UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission file number 000-21640

STATION CASINOS, INC.

(Exact name of registrant as specified in its charter)

 

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 x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    x    Accelerated filer    o    Non-accelerated filer    o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

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 nine major hotel/casino properties (one of which is 50% owned) and six smaller casino properties (two of which are 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, its wholly owned subsidiaries and MPM Enterprises, LLC (which is 50% owned by the Company and required to be consolidated). Investments in all other 50% or less owned affiliated companies are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated.

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 six months ended June 30, 2006 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, 2005.

Certain amounts in the condensed consolidated financial statements for the three and six months ended June 30, 2005 have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net income.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company is evaluating FIN 48 and has not yet determined the impact the adoption will have on the consolidated financial statements.

In December 2004, the FASB issued SFAS 123R, “Share-Based Payment”, replacing and superseding both SFAS 123, “Accounting for Stock-Based Compensation”, and APB Opinion 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires fair value measurement and recognition in the financial statements for all share-based compensation arrangements. SFAS 123R also requires additional disclosures related to income tax effects and cash flows resulting from share-based compensation

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arrangements. Adoption of SFAS 123R on January 1, 2006 reduced earnings consistent with past pro forma share-based compensation disclosures for the three and six months ended June 30, 2006. See Note 6 for additional information.

2.   Investments in Joint Ventures

The Company has investments in three 50% owned joint ventures, Green Valley Ranch, Barley’s and The Greens, a 50% investment in a joint venture that is developing Aliante Station and a 6.7% investment in a joint venture that owns 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. 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):

 

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2.   Investments in Joint Ventures (Continued)

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 expense in the Company’s condensed consolidated statements of operations. The following table identifies the total earnings from joint ventures (amounts in thousands, unaudited):

 

3.   Management Fees

The Company manages Thunder Valley Casino on behalf of the United Auburn Indian Community (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 Green Valley Ranch, Barley’s and The Greens and receives a management fee equal to 2% of revenues and approximately 5% of Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) from Green Valley Ranch and 10% of EBITDA from Barley’s and The Greens. 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 (the “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 Casino, a gaming and entertainment facility on approximately 49 acres located approximately seven miles north of Interstate 80 on Highway 65, in Placer County, California, near Sacramento, which opened on June 9, 2003.

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4.   Long-term Debt

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

 

Revolving Facility

In December 2005, the Company increased its availability under its revolving credit facility (the “Revolving Facility”) from $1.0 billion to $2.0 billion and extended the maturity by one year to December 2010. The Revolving Facility contains no principal amortization. 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 (as defined in the Revolving Facility). As of June 30, 2006, the Borrowers’ margin above the Eurodollar Rate on borrowings under the Revolving Facility was 1.75%. The maximum margin for Eurodollar Rate borrowings is 2.00%. The maximum margin for Alternate Base Rate borrowings is 0.75%. As of June 30, 2006, the fee for the unfunded portion of the Revolving Facility was 0.30%.

The Revolving Facility contains certain financial and other covenants, some of which were amended in June 2006. These include a maximum funded debt to Adjusted EBITDA ratio for the Borrowers combined of 4.50 to 1.00 for each quarter until December 31, 2008, which reduces to 4.25 to 1.00 on March 31, 2009 through December 31, 2009 and to 4.00 to 1.00 on March 31, 2010 and a minimum fixed charge coverage ratio for the preceding four quarters for the Borrowers combined of 1.25 to 1.00 for each quarter. As of June 30, 2006, the Borrowers’ funded debt to Adjusted EBITDA ratio was 2.30 to 1.00 and the fixed

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4.   Long-term Debt (Continued)

charge coverage ratio was 2.20 to 1.00. In addition, the Revolving Facility has financial and other covenants, which require that the maximum consolidated funded debt to Adjusted EBITDA ratio can be no more than 6.50 to 1.00 through June 30, 2007, which reduces to 6.25 to 1.00 on September 30, 2007 through June 30, 2008, to 6.00 to 1.00 on September 30, 2008 through December 31, 2008, to 5.50 to 1.00 on March 31, 2009 through December 31, 2009 and to 5.00 to 1.00 on March 31, 2010. Other covenants limit prepayments of indebtedness or rent (including subordinated debt other than re-financings meeting certain criteria), asset dispositions, dividends, indebtedness and investments. As of June 30, 2006, the Company’s consolidated funded debt to Adjusted EBITDA ratio was 5.22 to 1.00. The Company has pledged the stock of all of its major subsidiaries.

Senior and Senior Subordinated Notes

On August 1, 2006, the Company agreed to issue $400.0 million of 73¤4% senior notes due August 15, 2016. Proceeds from the sale of the notes will be used to reduce a portion of the amount outstanding on the Company’s Revolving Facility.

On March 13, 2006, the Company issued $300.0 million of 65¤8% senior subordinated notes due March 2018. Proceeds from the sale of the notes were used to reduce a portion of the amount outstanding on the Company’s Revolving Facility.

During the first quarter 2005, the Company redeemed the remaining $16.9 million of outstanding 83¤8% senior notes due 2008. As a result of the redemption, the Company recorded a loss on early retirement of debt of approximately $0.7 million in the six months ended June 30, 2005 to reflect the write-off of the unamortized loan costs and call premium.

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 June 30, 2006, the Company’s Consolidated Coverage Ratio (as defined in the Indentures) was 3.4 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 in the Indentures) 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 contains a limitation on liens the Company can incur.

