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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)  

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

For the Quarterly Period Ended September 30, 2002

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)

Nevada
(State of incorporation)		   88-0136443
(IRS Employer Identification No.)

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)

Not Applicable
(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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
Common stock, $0.01 par value		   Outstanding at October 31, 2002
57,768,580


STATION CASINOS, INC.
INDEX

Part I.   Financial Information    

Item 1.
 
Financial Statements
 
 
        Condensed Consolidated Balance Sheets (unaudited)—
September 30, 2002 and December 31, 2001		   3
        Condensed Consolidated Statements of Operations (unaudited)—
Three and nine months ended September 30, 2002 and 2001		   4
        Condensed Consolidated Statements of Cash Flows (unaudited)—
Nine months ended September 30, 2002 and 2001		   5
        Notes to Condensed Consolidated Financial Statements (unaudited)   6
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   15
Item 3.   Quantitative and Qualitative Disclosure About Market Risk   29
Item 4.   Controls and Procedures   29

Part II.
 
Other Information
 
 

Item 1.
 
Legal Proceedings
 
30
Item 2.   Changes in Securities and Use of Proceeds   32
Item 3.   Defaults Upon Senior Securities   32
Item 4.   Submission of Matters to a Vote of Security Holders   32
Item 5.   Other Information   32
Item 6.   Exhibits and Reports on Form 8-K   32
Signature   33
Officer Certifications   34

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

STATION CASINOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)

 
   September 30,
2002
   December 31,
2001
  
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 65,501   $ 66,117  
  Receivables, net     15,909     17,855  
  Inventories     4,360     4,454  
  Prepaid gaming tax     13,944     14,265  
  Prepaid expenses     7,388     6,080  
  Deferred income tax     5,706     4,262  
   
 
 
    Total current assets     112,808     113,033  

Property and equipment, net
 
 
1,059,667
 
 
1,106,102
 
Goodwill and other intangibles, net     167,792     189,095  
Land held for development     96,825     98,876  
Investments in joint ventures     73,163     72,012  
Other assets, net     95,222     77,004  
   
 
 
    Total assets   $ 1,605,477   $ 1,656,122  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Current portion of long-term debt   $ 146,836   $ 332  
  Accounts payable     7,334     22,620  
  Accrued payroll and related     27,229     19,556  
  Construction contracts payable     5,174     9,575  
  Accrued interest payable     26,276     17,559  
  Accrued progressives     5,717     6,209  
  Accrued expenses and other current liabilities     28,849     32,955  
   
 
 
    Total current liabilities     247,415     108,806  

Long-term debt, less current portion
 
 
1,024,210
 
 
1,236,758
 
Deferred income tax, net     52,283     40,453  
Other long-term liabilities, net     20,335     21,201  
   
 
 
    Total liabilities     1,344,243     1,407,218  
   
 
 

Commitments and contingencies
 
 
 
 
 
 
 

Stockholders' equity:
 
 
 
 
 
 
 
  Common stock, par value $0.01; authorized 135,000,000 shares; 66,212,463 and 65,349,368 shares issued     447     441  
  Treasury stock, 8,472,882 and 7,987,882 shares, at cost     (105,059 )   (99,248 )
  Additional paid-in capital     305,113     300,254  
  Deferred compensation — restricted stock     (17,984 )   (19,510 )
  Other comprehensive loss     (1,642 )   —  
  Retained earnings     80,359     66,967  
   
 
 
    Total stockholders' equity     261,234     248,904  
   
 
 
    Total liabilities and stockholders' equity   $ 1,605,477   $ 1,656,122  
   
 
 

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

3


STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2002
   2001
   2002
   2001
  
Operating revenues:                          
  Casino   $ 154,242   $ 165,696   $ 476,169   $ 493,415  
  Food and beverage     31,738     36,317     97,988     105,886  
  Room     11,473     11,025     36,294     36,178  
  Other     10,519     18,335     31,452     53,917  
  Earnings of Green Valley Ranch Station joint venture     3,733     —     10,601     —  
   
