UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from ______to _____

Commission file number 000-21640

STATION CASINOS, INC.

(Exact name of registrant as specified in its charter)

2411 West Sahara Avenue, Las Vegas, Nevada 

(Address of principal executive offices)

89102

(Zip Code)

 (702) 367-2411

Registrant’s telephone number, including area code

N/A

                (Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No  o

Indicate by check mark whether the registrant is an accelerated filer.  Yes ý No o

        Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

STATION CASINOS, INC.

INDEX

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

STATION CASINOS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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STATION CASINOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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STATION CASINOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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STATION CASINOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.             Basis of Presentation

                Station Casinos, Inc. (the “Company”), a Nevada corporation, is a gaming and entertainment company that currently owns and operates eight major hotel/casino properties (one of which is 50% owned) and five smaller casino properties (one of which is 50% owned), in the Las Vegas metropolitan area, as well as manages a casino for a Native American tribe. The accompanying condensed 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, LLC (“Texas Station”), Sunset Station, Inc. (“Sunset Station”), Santa Fe Station, Inc. (“Santa Fe Station”), Fiesta Station, Inc. (“Fiesta Rancho”), Lake Mead Station, Inc. (“Fiesta Henderson”), Tropicana Station, Inc., d.b.a. Wild Wild West Gambling Hall & Hotel (“Wild Wild West”), Rancho Station, LLC, d.b.a. Wildfire Casino (“Wildfire”), Magic Star Station, LLC (“Magic Star”) and Gold Rush Station, LLC (“Gold Rush”). The Company also consolidates MPM Enterprises, LLC (“MPM”), in which it owns a 50% interest and is required to be consolidated. The Company also owns a 50% interest in Town Center Amusements, Inc., d.b.a. Barley’s Casino & Brewing Company (“Barley’s”) and Green Valley Ranch Gaming, LLC (“Green Valley Ranch Station”) and a 6.7% interest in the Palms Casino Resort, which are accounted for under the equity method. The Company is the managing partner for both Barley’s and Green Valley Ranch Station. In addition, the Company manages Thunder Valley Casino (“Thunder Valley”) near Sacramento, California on behalf of the United Auburn Indian Community (“UAIC”), which opened on June 9, 2003. All significant intercompany accounts and transactions have been eliminated.

                On August 2, 2004, the Company acquired the Magic Star and the Gold Rush Casinos in Henderson, Nevada. The Company expects to spend approximately $20 million for the acquisitions and enhancements to the facilities, of which approximately $18.6 million has been spent as of September 30, 2004.  The acquisitions were accounted for using the purchase method of accounting.  The purchase price was allocated based on estimated fair values at the date of acquisition.  A total of approximately $8.2 million, representing the excess of acquisition cost over the estimated fair value of the tangible net assets, was allocated to goodwill.

                The accompanying condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the interim periods have been made. The results for the three and nine months ended September 30, 2004 are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

                Certain amounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2003 have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net income.

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2.             Investments in Joint Ventures

The Company has investments in two 50% owned joint ventures, Green Valley Ranch Station and Barley’s, and a 6.7% investment in a joint venture that operates the Palms Casino Resort in Las Vegas, Nevada, that are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of earnings, losses and distributions of the joint ventures. The investment balance also includes interest capitalized during the construction period, which is amortized against the earnings of the joint venture. Investments in joint ventures consist of the following (amounts in thousands):

Summarized balance sheet information for the joint ventures is as follows (amounts in thousands):

Summarized results of operations for the joint ventures are as follows (amounts in thousands, unaudited):

                The operating earnings from these joint ventures are shown as a separate line item on the Company’s condensed consolidated statements of operations after operating income. In addition, interest and other expense from these joint ventures is shown as a separate component under other income (expense) in the Company’s condensed consolidated statements of operations. The following table identifies the total equity earnings from joint ventures (amounts in thousands, unaudited):

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                Green Valley Ranch Station

