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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 In the three months ended March 31, 2004, we experienced increases in revenues, operating income and net income. Revenues were $164.6 million in the quarter compared to $146.4 million in the first quarter of 2003, an increase of 12.4%. Revenues improved at all four of our hotel-casinos, primarily in the gaming area, but food and beverage, hotel and other revenues were also up at all four properties. The improved revenues contributed to operating income of $36.1 million in the quarter ended March 31, 2004 compared to $29.7 million in 2003, an increase of 21.6%. Net income in the quarter was $17.3 million compared to $13.7 million in 2003. Casino. Casino revenues were $118.5 million in the three months ended March 31, 2004 compared to $107.9 million in the same period in 2003, an increase of 9.8%. Casino revenues at all four of our hotel-casinos increased due to higher customer wagering volume. Casino expenses increased 6.9%, primarily in payroll, payroll related costs and promotions at The Orleans and the Suncoast, in line with the increased customer wagering activity at those properties. The casino operating margin improved to 61.0% compared to 59.9% in 2003 as the increased costs were more than offset by the improved revenues. Food and Beverage. Food and beverage revenues were $31.2 million in the first quarter of 2004 compared to $28.5 million in 2003, an increase of 9.5% as revenues improved at all four of our hotel-casinos primarily due to increased customer visitation and slightly higher prices. Food and beverage expenses increased by 4.8%, primarily due to January 2004 wage increases, contributing to an improved food and beverage operating margin of 29.4% compared to 26.3% in 2003. Hotel. Hotel revenues were $16.1 million in the quarter ended March 31, 2004 compared to $13.2 million in 2003, an increase of 22.0%, in line with an overall increase in demand for rooms in the quarter throughout Las Vegas. Gold Coast room occupancy increased to 94.2% in the quarter compared to 86.8% in the prior year and its average daily room rate increased by $5.00. The Orleans room occupancy increased to 95.0% compared to 85.7% in the prior year and its average daily room rate increased by $4.68. Room occupancy at the Suncoast was flat at 86%, but its average daily room rate increased by $17.60. Occupancy at the Barbary Coast increased slightly, and its average daily room rate increased by $10.60. Hotel expenses increased by 10.3% in the quarter, contributing to an improved hotel operating margin of 64.5% compared to 60.7% in the first quarter of 2003. Other. Other revenues are derived primarily from bowling, retail, entertainment and leased facilities, including coffee outlets and a variety of restaurants. In the quarter ended March 31, 2004, other revenues were $13.1 million compared to $10.0 million in the first quarter of 2003, an increase of 31.0%, primarily due to a 59.7% increase at The Orleans. The arena at The Orleans, which opened in May 2003, contributed $2.8 million in revenues in the quarter from concerts and sporting events. Other expenses increased by $2.5 million (31.9%), primarily due to the arena at The Orleans. General and Administrative. General and administrative expenses were $30.6 million in the first quarter of 2004 compared to $27.1 million in 2003, an increase of 12.9%, primarily due to $1.2 million in expenses related to the merger with Boyd, approximately $1.2 million in payroll and related costs for corporate and property-level management and approximately $400,000 in expenses related to the pursuit of possible business opportunities outside of Nevada. 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 (continued) Depreciation and Amortization. Depreciation and amortization expense was $12.7 million in the first quarter of 2004 compared to $11.4 million in 2003, an increase of 11.4% primarily due to the depreciation of the Orleans Arena, completed in May 2003. Other Income (Expenses). Net interest expense was $9.3 million in each of the quarters ended March 31, 2004 and 2003. A lower aggregate indebtedness and lower weighted average interest rate on our bank facility in 2004 was offset by a higher bank facility commitment fee in 2004 due to the increase in the size of the facility in September 2003. Capitalized interest was $28,000 in the first quarter compared to $883,000 in the first quarter of 2003. Capitalized interest in 2003 included interest on the Orleans Arena that was completed in the second quarter of that year.
