpCo common stock covered by the substitute option shall be equal to the pre-Distribution number of shares of STN common stock covered by the STN option multiplied by a fraction, the numerator of which is the pre-Distribution STN Market Price and the denominator of which is the post-Distribution OpCo Market Price (the OpCo Conversion Factor), and (ii) the exercise price under the substituted option shall be equal to the pre-Distribution exercise price under the STN option multiplied by a fraction, the numerator of which is the post-Distribution OpCo Market Price and the denominator of which is the pre-distribution STN Market Price. For this purpose, the "pre-Distribution STN Market Price" means the average of the high and low prices of the STN common stock on the New York Stock Exchange for each of the ten trading days prior to the first day on which there is trading in STN common stock on a post-Distribution basis and the "post-Distribution OpCo Market Price" means the average of the high and low prices of OpCo common stock on the NASDAQ for each of the ten trading days beginning on the first day on which there is trading in OpCo common stock, including on a "when issued" basis. 401(K) PLANS STN adopted a defined contribution 401(k) plan, which covers all employees of OpCo who meet certain age and length of service requirements and allows an employer contribution up to 25 percent of the first four percent of each participating employee's compensation. Plan participants can elect to defer before tax compensation through payroll deductions. These deferrals are regulated under Section 401(k) of the Internal Revenue Code. Matching contributions are included in the accompanying combined financial statements in the amount of $442,000, $293,000, and $203,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. OpCo anticipates adopting a defined contribution plan for employees effective as of the day following the Distribution that will be substantially identical to the STN plan noted above. STN will cause the assets and liabilities attributable to the account balances of OpCo employees to be transferred from the STN plan to the OpCo 401(k) plan. 10. EXECUTIVE COMPENSATION PLANS STN has employment agreements with certain of its executive officers. These contracts provide for, among other things, an annual base salary with annual adjustments and an annual cash bonus equal to at least 5 percent of the executive's base salary, and supplemental long-term disability and supplemental life F-53 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EXECUTIVE COMPENSATION PLANS (CONTINUED) insurance benefits in excess of STN's normal coverage for employees. STN elected to self-insure with respect to the long-term disability benefits. In addition, STN has adopted a Supplemental Executive Retirement Plan for its Chief Executive Officer and a Supplemental Management Retirement Plan for certain key executives as selected by the Human Resources Committee of STN's Board of Directors. Other executive plans include a Deferred Compensation Plan and a Long-Term Stay-On Performance Incentive Plan. The expenses related to these plans are included in selling, general and administrative expense in the accompanying combined statements of operations. OpCo anticipates similar plans for its executive officers following the Distribution that will be substantially identical to the STN plans above. 11. RESTRUCTURING CHARGE In March 1997, STN introduced a plan designed to reduce costs and improve efficiency of operations at the Casino Properties. This plan resulted in a one-time charge to earnings in the fourth quarter of fiscal 1997 totaling $2,016,000, primarily related to employee severance payments. 12. INCOME TAXES The provision for income taxes for OpCo consists of the following (amounts in thousands):
MARCH 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Current: Federal........................................ 16,260 10,380 7,975 State.......................................... (1,257) 369 (1,247) --------- --------- --------- 15,003 10,749 6,728 Deferred........................................... 2,118 10,847 (5,916) --------- --------- --------- Total income taxes......................... 17,121 21,596 812 --------- --------- --------- --------- --------- ---------
The income tax provision (benefit) differs from that computed at the Federal statutory corporate tax rate as follows:
MARCH 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Federal statutory rate................................. 35.0% 35.0% 35.0% State income taxes, net of Federal benefit............. (2.4) 0.6 (79.5) Meals and entertainment................................ 0.3 1.2 85.5 Other, net............................................. 0.9 (0.8) 10.8 --------- --------- --------- Effective tax rate..................................... 33.8% 36.0% 51.8% --------- --------- --------- --------- --------- ---------
F-54 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES (CONTINUED) The two effects of significant temporary differences representing net deferred tax assets and liabilities are as follows (amounts in thousands):
