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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[_] 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 0-26922
COAST RESORTS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0345704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
4500 WEST TROPICANA AVENUE, LAS VEGAS, NEVADA 89103
(Address of principal executive offices) (Zip Code)
(702) 365-7000
(Registrant's telephone number, including area code)
NONE
(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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of September 30, 1998: 1,494,352.94
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COAST RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
1998 (unaudited) 1997
--------------------- ---------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 42,010 $ 29,430
Accounts receivable, net.................................... 4,599 5,617
Other current assets........................................ 17,176 17,975
--------------------- ---------------------
TOTAL CURRENT ASSETS.................................... 63,785 53,022
PROPERTY AND EQUIPMENT, net.................................... 300,549 307,151
OTHER ASSETS................................................... 5,897 6,446
--------------------- ---------------------
$370,231 $366,619
===================== =====================
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 5,711 $ 9,107
Accrued liabilities......................................... 35,119 27,681
Construction accounts payable............................... -- 2,491
Current portion of long-term debt........................... 7,934 8,076
--------------------- ---------------------
TOTAL CURRENT LIABILITIES............................... 48,764 47,355
LONG-TERM DEBT, less current portion........................... 201,750 207,173
DEFERRED INCOME TAXES.......................................... 8,465 8,645
DEFERRED RENT.................................................. 12,020 9,007
--------------------- ---------------------
TOTAL LIABILITIES....................................... 270,999 272,180
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding............... -- --
Common Stock, $.01 par value, 2,000,000 shares authorized,
1,494,353 shares issued and outstanding.................... 15 15
Additional paid-in capital.................................. 95,398 95,398
Retained earnings (deficit)................................. 3,819 (974)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY.............................. 99,232 94,439
--------------------- ---------------------
$370,231 $366,619
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
OPERATING REVENUES:
Casino......................................... $ 61,050 $ 50,655 $ 178,084 $ 154,235
Food and beverage.............................. 16,426 15,233 49,187 45,416
Hotel.......................................... 6,919 6,475 21,145 20,811
Other.......................................... 6,579 4,937 18,658 14,112
--------------- --------------- --------------- ---------------
GROSS OPERATING REVENUES.................... 90,974 77,300 267,074 234,574
Less: Promotional allowances.................. (7,903) (6,859) (23,006) (19,430)
--------------- --------------- --------------- ---------------
NET OPERATING REVENUES...................... 83,071 70,441 244,068 215,144
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Casino......................................... 31,967 28,239 93,851 84,419
Food and beverage.............................. 11,794 11,616 35,356 37,836
Hotel.......................................... 3,278 3,273 9,000 9,784
Other.......................................... 6,080 4,418 16,068 13,599
General and administrative..................... 16,090 13,650 43,925 42,258
Deferred rent.................................. 1,004 1,019 3,013 3,058
Depreciation and amortization.................. 5,193 4,743 15,398 14,227
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES.......................... 75,406 66,958 216,611 205,181
--------------- --------------- --------------- ---------------
OPERATING INCOME............................ 7,665 3,483 27,457 9,963
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSES)
Interest expense............................... (6,895) (6,577) (20,529) (19,607)
Interest income................................ 168 -- 460 98
Interest capitalized........................... -- 543 -- 543
Gain on disposal of assets..................... 15 52 157 895
--------------- --------------- --------------- ---------------
TOTAL OTHER INCOME (EXPENSES)..................... (6,712) (5,982) (19,912) (18,071)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES................. 953 (2,499) 7,545 (8,108)
--------------- --------------- --------------- ---------------
INCOME TAX PROVISION (BENEFIT)................... 529 (848) 2,752 (2,549)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS)................................. $ 424 $ (1,651) $ 4,793 $ (5,559)
=============== =============== =============== ===============
BASIC AND DILUTED NET INCOME
(LOSS) PER SHARE OF COMMON STOCK............... $ .28 $ (1.10) $ 3.21 $ (3.72)
=============== =============== =============== ===============
SHARES USED IN COMPUTATION OF NET
INCOME (LOSS) PER SHARE........................ 1,494,353 1,494,353 1,494,353 1,494,353
=============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COAST RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1998 1997
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ 4,793 $ (5,559)
---------------- ----------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................................ 15,398 14,227
Provision for bad debts.................................................. 352 112
Gain on disposal of assets............................................... (157) (895)
Deferred income taxes.................................................... (180) 689
Deferred rent............................................................ 3,013 3,058
Other non-cash expenses.................................................. 484 453
Changes in assets and liabilities:
Net (increase) decrease in accounts receivable and other assets......... 851 (5,078)
Net increase in accounts payable and accrued liabilities................ 4,042 94
---------------- ----------------
TOTAL ADJUSTMENTS.......................................................... 23,803 12,660
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 28,596 7,101
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................... (10,231) (45,065)
Proceeds from disposal of assets........................................... 157 1,143
Net reductions to restricted cash equivalents.............................. -- 8,186
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (10,074) (35,736)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of discounts and commissions......................................... -- 3,200
Principal payments on long-term debt....................................... (5,942) (5,832)
---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES...................................... (5,942) (2,632)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 12,580 (31,267)
CASH AND CASH EQUIVALENTS, at beginning of year.............................. 29,430 53,381
---------------- ----------------
CASH AND CASH EQUIVALENTS, at end of period.................................. $ 42,010 $ 22,114
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COAST RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Background Information
Coast Resorts, Inc. ("Coast Resorts" or the "Company") is a Nevada
corporation and serves as a holding Company for Coast Hotels and Casinos, Inc.