                Green Valley Ranch Station is owned by a 50/50 joint venture between the Company and GCR Gaming. In December 2003, Green Valley Ranch Station entered into a $250.0 million Amended and Restated Loan Agreement, the proceeds of which were used to pay off secured equipment and other financing and to fund the ongoing expansion of the facility. Green Valley Ranch Station has entered into an agreement to swap the majority of its floating-rate debt into fixed-rate debt that will approximate 7.0% during the term of the loan. The loan requires a limited make-well of $42.8 million, if necessary (based on operating results of the property). Pursuant to the make-well agreement, if Green Valley Ranch Station fails to comply with the Fixed Charge Coverage Ratio or the Leverage Ratio (both as defined in the Green Valley Ranch Station credit agreement), the partners will be required to make cash equity contributions in such amounts as required, which will result in pro forma compliance with the covenants. The make-well is a joint and several obligation of each partner, with GCR Gaming’s obligation collateralized. The make-well agreement will terminate upon achieving a post-expansion debt to Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio (as defined in the credit agreement) of less than or equal to 3.00 to 1.00 and producing Adjusted EBITDA before management fees for four consecutive quarters of at least $42.0 million after the completion of the expansion discussed below. As of September 30, 2004, the debt to Adjusted EBITDA ratio was 2.14 to 1.00. The outstanding balance of the Green Valley Ranch Station revolving credit facility as of September 30, 2004, was approximately $173.9 million.

                Green Valley Ranch Station has entered into interest rate swaps that have converted a portion of its floating-rate debt into fixed-rate debt and are matched to a portion of its revolving facility. At September 30, 2004, the combined notional amount of the interest rate swaps was $149.5 million. As of September 30, 2004, Green Valley Ranch Station was paying a weighted average fixed-rate of 4.27% on the interest rate swaps and was receiving a weighted average floating-rate based on three-month LIBOR of 1.77%. These interest rate swaps were priced to have no value at inception. As a result of the mark-to-market valuation of the interest rate swaps, the Company recorded approximately $1.1 million and $1.3 million as of September 30, 2004 and December 31, 2003, respectively, for its share of the Green Valley Ranch Station interest rate swaps in accumulated other comprehensive loss in the Company’s condensed consolidated balance sheets.

                In the fourth quarter of 2003, the Company began a $115 million expansion at Green Valley Ranch Station. The expansion will include 296 hotel rooms, 25,500 square feet of additional meeting space, approximately 200 slot machines and an expanded spa facility. Construction of the hotel rooms and additional meeting space is expected to be completed near the end of the fourth quarter of 2004. Construction of the spa facility is expected to be completed in the first quarter of 2005. In connection with the expansion, Green Valley Ranch Station purchased the lease of the existing spa during the nine months ended September 30, 2004. Green Valley Ranch Station also purchased the lease of a restaurant at the property during the nine months ended September 30, 2004. As a result of the purchase of these leases, the Company has recorded a reduction in earnings from joint ventures of approximately $3.6 million in the nine months ended September 30, 2004, which represents its 50% share of the total loss.

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3.             Management Fees

                The Company manages Thunder Valley for the UAIC and receives a management fee equal to 24% of net income (as defined in the management agreement). The Company is also the managing partner for both Green Valley Ranch Station and Barley’s and receives a management fee equal to 2% of revenues and approximately 5% of EBITDA from Green Valley Ranch Station and 10% of EBITDA from Barley’s. The Company’s management fees are included in net revenues on the Company’s condensed consolidated statements of operations.

                                                                United Auburn Indian Community

                The Company has entered into a Development Services Agreement and a Management Agreement with the UAIC. The Company’s seven-year Management Agreement was approved by the National Indian Gaming Commission (“NIGC”) and expires in June 2010. Pursuant to those agreements, and in compliance with a Memorandum of Understanding entered into by the UAIC and Placer County, California, the Company and the UAIC developed Thunder Valley, a gaming and entertainment facility on approximately 49 acres located approximately seven miles north of Interstate 80, in Placer County, California, near Sacramento, which opened on June 9, 2003. Thunder Valley currently has approximately 2,700 Class III slot machines and 98 table games, including a private VIP gaming area, three specialty restaurants, a 500-seat buffet, a food court, a center pit bar and parking for over 4,500 vehicles. In June 2004, the UAIC successfully negotiated a new Tribal-State Gaming Compact (“Amended Compact”) with the State of California which has received approval by the United States Department of the Interior (the “DOI”).  The Amended Compact allows an unlimited number of slot machines at Thunder Valley and extends the term an additional 18 years to 2037.  The Amended Compact also includes a revenue sharing agreement with the State of California.  The UAIC will pay approximately $33.8 million annually to the State of California commencing in January 2005 and additional fees for any slot machines added above the 1,906 machines that were in operation at Thunder Valley prior to the Amended Compact.