Interest Rate Swaps

The Company has entered into various interest rate swaps with members of its bank group to manage interest expense. As of June 30, 2006, the Company has interest rate swaps with a combined notional amount of $300.0 million. The Company entered into a fair value hedge interest rate swap with a notional amount of $50.0 million tied directly to the Company’s 6% senior notes converting a portion of the Company’s fixed-rate debt to a floating-rate based upon three-month LIBOR rates, terminating in April 2012. This interest rate swap qualifies for the “shortcut” method allowed under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (and as amended by SFAS 138 and 149), 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 instrument. 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

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4.   Long-term Debt (Continued)

the related debt. In accordance with SFAS 133, the Company recorded a liability of $3.7 million and $2.1 million as of June 30, 2006 and December 31, 2005, respectively, representing the fair value of this interest rate swap and a corresponding decrease in long-term debt, as this interest rate swap is considered highly effective under the criteria established by SFAS 133. The Company paid a rate based on LIBOR, which approximated 6.7% as of June 30, 2006 and received a fixed rate of 6.0%.

In December 2005, the Company entered into an interest rate swap with a notional amount of $250.0 million tied directly to the Company’s Revolving Facility converting a portion of the Company’s floating-rate debt to a fixed-rate based on three-month LIBOR rates, terminating in December 2010. As of June 30, 2006, the Company paid a fixed rate of 4.9% and received three-month LIBOR which approximated 5.3%. This interest rate swap is designated and qualifies as a cash flow hedge resulting in the effective portion of the gain or loss reported as a component of other comprehensive income (loss) with an offsetting adjustment to the carrying value of the related debt. For the three and six months ended June 30, 2006, the Company recorded other comprehensive income of $1.9 million and $4.8 million, respectively, related to the change in market value of this interest rate swap. As a result, the Company recorded a decrease in long-term debt of $4.0 million as of June 30, 2006 and an increase in long-term debt of $0.8 million as of December 31, 2005.

The difference between amounts received and paid under such agreements, as well as any costs or fees, is recorded as a reduction of, or an addition to, interest expense as incurred over the life of the swap. The net effect of the interest rate swaps resulted in additional interest expense of approximately $53,000 and $82,000 for the three and six months ended June 30, 2006, respectively. For the three and six months ended June 30, 2005, the net effect of the interest rate swaps resulted in a reduction of interest expense of approximately $0.7 million and $2.0 million, respectively.

5.   Stockholders’ Equity

Treasury Stock

During the three and six months ended June 30, 2006, the Company repurchased 6.3 million and 10.2 million shares, respectively, of its common stock for approximately $472.7 million and $737.6 million for the same periods, primarily through a combination of open market purchases and an accelerated stock buyback (“ASB”) program, completing the Company’s previously authorized stock repurchase. Of the shares repurchased in the second quarter 2006, 3.0 million shares related to the ASB program at a cost of approximately $232 million. On July 24, 2006, the Board of Directors authorized the repurchase up to an additional 10.0 million shares of which 1.8 million have been repurchased as of August 4, 2006 at a cost of approximately $100.0 million.

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5.   Stockholders’ Equity (Continued)

Comprehensive Income

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

 

Earnings Applicable to Common Stock

In accordance with the provisions of SFAS 128, “Earnings Per Share”, basic EPS is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding, excluding unvested restricted stock, during the period. Diluted EPS reflects the additional dilution for all potentially dilutive securities such as stock options and unvested restricted stock.

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):

 

On July 25, 2006, the Company announced an increase in its quarterly cash dividend to $0.2875 per share which is payable on September 1, 2006 to shareholders of record on August 11, 2006. During the six months ended June 30, 2006, the Company paid a quarterly cash dividend of $0.25 per share to shareholders of record on February 10, 2006 and May 12, 2006 for approximately $32.3 million. During the six months ended June 30, 2005, the Company paid a quarterly cash dividend of $0.21 per share to shareholders of record on February 11, 2005 and May 13, 2005 for approximately $28.4 million.

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6.   Share-Based Compensation

In May 2005, the stockholders approved and the Company adopted the 2005 Stock Compensation Plan (the “2005 Plan”) which provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock awards (collectively, the “Awards”). Individuals eligible to receive Awards under the 2005 Plan include employees, directors and independent contractors of the Company. New shares are issued upon option exercise or restricted stock awards. Each share grant subject to an award of restricted stock, restricted stock unit or other stock award shall reduce the shares available for grant by 1.9 shares. See Note 12 of the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2005, for additional information related to the Company’s share-based compensation plan.

Summarized information under the 2005 Plan for the six months ended June 30, 2006, is as follows (unaudited):

 

Effective January 1, 2006, the Company adopted SFAS 123R utilizing the modified prospective application. Under the modified prospective application, SFAS 123R applies to new awards and to awards that were outstanding on December 31, 2005 that are subsequently modified, repurchased or cancelled. Under the modified prospective application, compensation cost recognized for the three and six months ended June 30, 2006 includes compensation cost of all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimate in accordance with the original provisions of SFAS 123 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimate in accordance with the provisions of SFAS 123R. Accordingly, prior period amounts are not restated to reflect the impact of adopting SFAS 123R under the modified prospective application.

The recognition of compensation expense related to the issuance of restricted stock has not changed with the adoption of SFAS 123R, with the inclusion of the estimate of forfeitures, and such compensation expense continues to be expensed in the statements of operations. The following table reflects the impact in net income of adopting SFAS 123R reflecting compensation expense related to stock option awards that was previously not recognized in the financial statements due to the Company’s prior application of APB Opinion 25 (amounts in thousands, except per share data, unaudited):

 

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6.   Share-Based Compensation (Continued)

The Company receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the market price of the option exercised over the exercise price of such options. In accordance with SFAS 123R, for the six months ended June 30, 2006, the Company reported the tax benefit from the exercise of stock options as financing cash flows rather than operating cash flows as reported prior to the adoption of 123R. For the six months ended June 30, 2006, the Company reported $1.6 million of excess tax benefit.

Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and expensed using the straight-line approach. Option valuation models require the input of highly subjective assumptions and changes in the assumptions used can materially affect the fair value estimate. Expected volatility and dividends are based on implied and historical factors related to the Company’s common stock. The expected term represents the weighted-average time between grant date and exercise date and the risk-free interest rate is based on U.S. Treasury rates appropriate for the expected term. No stock options were granted during 2005 or 2006 resulting in no assumptions for dividend yield, expected volatility, risk-free interest rate or expected term of option.

The Company uses historical data and projections to estimate expected employee behaviors related to option exercises and forfeitures. SFAS 123R requires that forfeitures be included as part of the grant date estimate. The effect of forfeitures related to previous SFAS 123 pro forma expense was not material. At June 30, 2006, there was $1.5 million of unrecognized compensation expense related to share-based payments which is expected to be recognized over a weighted-average period of 0.8 years. Based on stock options outstanding at June 30, 2006, the Company estimates $1.1 million of additional expense in 2006, $0.3 million in 2007 and virtually zero thereafter. The remaining weighted average contractual term for options outstanding at June 30, 2006 is 5.1 years and 4.9 years for options exercisable at June 30, 2006.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the stock option. At June 30, 2006, the aggregate intrinsic value of stock options outstanding was $124.1 million and the aggregate intrinsic value of stock options exercisable was $94.3 million. Total intrinsic value of stock options exercised was $2.7 million and $5.4 million, for the three and six months ended June 30, 2006, respectively.

Net cash proceeds from the exercise of stock options were $1.1 million and $9.8 million for the six months ended June 30, 2006 and 2005, respectively. The actual income tax benefit realized from stock option exercises was $1.6 million and $17.7 million for the same periods, respectively.

Restricted Stock

The unearned share-based compensation related to restricted stock is amortized to compensation expense over the period the restrictions lapse (generally five to ten years). The share-based expense for these awards was determined based on the market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period. Upon adoption of SFAS 123R, the Company recognizes compensation expense based on its expectation of which restricted stock awards will vest over the requisite service period for such awards. Prior to implementing SFAS 123R, the Company recognized deferred compensation as a contra-equity account representing the amount of unrecognized restricted stock expense that was reduced as the expense was recognized. Under the provisions of SFAS 123R, the previously recorded deferred compensation was netted against additional paid-in capital.

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6.   Share-Based Compensation (Continued)

As of June 30, 2006, the Company has unearned share-based compensation of $154.2 million associated with these awards. The total fair value of restricted shares that vested for the three months ended June 30, 2006 and 2005 was $1.3 million and $0.3 million, respectively. The total fair value of restricted shares that vested for the six months ended June 30, 2006 and 2005 was $6.8 million and $5.6 million, respectively.

Compensation Expense

Upon adoption of SFAS 123R, the Company began recognizing compensation expense related to stock option awards that were previously disclosed as pro forma information regarding net income and earnings per share. Compensation expense related to restricted stock awards continues to be expensed as under APB Opinion 25, with the inclusion of estimated forfeitures.

The following table represents where reported share-based compensation expense was classified in the accompanying condensed consolidated statements of operations (amounts in thousands, unaudited):

 

The following table compares actual net income reflecting SFAS 123R share-based compensation expense of $3.9 million and $7.3 million, respectively, as reported for the three and six months ended June 30, 2006 to the prior year’s pro forma SFAS 123 fair value compensation expense of $0.7 million and $1.3 million, respectively and reported APB Opinion 25 intrinsic value compensation expense of $2.0 million and $3.9 million, respectively, related to restricted stock amortization (amounts in thousands, except per share data, unaudited):

 

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7.   Future Development

Las Vegas Development

Red Rock

On April 18, 2006, the Company opened phase I of Red Rock Casino Resort Spa (“Red Rock”) located on Charleston Boulevard at the Interstate 215/Charleston interchange in the Summerlin master-planned community in Las Vegas, Nevada. Phase I includes a hotel tower, casino, meeting and convention space, a spa, nine restaurants, a multi-screen movie theater complex, a night club and private pool club operated by Midnight Oil Company and both indoor and outdoor entertainment venues. Phase II, which includes an additional hotel tower, additional meeting and convention space and an expanded spa, is currently under construction and is expected to be completed in early 2007. The total cost of phases I and II of Red Rock is expected to be approximately $1.0 billion, of which approximately $880.9 million had been incurred as of June 30, 2006.

On July 25, 2006, the Company announced the phase III master-planned expansion of Red Rock, which will include a 72-lane bowling center and expansions of both parking garages. Construction of the bowling center is currently underway and is expected to be completed in the second quarter of 2007. The expansions of the parking garages are expected to begin in September 2006 and will be completed in phases beginning in the third quarter of 2007 through the first quarter of 2008. The cost of this expansion is expected to be approximately $60 million to $65 million.

On July 27, 2005, the Company entered into a joint venture with Cloobeck Molasky Partners I, LLC (“Cloobeck Molasky”) to develop a high-end residential project on approximately 5 acres located adjacent to the hotel at Red Rock. It is anticipated that the residential project will contain approximately 400 luxury units. Pursuant to the terms of the operating agreement, the Company owned 80% of the joint venture and Cloobeck Molasky owned 20%. In June 2006, the Company notified Cloobeck Molasky that the joint venture had been dissolved based on the terms of the operating agreement. On July 5, 2006, one of the principals of Cloobeck Molasky submitted a demand for arbitration to the Company which seeks, among other things, to recover damages from the Company as a result of such dissolution. The Company is proceeding with the residential project, and subject to obtaining local approvals and market conditions, sales of the residential towers are expected to begin in 2006.

Santa Fe Station Expansion

In October 2005, the Company began a $130 million phase III master-planned expansion at Santa Fe Station which includes an additional parking garage, a buffet, additional slot machines, a remodeled and expanded race and sports book, a meeting and banquet facility and a new center bar. The entire project is expected to include approximately 125,000 square-feet of additional space. Construction of this project is expected to be completed in phases beginning in the third quarter of 2006 through the summer of 2007 Approximately $58.5 million had been incurred on the expansion as of June 30, 2006.