("Coast Hotels"). Through Coast Hotels, the Company owns and operates the
following Las Vegas hotel-casinos:
. Gold Coast Hotel and Casino, approximately one mile west of the Las
Vegas Strip on Flamingo Road.
. Barbary Coast Hotel and Casino, located on the Las Vegas Strip.
. The Orleans Hotel and Casino, located approximately one mile west of
the Las Vegas Strip on Tropicana Avenue.
On July 21, 1998, Coast Resorts contributed all of the outstanding common
stock of Coast West to Coast Hotels, making Coast West a wholly owned subsidiary
of Coast Hotels. Coast West has no operations but holds a long-term lease (the
"Coast West Lease") on approximately fifty acres of land in Las Vegas on which
Coast Hotels may develop and operate a future hotel-casino.
The Gold Coast and Barbary Coast hotel-casinos had previously been owned
and operated independently by two partnerships, Gold Coast Hotel and Casino, a
Nevada limited partnership, and Barbary Coast Hotel and Casino, a Nevada general
partnership (collectively, the "Predecessor Partnerships"). On January 1, 1996,
the partners of the Predecessor Partnerships completed a reorganization (the
"Reorganization") with Coast Resorts. Coast Resorts was formed in September 1995
for the purpose of effecting such Reorganization of the Predecessor
Partnerships. Coast Resorts, Gold Coast and Barbary Coast were all related
through common ownership and management control.
In the Reorganization, the partners of the Predecessor Partnerships each
transferred to Coast Resorts their respective partnership interests in the
Predecessor Partnerships in exchange for an aggregate of 1,000,000 shares of
common stock, par value $.01 per share, of Coast Resorts ("Coast Resorts Common
Stock"). Coast Resorts immediately contributed to Coast Hotels all of the
assets and liabilities of the Predecessor Partnerships other than those relating
to the Coast West Lease, which Coast Resorts contributed to Coast West. Coast
Resorts retained the liability for an aggregate principal amount of $51.0
million in notes payable to former partners and retained the liability for $1.5
million relating to demand notes due to a related party (the "Exchange
Liabilities"). On January 16, 1996, the Exchange Liabilities were exchanged for
494,353 shares of Coast Resorts Common Stock, based upon management's estimate
of the fair market value of such Coast Resorts Common Stock.
5
COAST RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION (CONTINUED)
Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The unaudited
financial statements should be read in conjunction with the audited financial
statements and footnotes for the year ended December 31, 1997. In the opinion of
management, all adjustments and normal recurring accruals considered necessary
for a fair presentation of the results for the interim period have been
included. The interim results reflected in the unaudited financial statements
are not necessarily indicative of expected results for the full year.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
NOTE 2-COAST WEST
Coast Hotels has agreed to provide advances to Coast West sufficient to
make payments on the Coast West Lease and other obligations, including project
development and site improvement. The Coast West Lease relates to a parcel of
land located in the western area of Las Vegas to be used for future expansion
opportunities. The Coast West Lease term runs through December 31, 2055, with
three 10-year renewal options, with monthly payments of $166,667 for the year
ending December 31, 1995. Thereafter the monthly rent increases by the amount of
$5,000 in January of each year. The lease includes a put option exercisable by
the landlord requiring the purchase of the land at fair market value at the end
of the 20th through 24th years of the lease, provided that the purchase price
shall not be less than ten times, nor more than fifteen times, the annual rent
at such time. Based on the terms of the lease, the potential purchase price
commitment ranges from approximately $31.0 million to approximately $51.0
million in the years 2014 through 2018.