Liquidity and Capital Resources Our principal sources of liquidity have consisted of cash provided by operating activities and debt financing. Cash provided by operating activities was $39.5 million in the three months ended March 31, 2004, compared to $35.7 million in the same period in 2003. Cash used in investing activities, which was primarily for capital expenditures, was $14.9 million in the first three months of 2004, compared to $48.8 million in 2003. In the first three months of 2004, cash used for capital expenditures was $16.2 million, including $3.6 million for the hotel tower and swimming pool expansion project at The Orleans, $1.6 million for a new electronic sign at the Gold Coast, $4.7 million for design work on our newest hotel-casino project, the South Coast, and approximately $3.2 million for maintenance capital expenditures. In the first three months of 2003, cash used for capital expenditures was $48.8 million which was primarily used for expansion projects at The Orleans and the Gold Coast and the purchase of land at the Barbary Coast. Cash used in financing activities was $26.4 million in the three months ended March 31, 2004, primarily to pay a net amount of $21.0 million down on borrowings under our senior secured credit facility and to pay a dividend of $5.1 million. Cash provided by financing activities was $16.7 million in the first quarter of 2003, primarily from $17.8 million in net proceeds from the financing of our aircraft and $20.0 million in proceeds from borrowings under the senior secured credit facility, offset by $21.0 million in repayments of borrowings under the credit facility. In March 1999, Coast Hotels issued $175.0 million principal amount of 9.5% senior subordinated notes due in 2009 with interest payable on April 1 and October 1 of each year through their maturity in March 2009. On February 2, 2001, Coast Hotels issued an additional $50.0 million principal amount of senior subordinated notes. The net proceeds of approximately $49.1 million were used to reduce borrowings under the then existing credit facility. On March 19, 2002, Coast Hotels issued an additional $100.0 million principal amount of its senior subordinated notes. The notes were issued at a premium and the net proceeds of $103.2 million were used to reduce borrowings under the then existing credit facility. The notes issued in 2001 and 2002 were issued under the same indenture and have the same terms, interest rate and maturity date as the original $175.0 million principal amount of senior subordinated notes issued in 1999. 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) In February 2003, Coast Hotels borrowed $18.0 million under a secured loan agreement, collateralized by our Canadair Challenger aircraft. The proceeds were used to reduce borrowings under the then existing credit facility. The loan bears interest at a premium of 2.25% over the 30-day London Interbank Offered Rate (“LIBOR”), which is adjusted monthly. As of March 31, 2004, the interest rate was 3.34%, and for the three months ended March 31, 2004, the weighted average interest rate was 3.36%. Payments of interest only were required during the first twelve months. As of March 28, 2004, Coast Hotels is required to make monthly principal payments of $120,000 plus interest on the unpaid balance. A balloon payment of the remaining principal balance is due in February 2009. In September 2003, we replaced our existing credit facility with a $300.0 million senior secured credit facility due September 2008, represented by a $225.0 million revolving credit facility and a $75.0 million term loan. Subject to the satisfaction of certain conditions, Coast Hotels may increase the commitments under the senior secured credit facility by up to $50.0 million. Coast Casinos is a full and unconditional guarantor of the indebtedness under both of these debt agreements. Borrowings under the senior secured credit facility bear interest, selected monthly at Coast Hotels’ option, at a premium over the base rate or the one-, two-, three- or six-month Eurodollar Rate (“Eurodollar”). The premium varies depending on a certain financial ratio and can vary, if determined by reference to the base rate, between 0.5% and 1.25% and, if determined by reference to Eurodollar, between 1.75% and 2.5%. As of March 31, 2004, using the one-month Eurodollar option, the premium over Eurodollar was 2.00% and the interest rate was 3.09%. For the three months ended March 31, 2004, the weighted average interest rate for the senior secured credit facility was 3.11%. Coast Hotels incurs a commitment fee, payable quarterly in arrears, on the unused portion of the senior secured credit facility. This fee varies depending on a certain financial ratio and can vary between 0.375% and 0.5% per annum. As of March 31, 2004, the fee was 0.375% per annum times the average unused portion of the facility. In accordance with the terms of the senior secured credit facility, commencing on December 31, 2005 and each quarter thereafter, Coast Hotels is required to repay the $75.0 million term loan in an amount equal to 8.3333% of the principal amount of the term loan then outstanding. Advances under the senior secured credit facility may be used for working capital, general corporate purposes, and certain improvements to existing properties. As of March 31, 2004, all of the $75.0 million term loan was outstanding and $30.0 million was drawn on the $225.0 million revolving line of credit with approximately $194.9 million of availability remaining (net of a letter of credit of $119,000). The credit agreement governing the senior secured credit facility contains covenants that, among other things, limit Coast Hotels’ ability to pay dividends or make advances to Coast Casinos, to make certain capital expenditures, to repay certain existing indebtedness, to incur additional indebtedness or to sell material assets. Additionally, the credit agreement requires that Coast Hotels maintain certain financial ratios with respect to leverage and fixed charge coverage. Coast Hotels is also subject to certain covenants associated with the indenture governing its senior subordinated notes, including, in part, limitations on certain restricted payments, the incurrence of additional indebtedness and asset sales. At March 31, 2004, Coast Hotels was in compliance with all covenants and required ratios. 