Fiesta Henderson Expansion

In October 2005, the Company began a $70 million phase II master-planned expansion at Fiesta Henderson which includes a parking garage, additional slot machines, a remodeled and expanded race and sports book and a multi-screen movie theater complex. Construction of the project is expected to be completed in the third quarter of 2006, with the exception of the movie theater complex which is expected to be completed in the summer of 2007. Approximately $33.4 million had been incurred on the expansion as of June 30, 2006.

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7.   Future Development (Continued)

Green Valley Ranch Expansion

In October 2005, the Company began a $115 million phase III master-planned expansion at Green Valley Ranch which includes an additional parking garage, additional slot machines, a new race and sports book, a new poker room, an entertainment lounge, additional convention space and two new restaurants. Construction of this project is expected to be completed in phases from the fourth quarter of 2006 through the summer of 2007. Approximately $61.9 million had been incurred on the expansion as of June 30, 2006.

Aliante Station

In December 2005, the Company entered into an agreement with the Greenspun Corporation to develop Aliante Station, a hotel and casino in the Aliante master-planned community located in North Las Vegas, Nevada. The Company will develop and manage the facility, to be located on a gaming-entitled 40-acre site on the northeast corner of Interstate 215 and Aliante Parkway, which was contributed by the Greenspun Corporation for their 50% ownership in the joint venture. The Company will receive a management fee equal to 2% of the property’s revenues and approximately 5% of EBITDA. The first phase of Aliante Station is expected to include a hotel, casino, multiple full-service restaurants and a multi-screen movie theater complex. We expect to begin construction on Aliante Station in early 2007 with a cost of approximately $600 million. Pursuant to the terms of the agreement, in January 2006, the Company contributed a 54 acre site located on Losee Road in North Las Vegas, Nevada, as well as approximately $2.2 million, for our 50% ownership in the joint venture.

Native American Development

The Federated Indians of Graton Rancheria

The Company has entered into Development and Management Agreements with the Federated Indians of 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 them in designing, developing and financing of 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 24% 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 entered into an option to purchase 360 acres of land just west of the Rohnert Park city limits in Sonoma County, California. In August 2005, the Company purchased 180 acres of the optioned property and an additional 90 acres. The property purchased is approximately one-quarter 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. Prior to obtaining third-party financing, the Company will contribute significant financial support to the project. As of June 30, 2006, the Company had advanced approximately $130.2 million toward the development of this project, primarily to complete the environmental impact study and secure real estate for the FIGR project, which is included on the Company’s condensed consolidated balance sheets. Funds advanced by the Company are expected to be repaid from the proceeds of the project financing or from the FIGR’s gaming revenues. In addition, the Company has agreed to pay approximately $11.3 million upon achieving certain milestones, which will not be reimbursed. As of June 30, 2006, approximately $2.0 million of these

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7.   Future Development (Continued)

payments had been made and were expensed in development expense as incurred. The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurances when or if these approvals will be obtained.

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 Native American 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 June 30, 2006, approximately $2.0 million of these payments had been made and were 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 June 30, 2006, the Company had advanced approximately $31.7 million toward the development of this project, primarily to complete the environmental assessment and secure real estate for the project, which is included on the Company’s condensed consolidated balance sheets. Funds advanced by the Company are expected to be repaid from 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 $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 129th Avenue, approximately 25 miles north of Kalamazoo, Michigan. As currently contemplated, the project will include slot machines, table games, a buffet and specialty restaurants. Construction of the project includes the conversion of an existing 192,000 square-foot building into the casino and 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, the signing of a gaming compact by the Governor of the State of Michigan, the DOI taking 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. On May 13, 2005, the DOI published in the Federal Register a Notice of Final Agency Determination (the “Determination”) to take certain land into trust for the benefit of Gun Lake. The publication commenced a thirty-day period in which interested parties could seek judicial review of the Determination. On June 13, 2005, Michigan Gambling Opposition filed a complaint (the “Complaint”) in the United States District Court, District of Columbia, seeking declaratory and injunctive relief against the DOI and officials of the DOI. The Complaint seeks judicial review of the Determination. On July 27, 2005, Gun Lake filed a motion to intervene in that lawsuit. On September 1, 2005, the District Court granted Gun Lake’s motion to intervene. On January 6, 2006, Gun Lake filed a motion for judgment on the pleadings or, in the alternative, for summary judgment. Also on January 6, 2006, the DOI filed a motion to dismiss or, in the alternative, for summary judgment. As with all litigation, no assurances can be provided as to the outcome of that lawsuit. Prior to obtaining third-party financing, the Company will contribute significant financial support to the project. The timing of this type of project is difficult to predict and is dependent upon the

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7.   Future Development (Continued)

receipt of the necessary governmental and regulatory approvals. There can be no assurances when or if these approvals will be obtained.

Mechoopda Indian Tribe

The Company has 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. 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 June 30, 2006, the Company had advanced approximately $7.8 million toward the development of this project, primarily to complete the environmental assessment and secure real estate for the project, which is included on the Company’s condensed consolidated balance sheets. In addition, the Company has agreed to pay approximately $2.2 million of payments upon achieving certain milestones, which will not be reimbursed. As of June 30, 2006, $50,000 of these payments had been made and were 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 slot machines, 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. Prior to obtaining third-party financing, the Company will contribute significant financial support to the project. The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurances when or if these approvals will be obtained.