                On September 17, 2002, the DOI accepted the land into trust on behalf of the UAIC. The acceptance of the land into trust followed the decision of the United States District Court for the District of Washington, D.C., dismissing a lawsuit filed by the cities of Roseville and Rocklin, California, and Citizens for Safer Communities, which challenged the DOI’s decision to accept the land into trust. Immediately following the District Court’s decision, the plaintiffs appealed the decision to the United States Court of Appeals for the District of Columbia. On November 14, 2003, the Court of Appeals affirmed the dismissal of the lawsuit by the District Court. On February 15, 2004, Citizens for Safer Communities filed a petition for writ of certiorari with the United States Supreme Court, seeking to appeal the decision of the Court of Appeals. The remaining plaintiffs did not seek to appeal the decision. On April 5, 2004, the United States Supreme Court denied Citizens for Safer Communities’ petition for writ of certiorari.

                The Company assisted the UAIC in obtaining $215.0 million of financing for the project through a group of lenders, with the Company providing an unlimited completion guaranty and credit support for all amounts outstanding under such financing. Based on the operating results of Thunder Valley, the Company’s commitment to provide credit support has been terminated. The Company has evaluated its obligations related to the completion guaranty in accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others” and has determined that the fair value of the obligation is not material.

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4.             Long-term Debt

                Long-term debt consists of the following (amounts in thousands):

                Revolving Facility

                In March 2004, the Company increased the availability under its revolving credit facility (the “Revolving Facility”) from $365.0 million to $500.0 million. The Revolving Facility contains no principal amortization and matures in September 2007. The Borrowers are the major operating subsidiaries and the Revolving Facility is secured by substantially all of the Company’s assets. Borrowings under the Revolving Facility bear interest at a margin above the Alternate Base Rate or the Eurodollar Rate (each, as defined in the Revolving Facility), as selected by the Company. The margin above such rates, and the fee on the unfunded portions of the Revolving Facility, will vary quarterly based on the Company’s combined consolidated ratio of debt to Adjusted EBITDA (each, as defined in the Revolving Facility). As of September 30, 2004, the Borrowers’ margin above the Eurodollar Rate on borrowings under the Revolving Facility was 1.75%. The maximum margin for Eurodollar Rate borrowings is 2.50%. The maximum margin for Alternate Base Rate borrowings is 1.25%. As of September 30, 2004, the fee for the unfunded portion of the Revolving Facility was 0.375%.

                The Revolving Facility contains certain financial and other covenants. These include a maximum funded senior debt to Adjusted EBITDA ratio for the Borrowers combined of 2.25 to 1.00 for each quarter and a minimum fixed charge coverage ratio for the preceding four quarters for the Borrowers combined of 1.50 to 1.00 for each quarter. As of September 30, 2004, the Borrowers’ funded debt to Adjusted EBITDA ratio was 0.04 to 1.00 and the fixed charge coverage ratio was 3.22 to 1.00. In addition, the Revolving Facility has financial and other covenants, which state that the maximum consolidated funded debt to Adjusted EBITDA ratio can be no more than 5.00 to 1.00 through June 30, 2005, which reduces to 4.75 to 1.00 on September 30, 2005 through December 31, 2005, to 4.50 to 1.00 on March 31, 2006 through June 30, 2006 and to 4.00 to 1.00 on September 30, 2006. As of September 30, 2004, the Company’s consolidated funded debt to Adjusted EBITDA ratio was 3.6 to 1.0. Other covenants limit prepayments of indebtedness or rent

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(including subordinated debt other than re-financings meeting certain criteria), limitations on asset dispositions, limitations on dividends, limitations on indebtedness, limitations on investments and limitations on capital expenditures. The Company has pledged the stock of all of its major subsidiaries.

                Senior and Senior Subordinated Notes

                During the first quarter of 2004, the Company refinanced substantially all of its senior and senior subordinated notes. The Company issued $1.25 billion in new senior and senior subordinated notes which consists of $450.0 million 6% senior notes due in April 2012, $450.0 million 6¹/₂% senior subordinated notes due in February 2014 and $350.0 million 6⁷/₈% senior subordinated notes due in March 2016. The proceeds from these offerings were used to redeem or repurchase the $199.9 million 8⁷/₈% senior subordinated notes due in December 2008, to repurchase $357.6 million of the 9⁷/₈% senior subordinated notes due in July 2010, to repurchase $383.1 million of the 8³/₈% senior notes due in February 2008 and to reduce amounts outstanding under the Revolving Facility. As a result of these redemptions, the Company recorded a loss on early retirement of debt of approximately $93.3 million in the nine months ended September 30, 2004 to reflect the write-off of the unamortized loan costs, unamortized discount, call premium, tender fee and consent payments which were partially offset by the fair value of the interest rate swaps that were tied directly to the redeemed senior and senior subordinated notes.