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Construction Projects We own approximately 55 acres of land located in a gaming enterprise district on Las Vegas Boulevard South, adjacent to Interstate 15 and approximately 6 miles south of Tropicana Avenue. In April 2004, we broke ground at the site for our newest hotel-casino, the South Coast, and expect to complete it in the fourth quarter of 2005. The South Coast is expected to include 685 rooms and suites, 2,400 slot machines, 60 table games, 7 restaurants, 16 movie theaters, race and sports books, bingo, bowling, an equestrian events center and 150,000 square feet of convention, exhibit and banquet space. The preliminary budget for the construction and furnishing of the South Coast project was approximately $350 million, but recent substantial increases in the costs of building materials and certain changes in scope will cause the cost of the project to exceed that amount. Construction plans are still being developed and the extent of the increase has not yet been determined. Through March 31, 2004, we had capitalized $20.7 million on the project, primarily for architecture and design and $11.9 million for the purchase of the land. In the fourth quarter of 2003, we began construction of a new hotel tower at The Orleans. The project includes 461 hotel rooms and a remodeled and expanded swimming pool area. The project has a budget of $40.0 million and we expect to complete it in the fourth quarter of 2004. Through March 31, 2004, we had capitalized $3.2 million on the project. The construction projects are expected to be paid for through borrowings under our senior secured credit facility until such time as the merger with Boyd is completed. At that time, we anticipate that the projects will be financed by Boyd. There are no assurances that our construction projects will be completed within budget or the anticipated time frame, or that the merger will be completed or that Boyd will be able to obtain suitable financing to complete the projects. If the merger is not completed, it will be necessary for us to obtain financing for the completion of the South Coast project. In the ordinary course of operating its hotel-casinos, it is necessary for Coast Hotels to upgrade or replace fixtures and equipment and to make improvements that will extend the life of its physical plants. Coast Hotels anticipates that these maintenance capital expenditures will total approximately $20.0 million in 2004.
Dividends On February 5, 2004, we paid a dividend of $5,114,000 ($3.50 per share of common stock) to stockholders of record at the close of business on January 26, 2004. On January 26, 2004 there were 1,461,178 shares outstanding.
Other Matters In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). As the Company’s equity securities are not publicly traded, the Company is a nonpublic entity as defined by SFAS 150. This pronouncement became effective January 1, 2004. The adoption of SFAS 150 did not have an impact on our financial position, results of operations or cash flows as the Company does not have any such financial instruments. 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Other Matters (continued) On February 6, 2004, we entered into an Agreement and Plan of Merger with Boyd Gaming Corporation and BGC, Inc., a wholly-owned subsidiary of Boyd. Under the terms of the merger agreement, the Company will merge into a subsidiary of Boyd and become a wholly owned subsidiary of Boyd, and each outstanding share of our common stock will be converted into the right to receive cash, Boyd common stock or a combination of cash and Boyd common stock. The merger agreement and the merger have been approved by the stockholders of the Company and Boyd. Consummation of the merger is subject to customary closing conditions and receipt of regulatory approvals. If the merger with Boyd is consummated, holders of the senior subordinated notes will have the right to require the surviving corporation in the merger to purchase the outstanding senior subordinated notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, the consummation of the merger will result in a change of control that will result in a default under the credit agreement. Boyd has advised the Company that it intends to refinance the Company’s bank indebtedness upon consummation of the merger and will purchase any senior subordinated notes tendered for purchase by the holders thereof in accordance with the terms of the indenture governing the senior subordinated notes. However, no assurance can be given that all conditions to the consummation of the merger will be satisfied or that the merger will be consummated.
Certain Forward-Looking Statements This Form 10-Q includes “forward-looking statements” within the meaning of the securities laws. All statements regarding our expected financial position, business strategies and financing plans under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q are forward-looking statements. In addition, in those and other portions of this Form 10-Q, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends” and similar expressions, as they relate to Coast Hotels or its management, are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, and have based these expectations on our beliefs as well as assumptions we have made, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from such expectations are disclosed in this Form 10-Q, including, without limitation, the following factors: |