North Fork Rancheria of Mono Indian Tribe

The Company has entered into Development and Management Agreements with the North Fork Rancheria of Mono Indians (the “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. 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 June 30, 2006, the Company had advanced approximately $5.5 million toward the development of this project, primarily to complete the environmental impact study and secure real estate for the project, which is included on the Company’s condensed consolidated balance sheets. In addition, the Company has agreed to pay approximately $1.3 million of payments upon achieving certain milestones, which will not be reimbursed and will be expensed as incurred. As of June 30, 2006, none of these payments had 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 slot machines, table games, 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

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7.   Future Development (Continued)

DOI accepting the land into trust on behalf of the Mono and approval of the Management Agreement by the NIGC. Prior to obtaining third-party financing, the Company will contribute significant financial support to the project. The timing of this type of project is difficult to predict, and is dependant upon the receipt of the necessary governmental and regulatory approvals. There can be no assurances when or if these approvals will be obtained.

Land Held for Development

As of June 30, 2006, the Company had $238.5 million of land held for development that consists primarily of six sites that are owned or leased, which comprise 221 acres in the Las Vegas valley, 188 acres in the Sacramento area near Thunder Valley and 104 acres in Reno, Nevada. The primary gaming entitled land that the Company owns in the Las Vegas valley consists of 67 acres located at the intersection of Durango Road and the Southern Beltway/Interstate 215 in the southwest area of Las Vegas, 49 acres also located in southwest Las Vegas at the intersection of Flamingo Road and Interstate 215, 61 acres located on the southern end of Las Vegas Boulevard at Cactus Avenue of which the Company leases and has an option to purchase 2.5 acres and 26 acres on Boulder Highway at the site formerly known as Castaways Hotel Casino and Bowling Center.

The Company has also acquired or is under contract to acquire approximately 67 acres of land on which Wild Wild West is located and the surrounding area, of which approximately 48 acres have been acquired as of June 30, 2006. During the six months ended June 30, 2006 and 2005, the Company incurred and expensed approximately $0.5 million and $11.7 million, respectively, to terminate various leases related to this land. In 2003, the Company exercised its option to purchase the 19-acre parcel of leased land on which Wild Wild West is located which was to occur in July 2005 at a purchase price of approximately $36 million. In July 2005, the Company entered into an agreement to extend the date for the close of escrow to no later than January 2007 at a purchase price of $36 million, provided either party may accelerate the close of escrow to an earlier date upon 90 days’ prior written notice to the other party. In addition, the agreement reduced the lease expense from $2.9 million to $1.6 million per year. No amounts related to this purchase option have been recorded on the Company’s condensed consolidated balance sheets.

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.

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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) Includes the wholly owned properties of Red Rock (since April 18, 2006), Palace Station, Boulder Station, Texas Station, Sunset Station, Santa Fe Station, Fiesta Rancho and Fiesta Henderson.

       (b) Includes management fees from Thunder Valley, Green Valley Ranch, Barley’s and The Greens (since December 17, 2005).

        (c) Includes the wholly owned properties of Wild Wild West, Wildfire, Magic Star, Gold Rush and corporate and development expense.

Results of Operations

Consolidated net revenues for the three months ended June 30, 2006 increased 24.8% to $341.8 million as compared to $274.0 million for the three months ended June 30, 2005. Consolidated net revenues for the six months ended June 30, 2006 increased 15.9% to $634.3 million as compared to $547.4 million for the six months ended June 30, 2005. The increase in net revenues was due primarily to revenue increases at our Major Las Vegas Operations.

Combined net revenues from our Major Las Vegas Operations increased 27.9% to $305.3 million for the three months ended June 30, 2006 as compared to $238.7 million for the three months ended June 30, 2005, as a result of opening Red Rock Casino Resort Spa (“Red Rock”) on April 18, 2006 which includes 73 days of operations. Combined net revenues from our Major Las Vegas Operations increased 17.1% to $560.0 million for the six months ended June 30, 2006 as compared to $478.1 million for the six months ended June 30, 2005. The increase in combined net revenues was primarily due to the opening of Red Rock as noted above, in addition to the continued strength of the Las Vegas local economy, continued population and employment growth in the Las Vegas valley as well as the continued success of our Jumbo brand of products, including Jumbo Jackpot.

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Consolidated operating income was impacted in the three and six-months ended June 30, 2006 by an increase in preopening expenses of $12.4 million and $25.9 million during the same periods, respectively. Excluding preopening expenses, our consolidated operating income increased 15.6% and 19.7% during the three and six-months ended June 30, 2006, respectively, due to the increased consolidated net revenues noted above.

Share-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment”, utilizing the modified prospective application. Under the modified prospective application, SFAS 123R applies to new awards and awards that were outstanding on December 31, 2005 that are subsequently modified, repurchased or cancelled. Under the modified prospective application, compensation cost recognized in the three and six-months ended June 30, 2006 includes compensation cost of all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Accordingly, prior period amounts are not restated to reflect the impact of adopting SFAS 123R under the modified prospective application.

The recognition of compensation expense related to the issuance of restricted stock has not changed with the adoption of SFAS 123R, with the inclusion of the estimate of forfeitures, and such compensation expense continues to be expensed in the statements of operations. The following table reflects the impact in net income of adopting SFAS 123R reflecting compensation expense related to stock option awards that was previously not recognized in the financial statements due to our prior application of APB Opinion 25 (amounts in thousands, except per share data, unaudited):

 

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

 

Casino.   Casino revenues increased 20.8% and 13.4% for the three and six-months ended June 30, 2006, respectively as compared to the three and six-months ended June 30, 2005, primarily due to the same factors affecting the combined net revenues for our Major Las Vegas Operations noted above. Casino expenses increased 23.0% and 13.9% for the same three and six-month period. The increase in casino expenses is due to an increase in gaming taxes as a result of higher gaming revenues and due to the opening of Red Rock, which includes approximately 3,200 slot machines and over 60 table games. The operating margin was impacted as new facilities initially do not operate as efficiently as more mature facilities and thus can dilute departmental margins.