                The indentures (the “Indentures”) governing the Company’s senior and senior subordinated notes (the “Notes”) contain certain customary financial and other covenants, which limit the Company and its subsidiaries’ ability to incur additional debt. At September 30, 2004, the Company’s Consolidated Coverage Ratio (as defined in the Indentures) was 3.71 to 1.00. The Indentures provide that the Company may not incur additional indebtedness, other than specified types of indebtedness, unless the Consolidated Coverage Ratio is at least 2.00 to 1.00. In the event the Company’s Consolidated Coverage Ratio is below 2.00 to 1.00, the covenant limits the Company’s ability to incur additional indebtedness for borrowings under the Revolving Facility not to exceed the greater of $200 million or 1.5 times Operating Cash Flow (as defined) for the four most recent quarters, plus $15 million. The Indentures also give the holders of the Notes the right to require the Company to purchase the Notes at 101% of the principal amount of the Notes plus accrued interest thereon upon a Change of Control and Rating Decline (each as defined in the Indentures) of the Company. In addition, the indenture governing the senior notes also contains a limitation on liens the Company can incur.

                The Company has entered into various interest rate swaps with members of its bank group to manage interest expense. As of September 30, 2004, the Company has interest rate swaps with a combined notional amount of $250.0 million that are tied directly to the Company’s 6 ¹¤₂% senior subordinated notes and the Company’s 6% senior notes. The interest rate swaps convert a portion of the Company’s fixed-rate debt to a floating-rate based upon three and six-month LIBOR rates. At September 30, 2004, the Company pays a weighted average rate based on LIBOR, which approximates 3.62% and receives a weighted average rate of 6.33%. The interest rate swaps terminate in April 2012 and February 2014. The net effect of the interest rate swaps resulted in a reduction in interest expense of $1.8 million and $0.9 million for the three months ended September 30, 2004 and 2003, respectively. The net effect of the interest rate swaps resulted in a reduction in interest expense of $5.7 million and $2.7 million for the nine months ended September 30, 2004 and 2003, respectively.

                The interest rate swaps that the Company entered into qualify for the “shortcut” method allowed under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, which allows for an assumption of no ineffectiveness. As such, there is no income statement impact from changes in the fair value of the hedging instruments. Instead, the fair value of the instrument is recorded as an asset or liability on the Company’s balance sheet with an offsetting adjustment to the carrying value of the related debt. In accordance with SFAS No. 133, the Company recorded a liability of $1.2 million and an asset of $3.9 million as of September 30, 2004 and December 31, 2003, respectively, representing the fair value of the interest rate swaps and a corresponding decrease and increase in long-term debt, respectively, as these interest rate swaps are considered highly effective under the criteria established by SFAS No. 133.

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                In March 2004, the Company terminated an interest rate swap with a notional amount of $50.0 million, which was due to terminate in 2008. The interest rate swap was terminated at its market value and, as a result, the Company received approximately $3.6 million, which is included in the calculation of the net loss on the early retirement of debt as the interest rate swap was tied directly to the redemption of the $400.0 million 8³/₈% senior notes.

                In December 2002, the Company terminated an interest rate swap with a notional amount of $100 million, which was due to terminate in 2010. The interest rate swap was terminated at its market value and, as a result, the Company received approximately $9.5 million. This interest rate swap was tied directly to the $375 million 9⁷¤₈% senior subordinated notes. Approximately $357.6 million of the 9⁷/₈% senior subordinated notes were redeemed in the first quarter of 2004 and, as a result, approximately $7.6 million of the remaining value of this fair value hedge termination was included in the calculation of the net loss on the early retirement of debt.

5.             Stockholders’ Equity

                During the nine months ended September 30, 2004, the Company repurchased 35,458 shares of its common stock for approximately $1.6 million. As of September 30, 2004, the Company had acquired approximately 10.2 million shares at a cost of approximately $136.2 million. The Company is authorized to repurchase approximately 10.4 million additional shares of its common stock as of September 30, 2004.

                SFAS No. 130, “Reporting Comprehensive Income”, requires companies to disclose other comprehensive income and the components of such income.  Comprehensive income is the total of net income and all other non-stockholder changes in equity. The Company has recorded its 50% interest in the mark-to-market valuation of the interest rate swaps at Green Valley Ranch Station as other comprehensive loss. Comprehensive income was computed as follows (amounts in thousands, unaudited):

                The weighted average number of common shares used in the calculation of basic and diluted earnings per share consisted of the following (amounts in thousands, unaudited):

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                On March 4, 2004, the Company paid a quarterly cash dividend of $0.125 per share to shareholders of record on February 12, 2004 for approximately $7.8 million. On June 4, 2004 and September 3, 2004, the Company paid a quarterly cash dividend of $0.175 per share to shareholders of record on May 14, 2004 and August 13, 2004 for approximately $11.1 million and $11.4 million, respectively. On October 18, 2004, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share payable on December 3, 2004 to shareholders of record on November 12, 2004.