MARCH 31, 1997 1996 ---------- ---------- Deferred tax assets: Current: Accrued vacation, bonuses and group insurance........... 2,981 2,119 Prepaid gaming taxes.................................... (1,341) (1,177) Other................................................... 2,262 1,135 ---------- ---------- Total current............................................. 3,902 2,077 Long-term: Preopening and other costs, net of amortization......... 15,050 5,710 ---------- ---------- Total deferred tax assets................................. 18,952 7,787 ---------- ---------- Deferred tax liabilities: Long-term: Temporary differences related to property and equipment............................................. (29,084) (15,950) Other................................................... (149) -- ---------- ---------- Total deferred tax liabilities...................... (29,233) (15,950) ---------- ---------- Net................................................. $ (10,281) $ (8,163) ---------- ---------- ---------- ----------
13. SUBSEQUENT EVENT On January 16, 1997, Station Casino Kansas City's gaming license in Kansas City was formally issued for its facility which is located in a man-made basin filled with water piped in from the surface of the Missouri River. In reliance on numerous approvals from the Missouri Gaming Commission specific to the configuration and granted prior to the formal issuance of its gaming license, Station Casino Kansas City built and opened the Station Casino Kansas City facility. The license issued to Station Casino Kansas City and the resolutions related thereto specifically acknowledge that the Missouri Gaming Commission had reviewed and approved this configuration. On November 24, 1997, the Supreme Court of Missouri, in a case challenging the gaming licenses issued to certain competing operators of Station Casino St. Charles located in Maryland Heights, Missouri, ruled that gaming may occur only in artificial spaces that are contiguous to the surface stream of the Missouri and Mississippi Rivers. AKIN V. MISSOURI GAMING COMMISSION, Case No. 79594, Missouri Supreme Court (November 1997). The case was remanded to the trial court for a factual determination as to whether such competing facilities meet this standard. The Missouri Gaming Commission may also review the validity of Station Casino Kansas City's current configuration in connection with Station Casino Kansas City's relicensing hearing scheduled to occur in January 1998. Because of the uncertainties caused by the Missouri Supreme Court's decision, and because OpCo is not subject to any claim with regard to this matter at this time, Station Casino Kansas City cannot predict what effect the Missouri Supreme Court ruling or Missouri Gaming Commission's actions at such relicensing hearing will have on operations at Station Casino Kansas City. At this time, based on discussions with Missouri legal counsel, management believes that it has potentially meritorious defenses if F-55 STATION OPERATING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. SUBSEQUENT EVENT (CONTINUED) a lawsuit or administrative action based on this ruling were to be brought. In addition, based on its current understanding of the ruling, management believes that if it were to be required to take remedial action with respect to Station Casino Kansas City, such remediation could be completed at a cost that would not have a material adverse effect on OpCo's financial condition. However, management cannot provide any assurance as to whether the Station Casino Kansas City facility would be found to comply with the guidelines described in the Missouri Supreme Court ruling, whether it would be permitted to modify the facility to comply with such standards or whether OpCo's legal defenses, legislative avenues or other means available to permit the continued use of its current configuration would succeed. Further, it is unclear, in the event of a determination of non-compliance, what penalty or sanction, if any, including a possible temporary or permanent closure, could be imposed on Station Casino Kansas City. OpCo and Missouri legal counsel do not believe the court ruling will have an adverse impact on the Station Casino St. Charles operations. F-56 EXHIBIT A CERTAIN PROVISIONS OF THE NEVADA REVISED STATUTES RIGHTS OF DISSENTING OWNERS 92A.300. DEFINITIONS. As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those sections. (1995, ch. 586, Section 35, p. 2086.) 92A.305. "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder" means a person who is a beneficial owner of shares held in a voting trust or by a nominee as the stockholder of record. (1995, ch. 586, Section 36, p. 2087.) 92A.310. "CORPORATE ACTION" DEFINED. "Corporate action" means the action of a domestic corporation. (1995, ch. 586, Section 37, p. 2087.) 92A.315. "DISSENTER" DEFINED. "Dissenter" means a stockholder who is entitled to dissent from a domestic corporation's actions under NRS 92A.380 and who exercises that right when and in the manner required by NRS 92A.410 to 92A.480, inclusive. (1995, ch. 586, Section 38, p. 2087.) 92A.320. "FAIR VALUE" DEFINED. "Fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which he objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. (1995, ch. 586 Section 39, p.2087.) 92A.325. "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of record or a beneficial stockholder of a domestic corporation. (1995, ch. 586, Section 40, p. 2087.) 