Food and Beverage.   Food and beverage revenues increased 53.3% and 29.4% for the three and six-months ended June 30, 2006, respectively as compared to the three and six-months ended June 30, 2005. Food covers increased 23.1% and 11.9% and the average guest check increased 16.6% and 11.6% for the three and six-months ended June 30, 2006, respectively as compared to the three and six-months ended June 30, 2005. Food and beverage expenses increased 59.4% and 32.7% for the three and six-months ended June 30, 2006, respectively as compared to the three and six-months ended June 30, 2005 primarily due to the opening of Red Rock on April 18, 2006 which includes the addition of nine restaurants.

Room.   Room revenues increased 37.9% and 20.5% for the three and six-months ended June 30, 2006, respectively, as compared to the three and six-months ended June 30, 2005, while room expenses increased 46.1% and 26.6% for the three and six-months ended June 30, 2006, respectively, as compared to the three and six-months ended June 30, 2005. The increase in room revenue and expenses is related to the opening of Red Rock which includes 415 hotel rooms. Room occupancy remained virtually unchanged at 96% and 97% for the three and six-months ended June 30, 2006, respectively, as compared to 97% for the three and six-months ended June 30, 2005. The average daily room rate increased to $75 in the three months ended June 30, 2006 from $61 in the three months ended June 30, 2005 and to $71 in the six months ended June 30, 2006 from $63 in the six months ended June 30, 2005. The increase in room rate

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is primarily due to a continued increase in consumer demand for rooms in Las Vegas as well as an average daily room rate of $175 at Red Rock.

Other.   Other revenues primarily include income from the gift shops, bowling, entertainment, leased outlets and arcades. Other revenues increased by 38.8% to approximately $17.9 million for the three months ended June 30, 2006 as compared to approximately $12.9 million for the three months ended June 30, 2005. Other revenues increased by 32.4% to approximately $31.8 million for the six months ended June 30, 2006 as compared to approximately $24.1 million for the six months ended June 30, 2005. The increase in other revenues is primarily due to the opening of Red Rock.

Management Fees.   We manage Thunder Valley on behalf of the United Auburn Indian Community (“UAIC”) and receive a management fee equal to 24% of net income (as defined in the management agreement). In addition, we are the managing partner for Green Valley Ranch, Barley’s and The Greens and receive a management fee equal to 2% of revenues and approximately 5% of Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) from Green Valley Ranch and 10% of EBITDA from Barley’s and The Greens. For the three months ended June 30, 2006, management fees increased to approximately $24.0 million as compared to $23.6 million for the three months ended June 30, 2005. For the six months ended June 30, 2006, management fees increased to approximately $49.9 million as compared to $46.9 million for the six months ended June 30, 2005. The increase is due to improved results at both Thunder Valley and Green Valley Ranch.

Selling, General and Administrative (“SG&A”).   SG&A expenses increased 30.9% and 16.3% for the three and six-months ended June 30, 2006, respectively, primarily due to the opening of Red Rock during the second quarter. SG&A as a percentage of net revenues increased to 17.0% and 16.2% for the three and six-months ended June 30, 2006, respectively, as compared to 16.2% and 16.1% for the three and six-months ended June 30, 2005, respectively.

Corporate Expense.   Corporate expense as a percentage of net revenues decreased to 4.8% for the three months ended June 30, 2006, as compared to 5.1% for the three months ended June 30, 2005 and remained unchanged for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. Corporate expense increased 17.1% to $16.5 million for the three months ended June 30, 2006 as compared to $14.1 million for the three months ended June 30, 2005 and increased 15.9% to $32.8 million for the six months ended June 30, 2006 as compared to $28.3 million for the six months ended June 30, 2005. The increase is due primarily to increased incentive compensation which includes cash and restricted stock.

Development Expense.   Development expense includes costs to identify potential gaming opportunities, the internal costs incurred to bring the Native American projects currently under contract to fruition and other development opportunities, which includes payroll, travel and legal expenses. Development expenses for the three months ended June 30, 2006 and 2005 were approximately $2.5 million and $2.1 million, respectively. Development expenses for the six months ended June 30, 2006 and 2005 were approximately $4.7 million.

Depreciation and Amortization.   Depreciation and amortization increased 24.9% in the three months ended June 30, 2006 to $31.4 million as compared to $25.1 million in the three months ended June 30, 2005. Depreciation and amortization increased 15.3% in the six months ended June 30, 2006 to $57.0 million as compared to $49.5 million in the six months ended June 30, 2005. This increase was primarily due to the completion of phase I of Red Rock in April 2006 as well as the completion of the bowling center at Sunset Station in April 2005 and the remodel of the buffet at Sunset Station in December 2005.

Preopening Expenses.   Preopening expenses for the three and six-months ended June 30, 2006 were approximately $13.6 million and $27.7 million, respectively, which included costs incurred related to projects under development including phase I of Red Rock. Preopening expenses for the three and

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six-months ended June 30, 2005 were approximately $1.2 million and $1.8 million, respectively, which include costs incurred during development of Red Rock.

Lease Terminations.   During the six months ended June 30, 2006 and 2005, we recorded approximately $0.5 million and $11.7 million, respectively, to terminate various leases on land adjacent to the current Wild Wild West property.

Earnings from Joint Ventures.   We own a 50% interest in Green Valley Ranch, Barley’s, The Greens and Aliante Station, and a 6.7% interest in a joint venture that owns the Palms Casino Resort. For the three months ended June 30, 2006, we recorded approximately $9.9 million as our share of the earnings from these joint ventures as compared to approximately $8.7 million for the three months ended June 30, 2005. For the six months ended June 30, 2006, we recorded approximately $21.8 million as our share of the earnings from these joint ventures as compared to approximately $19.4 million for the six months ended June 30, 2005. The increase in earnings from joint ventures is primarily a result of the improved results at Green Valley Ranch.