                During the three and nine months ended September 30, 2003, the Company paid a quarterly cash dividend of $0.125 per share to shareholders of record on August 14, 2003 for approximately $7.4 million.

6.             Asset Impairment

                The Company recorded an impairment loss of $1.4 million in the nine months ended September 30, 2003, which primarily related to the write-off of the Company’s investment in a new slot product development. The impairment of this asset was based upon a decision by the Company to no longer pursue the development of certain slot products. As a result, all of the development costs that the Company had incurred were written off, as they were deemed to have no value.

7.             Future Development

                Red Rock Station

                In April 2004, the Company commenced construction on Red Rock Station Resort Casino and Spa in the Summerlin master-planned community in Las Vegas, Nevada, located on Charleston Boulevard at the Interstate 215/Charleston interchange. The initial phase of the property is expected to include 60 table games and 2,700 slot machines. The property is expected to also include 400 hotel rooms, 45,000 square feet of meeting space, 16 movie theaters, a 20,000 square-foot spa facility, multiple restaurants, including a buffet and a nightclub. The cost of the project is expected to be approximately $550 million, of which approximately $106.3 million has been spent as of September 30, 2004. The Company believes the project will be completed in late 2005 or early 2006.

                Santa Fe Station Expansion

                The Company is currently expanding Santa Fe Station, which will add more than 20,000 square feet of additional casino space, 350 slot machines, a new 16-screen movie theater complex, an upgrade of the property’s bowling center, a new entertainment venue and bar, a new Kid’s Quest child care facility and other amenities. The expansion project also included the removal of the ice arena. The cost of the expansion is expected to be approximately $52 million, of which approximately $14.2 million has been spent as of September 30, 2004. The Company believes the expansion project will be completed in the first quarter of 2005 with the exception of the movie theater complex, which will be completed in the second quarter of 2005.

                Sunset Station Expansion

                The Company is currently expanding Sunset Station to add a bowling center and additional casino space for 300 slot machines. The cost of the expansion is expected to be approximately $24 million, of which approximately $3.7 million has been spent as of September 30, 2004. The Company believes that the expansion will be completed in the first quarter of 2005.

                Fiesta Rancho Expansion

                The Company completed a 31,000 square-foot expansion project at Fiesta Rancho in September 2004, which added a new ice arena to the property, complete with concession area, pro shop, locker rooms and private special event rooms. The cost of the expansion was approximately $8.0 million.

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                The Federated Indians of the Graton Rancheria

                In April 2003, the Company entered into Development and Management Agreements with the Federated Indians of the Graton Rancheria (the “FIGR”), a federally recognized Native American tribe.  Pursuant to those agreements, the Company will assist the FIGR in developing and operating a gaming and entertainment project to be located in Sonoma County, California. The FIGR selected the Company to assist it in designing, developing and financing the project and, upon opening, the Company will manage the facility on behalf of the FIGR. The Management Agreement has a term of seven years from the opening of the facility and the Company will receive a management fee equal to 22% of the facility’s net income. The Company will also receive a development fee equal to 2% of the cost of the project upon the opening of the facility.

                In August 2003, the Company and the FIGR entered into an option to purchase 360 acres of land just west of the Rohnert Park city limits in Sonoma County, California. The proposed site of the project is bordered by Stony Point Road, Wilfred Avenue and Rohnert Park Expressway, approximately one-half mile from Highway 101 and approximately 43 miles from downtown San Francisco. In October 2003, the FIGR entered into a Memorandum of Understanding with the City of Rohnert Park. Development of the gaming and entertainment project is subject to certain governmental and regulatory approvals, including, but not limited to, negotiating a gaming compact with the State of California, the DOI accepting the land into trust on behalf of the FIGR and approval of the Management Agreement by the NIGC. No assurances can be given as to when, or if, the necessary government and regulatory approvals will be received. Prior to the receipt of such government and regulatory approvals, the Company will contribute significant credit support to the project. As of September 30, 2004, the Company had advanced approximately $21.4 million toward the development of this project, primarily to perform due diligence and secure real estate for the FIGR project, which is included in other assets, net on the Company’s condensed consolidated balance sheets. Funds advanced by the Company are expected to be repaid with the proceeds of the project financing or from the FIGR’s gaming revenues. In addition, the Company will make approximately $11.3 million of payments upon achieving certain milestones, which will not be reimbursed. As of September 30, 2004, approximately $2.0 million of these payments have been made which are expensed in development expense as incurred. The Company anticipates that the gaming and entertainment facility will open in 2007, but there can be no assurance that it will be completed within that timeframe or at all.