 
 
 
 
    Gross revenues     211,705     231,373     652,504     689,396  
  Promotional allowances     (17,241 )   (18,960 )   (53,414 )   (54,448 )
   
 
 
 
 
    Net revenues     194,464     212,413     599,090     634,948  
   
 
 
 
 
Operating costs and expenses:                          
  Casino     62,955     74,066     190,810     215,681  
  Food and beverage     18,944     22,692     58,165     64,697  
  Room     4,629     4,968     14,250     14,383  
  Other     4,357     11,183     11,947     31,814  
  Selling, general and administrative     41,797     44,778     121,242     123,877  
  Corporate expense     7,785     7,167     23,827     19,649  
  Depreciation and amortization     17,657     17,959     54,850     51,894  
  Preopening expenses     —     757     —     1,966  
  Gain on sale of Southwest Gaming     —     (1,662 )   —     (1,662 )
  Impairment loss     —     —     3,876     4,001  
   
 
 
 
 
      158,124     181,908     478,967     526,300  
   
 
 
 
 
Operating income     36,340     30,505     120,123     108,648  
   
 
 
 
 
Other income (expense):                          
  Interest expense, net     (24,923 )   (24,353 )   (72,724 )   (73,645 )
  Interest expense from joint ventures     (1,605 )   —     (4,739 )   —  
  Loss on early retirement of debt     (1,427 )   —     (1,427 )   (12,732 )
  Other     616     1,027     1,160     1,220  
   
 
 
 
 
      (27,339 )   (23,326 )   (77,730 )   (85,157 )
   
 
 
 
 
Income before income taxes and cumulative effect of change in accounting principle     9,001     7,179     42,393     23,491  
Income tax provision     (3,330 )   (2,584 )   (15,685 )   (8,584 )
   
 
 
 
 
Income before cumulative effect of change in accounting principle     5,671     4,595     26,708     14,907  
Cumulative effect of change in accounting principle, net of applicable income tax benefit of $7,170     —     —     (13,316 )   —  
   
 
 
 
 
Net income   $ 5,671   $ 4,595   $ 13,392   $ 14,907  
   
 
 
 
 
Basic and diluted earnings per common share:                          
  Income before cumulative effect of change in accounting principle:                          
    Basic   $ 0.10   $ 0.08   $ 0.46   $ 0.26  
    Diluted   $ 0.09   $ 0.08   $ 0.44   $ 0.25  
  Net income:                          
    Basic   $ 0.10   $ 0.08   $ 0.23   $ 0.26  
    Diluted   $ 0.09   $ 0.08   $ 0.22   $ 0.25  
  Weighted average common shares outstanding:                          
    Basic     57,888     57,894     57,822     57,918  
    Diluted     60,321     59,788     60,682     60,042  

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

4


STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)

 
   Nine Months Ended
September 30,
  
 
   2002
   2001
  
Cash flows from operating activities:              
Net income   $ 13,392   $ 14,907  
   
 
 
Adjustments to reconcile net income to net cash provided by operating activities:              
  Depreciation and amortization     54,850     51,894  
  Goodwill impairment loss     20,486     —  
  Loss on early retirement of debt     1,427     12,732  
  Gain on sale of Southwest Gaming     —     (1,662 )
  Impairment loss     3,876     4,001  
  Amortization of debt discount and issuance costs     3,304     4,827  
  Changes in assets and liabilities:              
    Decrease in receivables, net     1,946     9,297  
    Increase in inventories and prepaid expenses     (935 )   (7,592 )
    Increase in deferred income tax     10,386     8,925  
    Decrease in accounts payable     (15,315 )   (10,224 )
    Increase in accrued expenses and other current liabilities     11,848     1,233  
  Other, net     (649 )   (200 )
   
 
 
      Total adjustments     91,224     73,231  
   
 
 
      Net cash provided by operating activities     104,616     88,138  
   
 
 