Interest Expense.   Interest expense, net of capitalized interest, increased 118.9% to $41.3 million in the three months ended June 30, 2006 as compared to $18.9 million in the three months ended June 30, 2005. Gross interest expense increased approximately $23.6 million over the same periods due to an increase in our long-term debt of approximately $1.6 billion from June 30, 2005 to June 30, 2006, as well as an increase in our weighted-average cost of debt from 6.2% to 6.5%. Capitalized interest increased approximately $1.2 million for the three months ended June 30, 2006, primarily related to interest capitalized for the construction of phase I and II of Red Rock.

Interest expense, net of capitalized interest, increased 72.2% to $65.2 million in the six months ended June 30, 2006 as compared to $37.9 million in the six months ended June 30, 2005. Gross interest expense increased approximately $38.1 million over the same periods due to an increase in our long-term debt as noted above. Our weighted average cost of debt increased to 6.5% for the six months ended June 30, 2006 from 6.1% for the six months ended June 30, 2005. Capitalized interest increased approximately $10.8 million to $18.1 million for the six months ended June 30, 2006 primarily due to interest capitalized for the construction of Red Rock.

Interest and Other Expense from Joint Ventures.   For the three months ended June 30, 2006 and 2005, we recorded approximately $1.5 million and $2.1 million, respectively, in interest and other expense related to our unconsolidated joint ventures. For the six months ended June 30, 2006 and 2005, we recorded approximately $3.0 million and $3.8 million, respectively, in interest and other expense related to our unconsolidated joint ventures. The decrease in interest and other expense from the joint ventures during the three and six months ended June 30, 2006, is primarily related to interest capitalized during the construction period of the Green Valley Ranch phase III master-planned expansion and development of Aliante Station.

Loss on Early Retirement of Debt.   During the first quarter of 2005, we redeemed the remaining $16.9 million of outstanding 83¤8% senior notes due 2008. As a result of the redemption we recorded a loss on early retirement of debt of approximately $0.7 million during the six months ended June 30, 2005 to reflect the write-off of unamortized loan costs and call premium.

Liquidity and Capital Resources

The following liquidity and capital resources discussion contains certain forward-looking statements with respect to our business, financial condition, results of operations, dispositions, acquisitions, expansion projects and our subsidiaries, which involve risks and uncertainties that cannot be predicted or quantified, and consequently, actual results may differ materially from those expressed or implied herein. Such risks and uncertainties include, but are not limited to, financial market risks, the ability to maintain existing

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management, integration of acquisitions, competition within the gaming industry, the cyclical nature of the hotel business and gaming business, economic conditions, regulatory matters and litigation and other risks described in our filings with the Securities and Exchange Commission. In addition, construction projects such as Red Rock and the expansions at Green Valley Ranch, Santa Fe Station and Fiesta Henderson entail significant risks, including shortages of materials or skilled labor, unforeseen regulatory problems, work stoppages, weather interference, floods and unanticipated cost increases. The anticipated costs and construction periods are based on budgets, conceptual design documents and construction schedule estimates. There can be no assurance that the budgeted costs or construction period will be met. All forward-looking statements are based on our current expectations and projections about future events.

During the six months ended June 30, 2006, we generated cash flows from operating activities of approximately $133.6 million. In addition, we received $298.5 million from the issuance of senior subordinated notes and approximately $1.1 million from the exercise of stock options. At June 30, 2006, we had total available borrowings of $2.0 billion under the Revolving Facility, which was reduced by borrowings of $1.1 billion and various letters of credit totaling approximately $3.4 million, leaving approximately $874.4 million available as of June 30, 2006. We had $90.5 million in cash and cash equivalents as of June 30, 2006, virtually all of which is used for day-to-day operation of our casinos.

During the six months ended June 30, 2006, total capital expenditures were $486.4 million, of which approximately $311.0 million was related to the development of phases I and II of Red Rock (see “Future Development”), approximately $33.4 million for the purchase of land, approximately $47.4 million for the phase III expansion at Santa Fe Station, approximately $23.7 million for the phase II expansion at Fiesta Henderson and approximately $70.9 million for maintenance capital expenditures and various other projects. In addition to capital expenditures, we repurchased approximately $737.6 million of our common stock and paid approximately $32.3 million in common stock dividends.

On August 1, 2006, we agreed to issue $400 million of 7¾% senior notes due August 15, 2016. Proceeds from the sale of the notes will be used to reduce a portion of the amount outstanding on our Revolving Facility.

Our primary cash requirements for the remainder of 2006 are expected to include (i) approximately $35 million for the payment of common stock dividends, (ii) approximately $164 million related to construction of Red Rock phases I and II, (iii) approximately $14 million related to the phase III expansion of Red Rock, (iv) approximately $59 million related to the phase III expansion of Santa Fe Station, (v) approximately $27 million related to the phase II expansion at Fiesta Henderson,  (vi) approximately $73 million related to various land purchases, (vii) payments related to our existing and other potential Native American projects, (viii) principal and interest payments on indebtedness, (iv) maintenance and other capital expenditures, (x)  other strategic land purchases and (xi) opportunistic repurchases of our common stock.

Our primary cash requirements for 2007 are expected to include (i) approximately $30 million for Red Rock phase II, (ii) approximately $45 million for the phase III expansion at Red Rock, (iii) approximately $30 million for the phase III expansion of Santa Fe Station, (iv) approximately $15 million for the phase II expansion of Fiesta Henderson, (v) payments of cash dividends, (vi) principal and interest payments on indebtedness, (vii) maintenance and other capital expenditures, (viii) other strategic land purchases and (ix) opportunistic repurchases of our common stock.

We believe that cash flows from operations, borrowings under our Revolving Facility and existing cash balances will be adequate to satisfy our anticipated uses of capital during the remainder of 2006 and 2007. However, we are continually evaluating our financing needs. If more attractive financing alternatives or expansion, development or acquisition opportunities become available to us, we may amend our financing plans assuming such financing would be permitted under our existing debt agreements (see “Description of Certain Indebtedness and Capital Stock”) and other applicable agreements.