                Gun Lake Tribe

                On November 13, 2003, the Company agreed to purchase a 50% interest in MPM Enterprises, LLC, a Michigan limited liability company (“MPM”). Concurrently with the Company’s agreement to purchase that interest, MPM and the Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians, a federally recognized Indian tribe commonly referred to as the Gun Lake Tribe (“Gun Lake”), entered into amended Development and Management Agreements, pursuant to which MPM will assist Gun Lake in developing and operating a gaming and entertainment project to be located in Allegan County, Michigan. The Company has agreed to pay $6.0 million for its 50% interest in MPM, which is payable upon achieving certain milestones and is not reimbursable. As of September 30, 2004, approximately $2.0 million of these payments have been made which are expensed in development expense as incurred. An additional $12.0 million in total may be paid by the Company in years six and seven of the amended Management Agreement, subject to certain contingencies. Under the terms of the amended Development Agreement, the Company has agreed to arrange financing for the ongoing development costs and construction of the project. As of September 30, 2004, the Company had advanced approximately $11.9 million toward the development of this project, primarily to secure real estate for the project, which is included in other assets, net on the Company’s condensed consolidated balance sheets. Although no firm construction budget has been established, the Company expects that the total cost of the development and construction of the project will be less than $250 million. Funds advanced by the Company are expected to be repaid with the proceeds of the project financing or from Gun Lake’s gaming revenues. The amended Management Agreement has a term of seven years from the opening of the facility and provides for a management fee of 30% of the project’s net income to be paid to MPM. Pursuant to the terms of the MPM Operating Agreement, the Company’s portion of the management fee is 50% of the first

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$24 million of management fees earned, 83% of the next $24 million of management fees and 93% of any management fees in excess of $48 million.

                The proposed project will be located on approximately 145 acres on Highway 131 near 129^th Avenue, approximately 25 miles north of Kalamazoo, Michigan. As currently contemplated, the project would include approximately 2,500 slot machines, 75 table games, a buffet and specialty restaurants. Construction of the project includes the conversion of an existing 192,000 square-foot building into the entertainment facility. Development of the gaming and entertainment project and operation of Class III gaming is subject to certain governmental and regulatory approvals, including, but not limited to, entering into a gaming compact with the State of Michigan, the DOI accepting the land into trust on behalf of Gun Lake and approval of the Management Agreement by the NIGC. On February 27, 2004, the DOI issued a Finding Of No Significant Impact with respect to the proposed project. No assurances can be given as to when, or if, the necessary government and regulatory approvals will be received. Prior to the receipt of such governmental and regulatory approvals, the Company will contribute significant financial support to the project. The Company anticipates that the gaming and entertainment facility will open in 2006, but there can be no assurance that it will be completed within that timeframe or at all.

                Mechoopda Indian Tribe

                In January 2004, the Company entered into Development and Management Agreements with the Mechoopda Indian Tribe of Chico Rancheria, California (the “MITCR”), a federally recognized Native American tribe. Pursuant to those agreements, the Company will assist the MITCR in developing and operating a gaming and entertainment facility to be located on approximately 650 acres in Butte County, California, at the intersection of State Route 149 and Highway 99, approximately 10 miles southeast of Chico, California and 80 miles north of Sacramento, California. Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility. Although no firm construction budget has been established, the Company expects the total cost of the development and construction of the facility will be less than $80 million. Funds advanced by the Company are expected to be repaid from the proceeds of the facility financing or from the MITCR’s gaming revenues. As of September 30, 2004, the Company had advanced approximately $5.6 million toward the development of this project, primarily to secure real estate for future development, which is included in other assets, net on the Company’s condensed consolidated balance sheets. In addition, the Company will make approximately $2.2 million of payments upon achieving certain milestones, which will not be reimbursed. As of September 30, 2004, $50,000 of these payments had been made which are expensed in development expense as incurred. The Management Agreement has a term of seven years from the opening of the facility and provides for a management fee of 24% of the facility’s net income. As currently contemplated, the facility will include approximately 700 slot machines, 12 table games and dining and entertainment amenities. Development of the facility is subject to certain governmental and regulatory approvals, including, but not limited to, negotiating a gaming compact with the State of California, the DOI accepting land into trust on behalf of the MITCR and approval of the Management Agreement by the NIGC. No assurances can be given as to when, or if, the necessary governmental and regulatory approvals will be received. Prior to the receipt of such governmental or regulatory approvals, the Company will contribute significant financial support to the project. The Company anticipates that the gaming and entertainment facility will open in 2006, but there can be no assurance that it will be completed within that timeframe or at all.