92A.330. "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means the person in whose name shares are registered in the records of a domestic corporation or the beneficial owner of shares to the extent of the rights granted by a nominee's certificate on file with the domestic corporation. (1995, ch. 586, Section 41, p. 2087.) 92.335. "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the domestic corporation which is the issuer of the shares held by a dissenter before the corporate action creating the dissenter's rights becomes effective or the surviving or acquiring entity of that issuer after the corporate action becomes effective. (1995, ch. 586, Section 42, p. 2087.) 92A.340. COMPUTATION OF INTEREST. Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be computed from the effective date of the action until the date of payment, at the average rate currently paid by the entity on its principal bank loans or, if it has no bank loans, at a rate that is fair and equitable under all of the circumstances. (1995, ch. 586, Section 43, p. 2087.) A-1 92A.350. RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A partnership agreement of a domestic limited partnership or, unless otherwise provided in the partnership agreement, an agreement of merger or exchange, may provide that contractual rights with respect to the partnership interest of a dissenting general or limited partner of a domestic limited partnership are available for any class or group of partnership interests in connection with any merger or exchange in which the domestic limited partnership is a constituent entity. (1995, ch. 586, Section 47, p. 2088.) 92A.360. RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY COMPANY. The articles of organization or operating agreement of a domestic limited-liability company or, unless otherwise provided in the articles of organization or operating agreement, an agreement of merger or exchange, may provide that contractual rights with respect to the interest of a dissenting member are available in connection with any merger or exchange in which the domestic limited-liability company is a constituent entity. (1995, ch. 586, Section 48, p. 2088.) 92A.370. RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION. 1. Except as otherwise provided in subsection 2 and unless otherwise provided in the articles or bylaws, any member of any constituent domestic, nonprofit corporation who voted against the merger may, without prior notice, but within 30 days after the effective date of the merger, resign from membership and is thereby excused from all contractual obligations to the constituent or surviving corporations which did not occur before his resignation and is thereby entitled to those rights, if any, which would have existed if there had been no merger and the membership had been terminated or the member had been expelled. 2. Unless otherwise provided in its articles of incorporation or bylaws, no member of a domestic nonprofit corporation, including, but not limited to, a cooperative corporation, which supplies services described in chapter 704 of NRS to its members only, and no person who is a member of a domestic nonprofit corporation as a condition of or by reason of the ownership of an interest in real property, may resign and dissent pursuant to subsection 1. (1995, ch. 586, Section 46, p. 2088.) 92A.380. RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND TO OBTAIN PAYMENT FOR SHARES. 1. Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder is entitled to dissent from, and obtain payment of the fair value of his shares, in the event of any of the following corporate actions: (a) Consummation of a plan of merger to which the domestic corporation is a party: (1) If approval by the stockholders is required for the merger for NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation and he is entitled to vote on the merger; or (2) If the domestic corporation is a subsidiary and is merged with its parent under NRS 92A.180. (b) Consummation of a plan of exchange to which the domestic corporation is a party as the corporation whose subject owner's interests will be acquired, if he is entitled to vote on the plan. (c) Any corporate action taken pursuant to a vote of the stockholders to the event that the articles of incorporation, bylaws or a resolution of the board of directors provides that a voting or nonvoting stockholders are entitled to dissent and obtain payment for their shares. 