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Off Balance Sheet Arrangements

As of June 30, 2006, we have certain off-balance sheet arrangements that affect our financial condition, liquidity and results of operations, which include interest rate swaps with a notional amount of $300.0 million (see “Description of Certain Indebtedness and Capital Stock—Interest Rate Swaps”). We also have certain contractual obligations including long-term debt, operating leases, employment contracts, long-term stay on agreements, slot conversion purchases and the purchase of land. Other than the issuance of the $300 million of 65¤8%  senior subordinated notes in March 2006 and the $400 million of 7¾% of senior notes in August 2006, there were no material changes to our contractual obligations previously reported in our Annual Report on Form 10-K for the year ended December 31, 2005.

Future Development—Las Vegas

Red Rock

On April 18, 2006, we opened phase I of Red Rock Casino Resort Spa (“Red Rock”) located on Charleston Boulevard at the Interstate 215/Charleston interchange in the Summerlin master-planned community in Las Vegas, Nevada. Phase I includes 415 hotel rooms, approximately 3,200 slot machines, 94,000 square feet of meeting and convention space, a 35,000-square-foot spa, nine restaurants, a 16-screen movie theater complex, a night club and private pool club operated by Midnight Oil Company, both indoor and outdoor entertainment venues and parking for approximately 5,000 vehicles. Phase II, which includes an additional hotel tower containing over 400 hotel rooms, additional meeting and convention space and an expanded spa, is currently under construction and is expected to be completed in early 2007. The total cost of phases I and II of Red Rock is expected to be approximately $1.0 billion, of which approximately $880.9 million had been incurred as of June 30, 2006.

On July 25, 2006, we announced the phase III master-planned expansion of Red Rock, which will include a 72-lane bowling center and expansions of both parking garages. Construction of the bowling center is currently underway and is expected to be completed in the second quarter of 2007. The expansions of the parking garages are expected to begin in September 2006 and will be completed in phases beginning in the third quarter of 2007 through the first quarter of 2008. The cost of this expansion is expected to be approximately $60 million to $65 million.

On July 27, 2005, we entered into a joint venture with Cloobeck Molasky Partners I, LLC (“Cloobeck Molasky”) to develop a high-end residential project on approximately 5 acres located adjacent to the hotel at Red Rock. It is anticipated that the residential project will contain approximately 400 luxury units. Pursuant to the terms of the operating agreement, we owned 80% of the joint venture and Cloobeck Molasky owned 20%. In June 2006, we notified Cloobeck Molasky that the joint venture had been dissolved based on the terms of the operating agreement. On July 5, 2006, one of the principals of Cloobeck Molasky submitted a demand for arbitration to us which seeks, among other things, to recover damages from us as a result of such dissolution. We are proceeding with the residential project, and subject to obtaining local approvals and market conditions, sales of the residential towers are expected to begin in 2006.

Santa Fe Station Expansion

In October 2005, we began a $130 million phase III master-planned expansion at Santa Fe Station which is expected to include a 2,900-space parking garage, a 500-seat buffet, 400 additional slot machines, a remodeled and expanded race and sports book, a 15,000 square-foot meeting and banquet facility and a new center bar. The entire project is expected to include approximately 125,000 square-feet of additional space. Construction of this project is expected to be completed in phases beginning in the third quarter of 2006 through the summer of 2007.  Approximately $58.5 million had been incurred on the expansion as of June 30, 2006.

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Fiesta Henderson Expansion

In October 2005, we began a $70 million phase II master-planned expansion at Fiesta Henderson which is expected to include a 1,500-space parking garage, 350 additional slot machines, a remodeled and expanded race and sports book and a 12-screen movie theater complex. Construction of the project is expected to be completed in the third quarter of 2006, with the exception of the movie theater complex which is expected to be completed in the summer of 2007. Approximately $33.4 million had been incurred on the expansion as of June 30, 2006.

Green Valley Ranch Expansion

In October 2005, we began a $115 million phase III master-planned expansion at Green Valley Ranch which is expected to include a 1,500-space parking garage, additional slot machines, a new race and sports book, a new poker room, a 500-seat entertainment lounge, 14,000 square feet of convention space and two new restaurants. Construction of this project is expected to be completed in phases from the fourth quarter of 2006 through summer of 2007. Approximately $61.9 million had been incurred on the expansion as of June 30, 2006.

Aliante Station

In December 2005, we entered into an agreement with the Greenspun Corporation to develop Aliante Station, a hotel and casino in the Aliante master-planned community located in North Las Vegas, Nevada. We will develop and manage the facility, to be located on a gaming-entitled 40-acre site on the northeast corner of Interstate 215 and Aliante Parkway, which was contributed by the Greenspun Corporation for their 50% ownership in the joint venture. We will receive a management fee equal to 2% of the property’s revenues and approximately 5% of EBITDA. The first phase of Aliante Station is expected to include 200 hotel rooms, approximately 2,000 slot machines, multiple full-service restaurants and a multi-screen movie theater complex. We expect to begin construction on Aliante Station in early 2007 with a cost of approximately $600 million. Pursuant to the terms of the agreement, in January 2006, we contributed a 54 acre site located on Losee Road in North Las Vegas, Nevada, as well as approximately $2.2 million, for our 50% ownership in the joint venture.

Future Development—Native American

The Federated Indians of Graton Rancheria

We have entered into Development and Management Agreements with the Federated Indians of Graton Rancheria (the “FIGR”), a federally recognized Native American tribe. Pursuant to those agreements, we will assist the FIGR in developing and operating a gaming and entertainment project to be located in Sonoma County, California. The FIGR selected us to assist them in designing, developing and financing the project and, upon opening; we 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 we will receive a management fee equal to 24% of the facility’s net income. We will also receive a development fee equal to 2% of the cost of the project upon the opening of the facility.

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