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                North Fork Rancheria of Mono Indian Tribe

                In March 2004, the Company entered into Development and Management Agreements with the North Fork Rancheria of Mono Indians (“Mono”), a federally recognized Native American tribe located near Fresno, California.  Pursuant to those agreements, the Company will assist the Mono in developing and operating a gaming and entertainment facility to be located in Madera County, California. The Company has secured for the benefit of the Mono two parcels of land located on Highway 99 north of the city of Madera. Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility. Although no firm construction budget has been established, the Company expects the total cost of the development and construction of the facility will be approximately $250 million to $300 million. Funds advanced by the Company are expected to be repaid from the proceeds of the project financing or from the Mono’s gaming revenues. As of September 30, 2004, the Company had advanced approximately $1.0 million toward the development of this project, primarily to secure real estate for future development, which is included in other assets, net on the Company’s condensed consolidated balance sheets. In addition, the Company will make approximately $1.3 million of payments upon achieving certain milestones, which will not be reimbursed. As of September 30, 2004, none of these payments have been made. The Management Agreement has a term of seven years from the opening of the facility and provides for a management fee of 24% of the facility’s net income. As currently contemplated, the facility will include approximately 2,000 slot machines, 60 table games and dining, hotel and entertainment amenities. Development of the gaming and entertainment project is subject to certain governmental and regulatory approvals, including, but not limited to, negotiating a gaming compact with the State of California, the DOI accepting the land into trust on behalf of the Mono and approval of the Management Agreement by the NIGC. No assurances can be given as to when, or if, the necessary governmental and regulatory approvals will be received. Prior to the receipt of such governmental or regulatory approvals, the Company will contribute significant financial support to the project. The Company anticipates that the gaming and entertainment facility will open in 2007, but there can be no assurance that it will be completed within that timeframe or at all.

                Land Held for Development

                The Company has acquired certain parcels of land in the Las Vegas valley and near Sacramento, California as part of its future development activities. As of September 30, 2004, the Company had $131.8 million of land held for development that consists primarily of four sites that are owned or leased, which comprise 167 acres in the Las Vegas valley and 188 acres in the Sacramento area near Thunder Valley. The Durango site, located at the intersection of Durango Road and the Southern Beltway/Interstate 215 in the southwest quadrant of Las Vegas, currently consists of 67 acres. The Company also owns a 49-acre gaming-entitled parcel in southwest Las Vegas at the intersection of Flamingo Road and Interstate 215. During the nine months ended September 30, 2004, the Company purchased approximately 51 acres of land in a gaming enterprise district on the southern end of Las Vegas Boulevard at Cactus Avenue for approximately $31.6 million.

                In April 2004, the Company sold a 27-acre parcel of land, after removing the gaming entitlements, located at the intersection of Boulder Highway and Nellis Boulevard for net proceeds of approximately $10.5 million. In July 2004, the Company sold a 68-acre parcel of land, after removing the gaming entitlements, located at the intersection of Boulder Highway and Tropicana Avenue in eastern Las Vegas for net proceeds of approximately $15.2 million. As a result of the sale of these parcels of land, the Company recorded a loss of approximately $2.7 million during the nine months ended September 30, 2004.

On October 1, 2004, the Company purchased approximately 26 acres of real property and improvements formerly known as the Castaways Hotel Casino and Bowling Center (the “Castaways”) in Las Vegas, Nevada, for $33.75 million.  The Castaways closed on January 26, 2004, shortly after its former owners filed for bankruptcy.  The Company is currently evaluating the potential uses of the property, but does not believe it is competitive in its current state.

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                The Company has acquired approximately 27 acres of land adjacent to Wild Wild West.  In addition, the Company exercised its option to purchase the 19-acre parcel of leased land on which Wild Wild West is located. Pursuant to the lease, the purchase will occur in July 2005 at a purchase price equal to the fair market value of the land, but in no event less than $27 million or more than approximately $36 million. No amounts related to this purchase option have been recorded on the Company’s condensed consolidated balance sheets. The Company currently leases this land for approximately $2.9 million per year.

                The Company’s decision whether to proceed with any new gaming or development 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 it will be able to secure additional, acceptable financing in order to proceed with any particular project.