2. A stockholder who is entitled to dissent and obtain payment under NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action creating his entitlement unless the action is unlawful or fraudulent with respect to him or the domestic corporation. (1995, ch. 586, Section 44, p. 2087.) A-2 92A.390. LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER. 1. There is no right of dissent with respect to a plan of merger or exchange in favor of stockholders of any class or series which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting at which the plan of merger or exchange is to be acted on, were either listed on a national securities exchange, included in the national market system by the National Association of Securities Dealers, Inc., or held by at least 2,000 stockholders of record, unless: (a) The articles of incorporation of the corporation issuing the shares provide otherwise; or (b) The holders of the class or series are required under the plan of merger or exchange to accept for the shares anything except: (1) Cash, owner's interests or owner's interests and cash in lieu of fractional owner's interests of: (I) The surviving or acquiring entity; or (II) Any other entity which, at the effective date of the plan of merger or exchange, were either listed on a national securities exchange, included in the national market system by the National Association of Securities Dealers, Inc., or held of record by a least 2,000 holders of owner's interests of record; or (2) A combination of cash and owner's interests of the kind described in sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b). 2. There is no right of dissent for any holders of stock of the surviving domestic corporation if the plan of merger does not require action of the stockholders of the surviving domestic corporation under NRS 92A.130. (1995), ch. 586, Section 45, p. 2088.) 92A.400. LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER. 1. A stockholder of record may assert dissenter's rights as to fewer than all of the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one person and notifies the subject corporation in writing of the name and address of each person on whose behalf he asserts dissenter's rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different stockholders. 2. A beneficial stockholder may assert dissenter's rights as to shares held on his behalf only if: (a) He submits to the subject corporation the written consent of the stockholder of record to the dissent not later than the time the beneficial stockholder asserts dissenter's rights; and (b) He does so with respect to all shares of which he is the beneficial stockholder or over which he has power to direct the vote. (1995, ch. 586, Section 49. p. 2089). 92A.410. NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT. 1. If a proposed corporate action creating dissenters' rights is submitted to a vote at a stockholders' meeting, the notice of the meeting must state that stockholders are or may be entitled to assert dissenters' rights under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections. 2. If the corporate action creating dissenters' rights is taken by written consent of the stockholders or without a vote of the stockholders, the domestic corporation shall notify in writing all stockholders entitled to assert dissenters' rights that the action was taken and send them the dissenter's notice described in NRS 92A.430. (1995, ch. 586, Section 50, p. 2089; 1997, ch. 208, Section 78, p.730.) A-3 92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES. 1. If a proposed corporate action creating dissenters' rights is submitted to a vote at a stockholders' meeting, a stockholder who wisher to assert dissenter's rights: (a) Must deliver to the subject corporation, before the vote is taken, written notice of his intent to demand payment for his shares if the proposed action is effectuated; and (b) Must not vote his shares in favor of the proposed action. 2. A stockholder who does not satisfy the requirements of subsection 1 is not entitled to payment for his shares under this chapter. (1995, ch. 586, Section 51, p. 2089.) 92A.430. DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDER ENTITLED TO ASSERT RIGHTS; CONTENTS. 1. If a proposed corporate action creating dissenters' rights is authorized at a stockholders' meeting, the subject corporation shall deliver a written dissenter's notice to all stockholders who satisfied the requirements to assert those rights. 2. The dissenter's notice must be sent no later than 10 days after the effectuation of the corporate action, and must: (a) State where the demand for payment must be sent and where and when certificates, if any, for shares must be deposited; (b) Inform the holders of shares not represented by certificates to what extent the transfer of the shares will be restricted after the demand for payment is received; (c) Supply a form for demanding payment that includes the date of the first announcement to the news media or to the stockholders of the terms of the proposed action and requires that the person asserting dissenter's rights certify whether or not he acquired beneficial ownership of the shares before that date; (d) Set a date by which the subject corporation must receive the demand for payment, which may not be less than 30 nor more than 60 days after the date the notice is delivered; and (e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive. (1995), ch. 586, Section 52, p. 2089.) 92A.440. DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS OF STOCKHOLDER. 1. A stockholder to whom a dissenter's notice is sent must: (a) Demand payment; (b) Certify whether he acquired beneficial ownership of the shares before the date required to be set forth in the dissenter's notice for this certification; and (c) Deposit his certificates, if any, in accordance with the terms of the notice. 2. The stockholder who demands payment and deposits his certificates, if any, before the proposed corporate action is taken retains all other rights of a stockholder until those rights are canceled or modified by the taking of the proposed corporate action. 