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Analysts Generally Optimistic on Station

2 September 2000

by David Strow

LAS VEGAS, Nevada – Sept. 1, 2000 --Wall Street analysts, for the most part, are optimistic that the worst may be over for Station Casinos Inc. of Las Vegas, after Missouri gaming regulators on Thursday wrapped up a controversial hearing into Station's activities in that state.

However, there is growing concern that a preliminary order to revoke Station's licenses in the state could delay Station's plans to sell its two Missouri riverboats to a management-led group for $475 million.

The two days of hearings centered around one subject: Did Station use former attorney Michael Lazaroff -- convicted of hiding Station bonus money from his law partners -- as a middle man in conversations with former Missouri Gaming Commission Chairman Robert Wolfson? Lazaroff insists that Station did; Wolfson and Station strongly deny it.

Now, it's up to the five-member Missouri Gaming Commission to decide if Lazaroff's allegations are true. If the commission decides to take disciplinary action against Station over Lazaroff's allegations, it could act as soon as the next commission meeting, scheduled to be held in 30 days.

Station must also appeal the order to revoke the Missouri licenses in 30 days to prevent automatic revocation. Hearings on this order will focus solely on Station's refusal to honor the commission subpoenas.

But Adam Steinberg, a gaming analyst with CIBC World Markets who attended the hearing, believes Missouri doesn't have a case. He backed that up Thursday, repeating his "strong buy" rating on Station.

"My feeling coming out of it is that they (Missouri regulators) proved absolutely nothing," Steinberg said. "Really, they had the word of Lazaroff casting allegations against Station Casinos ... here's a convicted felon who's confessed to embezzling and falsifying records. I would definitely like to see a corroborating witness support his testimony before they proceed with anything."

Marc Falcone, analyst with Bear Stearns, also came away from the hearings breathing a little easier.

"The tone of the hearings switched from Station to focus on the activities of Chairman Wolfson," Falcone said. "We believe there was no (improper) contact. At this point, we're a little more comfortable with the situation, but it's still a little too early to make a judgment on the outcome of this hearing."

At midday today on Wall Street, Station stock traded at $14.38, unchanged. It fell 44 cents Thursday and 6 cents Wednesday, the first day of the hearing.

Contrasting the optimistic reports was a Wednesday report issued by Robertson Stephens gaming analyst Harry Curtis that downgraded Station from a "buy" to a "long-term accumulate." Curtis cited "uncertainties surrounding shares of Station Casinos" as grounds for the downgrade, particularly the uncertainty surrounding Missouri's move to revoke the licenses.

"It doesn't matter what industry you're in, any litigation uncertainty limits the upside in stocks," Curtis said. "In this case, the litigation uncertainty could last for three months, it could last for three years. It is in the best interest of both sides to agree to a settlement that would allow Station to exit the state and sell those two assets."

Curtis' report also cited earnings dilution from such a sale, as well as the impact the new Suncoast casino in Las Vegas will have on earnings at Station's nearby Texas Station and Palace Station hotel-casinos.

However, Curtis also believes Station's case was strengthened by the Missouri hearings.

"I think that our read of it was that the Missouri case strengthened the connection between Lazaroff and Chairman Wolfson, but that there was little or no evidence implicating Station," Curtis said.

A possible delay in the sale of the Missouri casinos also concerned Lehman Bros. analyst Stuart Linde, particularly after staff members told the commission that they would probably recommend the denial of the license application of Station Vice President of Finance William Warner, one of the members of the management team trying to buy the riverboats. He refused to testify this week.

"The rejection of Warner's application could delay the pending sale of the Missouri assets," Linde wrote. "If a significant delay were to transpire, we still feel that the riverboats would be attractive to other buyers given the strength of the Missouri assets."

If those questions continue during the licensing hearing, Warner may have to be removed from the management group buying the casinos, said Station attorney Frank Schreck.

"He just won't be in that group, unless we can get this straightened out with them (Missouri regulators)," Schreck said. "The problem is, the commission generally tends to follow what the staff recommends.

"A disciplinary action doesn't necessarily mean we can't sell out. We have a lot of different options available."

Station boycotted the two-day hearing, complaining that it failed to recognize its due process rights. However, the company received permission from the commission to file a response brief by Sept. 15. A decision on whether disciplinary action against Station is warranted could be made within 30 days.

To back up Lazaroff's claims that Station was aware of improper contacts between Lazaroff and Wolfson, supposedly on Station's behalf, the staff presented video testimony of former Station executive Joe Canfora. Canfora helped construct and open Station's Kansas City casino in 1997, and was fired by the company several months later. Canfora sued the company for wrongful termination, and the two sides settled.

In his video testimony, Canfora testified he was in Station Chairman Frank Fertitta III's office during a conference call with Lazaroff when Lazaroff suggested discussing a subject with his "friend," Chairman Wolfson. Canfora said he questioned the wisdom of this, and Fertitta responded by placing a finger over his lips.

"We don't think the incident even occurred," Schreck said. "Frank has no personal recollection of it."

But if it did occur, Schreck said there was nothing sinister about Fertitta's actions, saying anyone would do something similar if interrupted during a long-distance conference call. "What would you do? You'd signal them to be quiet so you could finish your conversation," Schreck said. "There's nothing sinister about that."

During his testimony, Canfora also said he had no knowledge of $250,000 in bonus payments made to Lazaroff until they showed up on Station Casino Kansas City's balance sheet.

"I saw the amount for $250,000 ... it was just sitting there looking at me," Canfora said. "I remember saying to (John Pasaqualotto, Station vice president of regulatory compliance), this doesn't look good, and John agreed. I expressed my displeasure to Glenn Christenson (Station chief financial officer), and he gave me a passive answer."

But Schreck said Canfora was well aware of the bonuses; in fact, he said, Station has copies of a $150,000 bonus check sent to Lazaroff signed by Canfora.

"He was making that up as he went," Schreck said. "They (the staff) didn't inform the commission (of the Canfora-signed check)."

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