Cash flows from investing activities:              
  Capital expenditures     (15,637 )   (418,452 )
  Proceeds from sale of land, property and equipment     12,300     11,399  
  Investments in joint ventures     (246 )   (25,974 )
  Purchase of land held for development     —     (13,159 )
  (Decrease) increase in construction contracts payable     (4,401 )   9,947  
  Other, net     (16,320 )   (2,945 )
   
 
 
      Net cash used in investing activities     (24,304 )   (439,184 )
   
 
 
Cash flows from financing activities:              
  (Payments) borrowings under bank facility, net     (78,100 )   26,000  
  Principal payments on notes payable     (3,545 )   (5,609 )
  Proceeds from interest rate swap termination     5,842     —  
  Proceeds from the issuance of senior notes     —     400,000  
  Redemption of senior subordinated notes     —     (206,247 )
  Purchase of treasury stock     (5,811 )   (47,561 )
  Debt issuance costs     (3,437 )   (7,572 )
  Exercise of stock options     3,992     990  
  Other, net     131     1,538  
   
 
 
      Net cash (used in) provided by financing activities     (80,928 )   161,539  
   
 
 
Cash and cash equivalents:              
  Decrease in cash and cash equivalents     (616 )   (189,507 )
  Balance, beginning of period     66,117     255,984  
   
 
 
  Balance, end of period   $ 65,501   $ 66,477  
   
 
 
Supplemental cash flow disclosures:              
  Cash paid for interest, net of $2,065 and $8,273 capitalized   $ 58,933   $ 58,178  
  Cash paid (received) for income taxes, net   $ 546   $ (12,798 )
  Sale of Southwest Gaming   $ —   $ 8,440  
  Equipment purchases financed by debt   $ —   $ 200  

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

5


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 percent owned) and two smaller casino properties (one of which is 50 percent owned) in the Las Vegas metropolitan area. Until September 30, 2001, the Company also owned and provided slot route management services in southern Nevada. On January 4, 2001, the Company consummated the purchase of substantially all of the assets of the Fiesta Casino Hotel for a purchase price of $170 million and renamed the property Fiesta Rancho Casino Hotel in December 2001. On January 30, 2001, the Company consummated the purchase of substantially all of the assets of The Reserve Hotel & Casino for an aggregate purchase price of $71.8 million and renamed the property Fiesta Henderson Casino Hotel in December 2001. In addition, the Company opened Green Valley Ranch Station Casino, a 50% joint venture, on December 18, 2001.

        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") and Wild Wild West Gambling Hall & Hotel ("Wild Wild West"). The Company also owns a 50% interest in Barley's Casino & Brewing Company ("Barley's") and Green Valley Ranch Gaming, LLC ("Green Valley Ranch Station"). 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 accounting principles generally accepted in the United States 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, 2002 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, 2001.

        Certain amounts in the condensed consolidated financial statements for the three and nine months ended September 30, 2001 have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net income.

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

6


construction period, which is amortized against the earnings of the joint venture. Investments in joint ventures consist of the following (amounts in thousands, unaudited):

 
   September 30,
2002
   December 31,
2001
Green Valley Ranch Station (50.0%)   $ 53,628   $ 52,596
Barley's (50.0%)     2,745     2,608
Palms Casino Resort (6.7%)     16,790     16,808
   
 
  Investments in joint ventures   $ 73,163   $ 72,012
   
 

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

 
   September 30,
2002
   December 31,
2001
Current assets   $ 44,758   $ 38,482
Property and equipment and other assets, net     541,495     566,845
Current liabilities     64,185     88,454
Long-term debt and other liabilities     216,390     191,584
Stockholders' equity     305,678     325,289

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

 
   Three Months
Ended September 30,
   Nine Months
Ended September 30,
  
 
   2002
   2001
   2002
   2001
  
Net revenues   $ 70,215   $ 3,082   $ 199,532   $ 9,976  
Operating costs and expenses     57,989     7,468     171,441     13,787  
Operating income (loss)     12,226     (4,386 )   28,091     (3,811 )
Net income (loss)     6,562     (4,334 )   12,478     (3,655 )

        Green Valley Ranch Station, located at the intersection of Interstate 215 and Green Valley Parkway in Henderson, Nevada, opened on December 18, 2001. It is owned by a 50/50 joint venture between the Company and GCR Gaming, which is primarily owned by members of the Greenspun family. The Company developed the project on 40 acres of a 170-acre multi-use commercial development. The Company is the managing partner of Green Valley Ranch Station and receives a management fee for its services equal to two percent of the property's revenues and approximately five percent of EBITDA, as defined in the operating agreement.

