Station shareholders OK stock compensation plan

By Liz Benston (contact)

Thursday, May 22, 2003 | 11:03 a.m.

Station Casinos Inc. shareholders voted Wednesday to extend the company's executive stock compensation plan for another 10 years, overriding criticism from the Culinary Union that the plan overwhelmingly benefits top executives and could significantly divert future earnings from outside shareholders.

While Station called the results an "overwhelming" margin of approval, Culinary Union Research Director Courtney Alexander said it was a "close vote" given that close to 30 percent of the stock is controlled by insiders who voted in favor of the plan.

The union, which has for years been interested in organizing Station's roughly 10,000 employees, issued a report to shareholders prior to the meeting that denounced the plan. It also touted results from Institutional Shareholder Services, an independent proxy research firm that recommended institutional shareholder clients vote against the plan, saying it was too costly.

The plan authorizes the company's board of directors to issue another 410,905 options to executives. As of year-end, options to purchase about 12.2 million shares of common stock were outstanding, of which about 6.9 million were exercisable, according to the company's latest proxy statement.

The company has about 57 million shares of stock outstanding.

The compensation plan is in line with those at other gaming companies and is aligned with executive performance, Station Chief Executive Officer Frank Fertitta III told Alexander during the meeting.

"I don't think it's a unique situation in the gaming industry" to have significant insider ownership of shares, Fertitta added.

Alexander disagreed, saying that the percentage of options granted to insiders is high compared to other gaming companies.

According to a Culinary Union analysis of the company's proxy and 2002 annual report, the Fertitta family controls about 28 percent of the company's stock and about 50 percent of the outstanding options. Fertitta, his brother, President Lorenzo Fertitta and the Fertitta's sister and brother-in-law, Delise and Blake Sartini, are on the company's eight-member board of directors.

Shareholders have been rewarded by the company's healthy stock price since Station Casinos' inception as a public company nearly 10 years ago -- proof that the company's performance plan is working, Fertitta said.

Station Casinos stock has risen 61 percent in the past 10 years and 111 percent in the past five years -- significantly higher than peers including MGM MIRAGE, Harrah's Entertainment Inc., Mandalay Resort Group and Park Place Entertainment Corp. since that company's inception a few years ago, he said. Station's stock has risen 87 percent since January 2002 compared to declines at MGM MIRAGE and Park Place, a 26 percent jump at Mandalay and a 6 percent increase at Harrah's.

The economic factors driving growth in Las Vegas -- rising population, low taxes, favorable weather and affordable housing -- will power the company into the future, Lorenzo Fertitta said.

"Essentially, a healthy Las Vegas equals a healthy Station Casinos," he said.

The company's appreciated stock price should make investors even more concerned about how the compensation plan will dilute earnings, Alexander said.

"Stockholders are looking to future earnings. They are putting a high price on those future earnings."

Alexander also accused the company of issuing or repricing options for executives when the stock price has dipped, a move that helps insiders at the expense of outside shareholders.

None of the Fertitta family members or outside directors have ever repriced options, while the company has typically issued options at the end of the year regardless of the market, executives said. Moreover, the union is ignoring competitors that have repriced options to benefit their executives, diluting per-share earnings for outside shareholders, they said.

Executives' average salaries are lower than their peers while the company's return on investment to shareholders is in line with or surpasses the competition, executives said.

Station Casinos is a large gaming company but doesn't match the billions of dollars in revenue and hundreds of millions in profit generated each year by its counterparts on the Las Vegas Strip, Alexander said after the meeting.

"I would argue (that Station and MGM MIRAGE) do not come close to comparison in size or in earnings produced for their shareholders."

During the meeting, Frank Fertitta invited the Culinary Union to boost its ownership beyond the 252 shares held by its international parent to have more influence on such matters.

"One share equals one vote," he said. "I intend to vote my 5 million shares today."

After about two years of focusing on cutting costs, the company is now concentrating on growing revenue through a number of casino programs that give players new chances to win bigger jackpots, Lorenzo Fertitta told shareholders. The programs include "Jumbo Bingo," introduced three years ago, "Jumbo Hold 'Em Poker" and the March addition of "Jumbo Jackpot" -- a game that gives slot club members a shot at a random daily jackpot of up to $150,000 whether they win at the machines they play or not.

New projects also will boost results, Fertitta said, including the June 9 opening of the Station-managed Thunder Valley tribal casino near Sacramento, the expected opening in late 2005 of Red Rock Station Casino at Charleston Avenue near I-215 and an upcoming deal to manage another casino near San Francisco for the Federated Indians of Graton Rancheria.

"There are very few gaming companies that have these types of growth prospects," he said.