3. The stockholder who does not demand payment or deposit his certificates where required, each by the date set forth in the dissenter's notice, is not entitled to payment for his shares under this chapter. (1995), ch. 586, Section 53, p. 2090.) A-4 92A.450. UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER. 1. The subject corporation may restrict the transfer of shares not represented by a certificate from the date the demand for their payment is received. 2. The person for whom dissenter's rights are asserted as to shares not represented by a certificate retains all other rights of a stockholder until those rights are canceled or modified by the taking of the proposed corporate action. (1995, ch. 586 Section 54, p. 2090.) 92A.460. PAYMENT FOR SHARES: GENERAL REQUIREMENTS. 1. Except as otherwise provided in NRS 92A.470, within 30 days after receipt of a demand for payment, the subject corporation shall pay each dissenter who complied with NRS 92A.440 the amount the subject corporation estimates to be the fair value of his shares, plus accrued interest. The obligation of the subject corporation under this subsection may be enforced by the district court: (a) Of the county where the corporation's registered office is located; or (b) At the election of any dissenter residing or having its registered office in this state, of the county where the dissenter resides or has its registered office. The court shall dispose of the complaint properly. 2. The payment must be accompanied by: (a) The subject corporation's balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, a statement of income for that year, a statement of changes in the stockholders' equity for that year and the latest available interim financial statements, if any; (b) A statement of the subject corporation's estimate of the fair value of the shares; (c) An explanation of how the interest was calculated; (d) A statement of the dissenter's rights to demand payment under NRS 92A.480; and (c) A copy of NRS 92A.300 to 92A.500, inclusive. (1995), ch. 586 Section 55, p. 2090.) 92A.470. PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S NOTICE. 1. A subject corporation may elect to withhold payment for a dissenter unless he was the beneficial owner of the shares before the date set forth in the dissenter's notice as the date of the first announcement to the news media or to the stockholders of the terms of the proposed action. 2. To the extent the subject corporation elects to withhold payment, after taking the proposed action, it shall estimate the fair value of the shares, plus accrued interest, and shall offer to pay this amount to each dissenter who agrees to accept it in full satisfaction of his demand. The subject corporation shall sent with its offer a statement of its estimate of the fair value of the shares, an explanation of how he interest was calculated, and a statement of the dissenters' right to demand payment pursuant to NRS 92A.480; (1995, ch. 586, Section 56. p. 2091.) 92A.480. DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE. 1. A dissenter may notify the subject corporation in writing of his own estimate of the fair value of his shares and the amount of interest due, and demand payment of his estimate, less any payment pursuant to NRS 92A.460, or reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of his shares and interest due, if he believes that the amount paid pursuant to NRS 92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his shares or that the interest due is incorrectly calculated. A-5 2. A dissenter waives his right to demand payment pursuant to this section unless he notifies the subject corporation of his demand in writing within 30 days after the subject corporation made or offered payment for his shares. (1995, ch. 586, Section 57, p. 2091.) 92A.490. LEGAL PROCEEDING TO DETERMINE FAIR VALUE; DUTIES OF SUBJECT CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER. 1. If a demand for payment remains unsettled, the subject corporation shall commence a proceeding within 60 days after receiving the demand and petition the court to determine the fair value of the shares and accrued interest. If the subject corporation does not commence the proceeding within the 60-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. 2. A subject corporation shall commence the proceeding in the district court of the county where its registered office is located. If the subject corporation is a foreign entity without a resident agent in the state, it shall commence the proceeding in the county where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign entity was located. 3. The subject corporation shall make all dissenters, whether or not residents of Nevada, whose demands remain unsettled, parties to the proceeding as in an action against their shares. All parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. 4. The jurisdiction of the court in which the proceeding is commenced under subsection 2 is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers have the powers described in the order appointing them, or any amendment thereto. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. 