8.             Stock—Based Employee Compensation

The Company accounts for its stock-based employee compensation programs using the intrinsic value method under APB Opinion No. 25 and related interpretations. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing method. 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 programs been determined in accordance with SFAS No. 123, the effect on the Company’s net income and basic and diluted earnings per common share would have been as follows (amounts in thousands, except per share data, unaudited):

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9.             Recently Issued Accounting Standards

                In April 2003, the FASB issued SFAS No. 149, “Amendment to Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The Company has determined that SFAS No. 149 will not have a significant impact on its results of operations or financial position.

                In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. On October 29, 2003, the FASB voted to defer for an indefinite period the application of the guidance in SFAS No. 150 to non-controlling interests that are classified as equity in the financial statements of the subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150. The FASB decided to defer the application of FASB No. 150 to these non-controlling interests until it could consider some of the resulting implementation issues associated with the measurement and recognition guidance for these non-controlling interests. The Company currently has no instruments impacted by the adoption of this statement and therefore the adoption did not have a significant impact on its results of operations or financial position.

10.          Other

                Cash Transaction Reporting Violations

                In April 2003, the Company became aware of violations of certain gaming regulations regarding the reporting of certain cash transactions at three of its properties. The Company self-reported these administrative violations to the Nevada State Gaming Control Board. The Company, along with the Nevada State Gaming Control Board, has investigated the violations.  On September 15, 2004, the Company and the Nevada Gaming Control Board entered into a settlement agreement with respect to these violations, pursuant to which the Company agreed to pay approximately $2.4 million in fines and investigative costs to the State of Nevada.  On September 24, 2004, the Nevada Gaming Commission approved the settlement agreement.  The Company has hired additional staff at each of its properties and has increased the level of internal audit review to prevent this type of violation in the future.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(unaudited)

                Overview

The following table highlights the results of our operations as compared to the prior period (dollars in thousands, unaudited):

(a)          The Major Las Vegas Operations include the wholly owned properties of Palace Station, Boulder Station, Texas Station, Sunset Station, Santa Fe Station, Fiesta Rancho and Fiesta Henderson.

(b)         Includes management fees from Thunder Valley (since June 9, 2003), Green Valley Ranch Station and Barley’s.

(c)          Other Operations and Corporate includes the wholly owned properties of Wild Wild West, Wildfire (since January 27, 2003), Magic Star (since August 2, 2004), Gold Rush (since August 2, 2004) and Corporate and development expense.

                Results of Operations

                Consolidated net revenues for the three months ended September 30, 2004 increased 11.1% to $242.9 million as compared to $218.7 million for the three months ended September 30, 2003 primarily due to revenue increases at our Major Las Vegas Operations.  Consolidated net revenues for the nine months ended September 30, 2004 increased 14.9% to $722.0 million as compared to $628.2 million for the nine months ended September 30, 2003. The increase in net revenues during the nine months ended September 30, 2004 was due primarily to revenue increases at our Major Las Vegas Operations and an increase in management fees, primarily from Thunder Valley, which opened on June 9, 2003, and from Green Valley Ranch Station.

                Combined net revenues from our Major Las Vegas Operations increased 11.9% to $214.0 million for the three months ended September 30, 2004 as compared to $191.2 million for the three months ended September 30, 2003. Combined net revenues from our Major Las Vegas Operations increased 10.1% to $636.1 million for the nine months ended September 30, 2004 as compared to $577.8 million for the nine months ended September 30, 2003. The increase in combined net revenues was primarily due to a strong Las Vegas local economy, continued population and employment growth in the Las Vegas valley, no new competition in the locals’ market, as well as the introduction of our Jumbo brand of products

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including Jumbo Jackpot. Jumbo Jackpot, which we introduced in April 2003, is an exclusive progressive slot jackpot that allows our customers using their Boarding Pass card the opportunity to win between $50,000 and $150,000 just for playing slot machines. The increase in revenues was also due to relatively easy comparisons as a result of a short-term slowdown in our business during the first quarter of 2003, as our customers were distracted by the events leading up to and including the war in Iraq.

                Consolidated operating income increased 17.5% for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. Our consolidated operating margin increased 1.3 percentage points over the same three-month period. Consolidated operating income increased 33.3% for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. Our consolidated operating margin increased 3.6 percentage points over the same nine-month period. The increase in consolidated operating income is primarily due to increased consolidated net revenues noted above.  There is significant operating leverage on incremental revenue because there are a significant amount of fixed costs.

The following table highlights the various sources of our revenues and expenses as compared to the prior periods (dollars in thousands, unaudited):