        During the third quarter of 2001, the Company completed financing for Green Valley Ranch Station. The financing was completed with a group of banks, and provides for borrowings up to $165.0 million at a margin above the LIBOR rate of up to 250 basis points. Also during the third quarter of 2001, the Company entered into an agreement to swap the majority of this floating rate to a fixed rate that will approximate 6.9% during the term of the loan. The loan required a completion guaranty and a limited make-well of $44.0 million, if necessary (based on operating results of the property). Both the completion guaranty and make-well are joint and several obligations of each partner, with GCR Gaming's obligation collateralized. The Company was not required to make any payments related to the completion guaranty. As of September 30, 2002, the Company has paid approximately $0.2 million as a result of the make-well agreement. The make-well agreement will terminate upon achieving a debt to Adjusted EBITDA (as defined) ratio of less than or equal to 3.00 to 1.00 and producing Adjusted EBITDA before management fees of at least $42.0 million. As of September 30, 2002, the debt to Adjusted EBITDA ratio was 4.25 to 1.00. In addition to the initial

7


equity contributions and the bank financing, the Company has secured approximately $35.0 million of equipment financing.

        On December 31, 2001, Green Valley Ranch Station entered into an interest rate swap that is matched to a portion of its revolving facility, which terminates on December 29, 2006. The notional amount at December 31, 2001 was $100.0 million and increased to $120.0 million on March 28, 2002. At September 30, 2002, the notional amount was $111.0 million, which decreases by varying amounts each quarter until it reaches $20.0 million on September 29, 2006 through the termination date. In March 2002, Green Valley Ranch Station entered into an additional interest rate swap that terminates on March 28, 2007, and is matched to a portion of its equipment financing. The notional amount of this interest rate swap at September 30, 2002, was $27.0 million and decreases by $1.5 million each quarter. The interest rate swaps have converted a portion of Green Valley Ranch Station's floating rate debt to a fixed rate. As of September 30, 2002, Green Valley Ranch Station was paying a weighted average fixed rate of 4.33% on the interest rate swaps and was receiving a weighted average floating rate based on three-month LIBOR of 1.81%. These interest rate swaps were also priced to have no value at inception. As a result of the mark-to-market valuation of the interest rate swaps as of September 30, 2002, the Company recorded approximately $1.6 million for its share of the Green Valley Ranch Station interest rate swaps in other comprehensive loss in the condensed consolidated balance sheets.

3.    Long-term Debt

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

 
   September 30,
2002
   December 31,
2001
  
Revolving credit facility, $365.0 million limit at September 30, 2002, due September 30, 2007, interest at a margin above the Alternate Base Rate or the Eurodollar Rate (4.6% at September 30, 2002)   $ 30,000   $ 108,100  
83/8% senior notes, interest payable semi-annually, principal due February 15, 2008     400,000     400,000  
97/8% senior subordinated notes, interest payable semi-annually, principal due July 1, 2010, net of unamortized discount of $1.3 million at September 30, 2002     373,742     373,662  
87/8% senior subordinated notes, interest payable semi-annually, principal due December 1, 2008     199,900     199,900  
93/4% senior subordinated notes, interest payable semi-annually, principal due April 15, 2007, net of unamortized discount of $3.3 million at September 30, 2002 (redeemed on October 18, 2002 using the revolving credit facility)     146,699     146,287  
Other long-term debt, collateralized by equipment, monthly installments including interest of 8.0% at September 30, 2002