5. Each dissenter who is made a party to the proceeding is entitled to a judgment; (a) For the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the subject corporation; or (b) For the fair value, plus accrued interest, of his after-acquired shares for which the subject corporation elected to withhold payment pursuant to NRS 92A.470. (1995, ch. 586, 58, p. 2091.) 92A.500. LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND FEES. 1. The court in a proceeding to determine fair value shall determine all of the costs of the proceeding, including the reasonable compensation and expenses of any appraisers appointed by the court. The court shall assess the costs against the subject corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extend the court finds the dissenters acted arbitrarily, vexatiously or not in good faith in demanding payment. 2. The court may also assess the fees and expenses of the counsel and experts for the respective parties, in amounts the court finds equitable: (a) Against the subject corporation and in favor of all dissenters if the court finds the subject corporation did not substantially comply with the requirements of NRS 92A.300 to 92A.500, inclusive; or (b) Against either the subject corporation or a dissenter in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by NRS 92A.300 to 92A.500, inclusive. 3. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the subject A-6 corporation, the court may aware to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. 4. In a proceeding commended pursuant to NRS 92A.460, the court may assess the costs against the subject corporation, except that the court may assess costs against all or some of the dissenters who are parties to the proceeding, in amounts the court finds equitable, to the extend the court finds that such parties did not act in good faith in instituting the proceeding. 5. This action does not preclude any party in a proceeding commenced pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68 or NRS 17.115. (1995, ch. 586 Section 59, p. 2092.) A-7 Any questions or request for assistance may be directed to the Information Agent at the telephone numbers set forth below. Requests for additional proxy cards or copies of this Proxy Statement may be directed to the Information Agent and such additional materials will be provided promptly at the Company's expense. Stockholders may also contact their local broker, dealer, commercial bank or trust company for assistance concerning the matters set forth herein. The Information Agent is: D.F. King & Co., Inc 77 Water Street New York, New York 10005 (800) 549-6864 (Toll Free) ------------------------ STATION CASINOS, INC. 2411 WEST SAHARA AVENUE, LAS VEGAS, NEVADA 89102 The undersigned hereby appoints FRANK J. FERTITTA III and SCOTT M. NIELSON, and each of them, proxies each with full power of substitution, to vote all stock of the undersigned at the special meeting of stockholders of Station Casinos, Inc. (the "Company") to be held February , 1998 at a.m. local time at Sunset Station Hotel & Casino, 1301 West Sunset Road, Henderson, Nevada and/or at any adjournment of the special meeting, in the manner indicated below, all in accordance with and as more fully described in the Notice of Special Meeting and accompanying Proxy Statement for the meeting, receipt of which is hereby acknowledged. THE SHARES REPRESENTED BY THIS PROXY SHALL BE VOTED AS INDICATED BELOW: (1) To approve proposed amendments to the Company's Amended and Restated Articles of Incorporation to: (a) increase the authorized shares of the Company to 360,000,000 shares consisting of 300,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock; (b) add certain transfer restrictions and related provisions with respect to the Company's capital stock desirable for the Company to protect its status as a real estate investment trust for federal income tax purposes; (c) change the name of the Company to "Station Entertainment Properties, Inc." / / FOR / / AGAINST / / ABSTAIN (2) To vote in their discretion on such other business as may properly come before the annual meeting or any adjournment thereof. (CONTINUED ON REVERSE SIDE) PRELIMINARY COPY THESE MATERIALS CONSTITUTE PRELIMINARY PROXY MATERIALS FILED WITH RESPECT TO THE FORTHCOMING MEETING OF STOCKHOLDERS. CERTAIN INFORMATION IS PRESENTED AS IT IS EXPECTED TO EXIST WHEN (AND IF) DEFINITIVE PROXY MATERIALS ARE MAILED TO STOCKHOLDERS AND WILL BE REVISED TO REFLECT ACTUAL FACTS AT THAT TIME. UNLESS AUTHORITY TO VOTE THEREFORE IS WITHHELD IN THIS PROXY CARD, IT IS THE INTENTION OF THE PROXIES TO VOTE FOR THE PROPOSAL. IF ANY OTHER BUSINESS IS PRESENTED, THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE AFOREMENTIONED PROXIES. DATE ________________________________ SIGNATURE(S) ________________________ PLEASE MARK, DATE AND SIGN AS YOUR NAME APPEARS TO THE LEFT AND RETURN IN THE ENCLOSED ENVELOPE. IF ACTING AS EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, STATE YOUR FULL TITLE AND AUTHORITY WHEN SIGNING. IF THE SIGNER IS A CORPORATION, PLEASE SIGN THE FULL CORPORATE NAME BY A DULY AUTHORIZED OFFICER. IF SHARES ARE HELD JOINTLY, EACH STOCKHOLDER NAMED SHOULD SIGN. PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR A SPECIAL MEETING--FEBRUARY , 1998. PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----