The advances to Coast West are non-interest bearing and, pursuant to the
indenture governing 13% first mortgage notes issued by Coast Hotels (the
"Indenture"), cannot exceed $8.0 million in aggregate principal amount at any
time outstanding unless Coast West becomes a subsidiary of Coast Hotels. Based
on the cash requirements of Coast West for lease payments and anticipated
development costs, it was likely that by September 1998 Coast West would require
cash from Coast Hotels that, when added to the outstanding advances from Coast
Hotels, would exceed $8.0 million. On July 21, 1998, the Company contributed the
capital stock of Coast West to Coast Hotels, as a result of which Coast West
became a wholly owned subsidiary of Coast Hotels. Coast West remains a guarantor
of the 13% First Mortgage Notes. Pursuant to the terms of the Indenture, Coast
Hotels may continue to make advances to Coast West as it is now a wholly owned
subsidiary.
Coast West is a development stage enterprise and has no source of income
and is therefore solely dependent on the advances to be provided by Coast
Hotels. There can be no assurance that Coast West will develop a gaming property
at the Coast West site or that it will be able to repay any advances made by
Coast Hotels.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial information regarding the results of operations of the Company:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
GOLD COAST
Net operating revenues..................... $31,058 $29,994 $ 94,527 $ 93,950
Operating income........................... 5,106 4,822 18,131 16,847
EBITDA (1)................................. 6,358 6,029 21,863 20,455
BARBARY COAST
Net operating revenues..................... $10,507 $10,884 $ 31,860 $ 33,509
Operating income (loss).................... (152) 611 541 518
EBITDA (1)................................. 298 1,008 1,855 1,721
THE ORLEANS
Net operating revenues..................... $41,505 $29,563 $117,681 $ 87,686
Operating income (loss).................... 4,964 245 15,559 (972)
EBITDA (1)................................. 8,672 3,628 26,563 9,182
EBITDAR (1)................................ 9,197 4,153 28,138 10,757
TOTAL (INCLUDING CORPORATE)
Net operating revenues..................... $83,071 $70,441 $244,068 $215,144
Operating income........................... 7,665 3,483 27,457 9,963
EBITDA (1)................................. 13,862 9,245 45,868 27,248
EBITDAR (1)............................... 14,932 10,304 49,077 30,417
(1) "EBITDA" is defined as earnings before interest, taxes, depreciation,
amortization and deferred (non-cash) rent. "EBITDAR" is defined as earnings
before interest, taxes, depreciation, amortization and rent expense (both
cash and deferred). EBITDA and EBITDAR should not be construed as
alternatives to operating income as an indicator of the company's operating
performance, or as alternatives to cash provided by operating activities as
an indicator of cash flows or a measure of liquidity. EBITDA and EBITDAR
are presented solely as supplemental disclosure because management believes
that they are widely used measures of financial performance in the gaming
industry.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997 and Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997
Net revenues, operating income and net income all improved in the quarter
ended and nine months ended September 30, 1998, primarily due to improved
revenues at the Company's newest hotel-casino, The Orleans. Net revenues in the
quarter ended September 30, 1998 were $83.1 million compared to $70.4 million in
the same quarter of 1997, an increase of 17.9%. For the nine months ended
September 30, 1998, net revenues were $244.1 million compared to $215.1 million
in the same period in 1997, an increase of 13.4%. Operating income in the third
quarter of 1998 was $7.7 million compared to $3.5 million in the third quarter
of 1997, an increase of 120.1%. For the nine months ended September 30, 1998,
operating income was $27.5 million, an increase of 175.2% over operating income
of $10.0 million in the same period in 1997. Net income in the quarter ended
September 30, 1998 was $424,000 compared to a net loss of $1.7 million in the
third quarter of 1997. For the nine months ended September 30, 1998, net income
was $4.8 million compared to a net loss of $5.6 million in 1997.
The Orleans. The Orleans opened in December 1996 and generated lower-than-
expected revenues in the first half of 1997. During the second half of 1997, the
property expanded its customer base through increased promotional activities,
the use of headliner entertainment in its showroom and, in December 1997, the
opening of twelve new movie theaters. Net revenues in the three months ended
September 30, 1998 were $41.5 million, an increase of 40.4% over revenues of
$29.6 million in the same quarter in 1997. For the nine month period ended
September 30, 1998, net revenues were $117.7 million, an increase of 34.2%
compared to the first nine months of 1997. Casino revenues were up in the third
quarter of 1998 (47.1%) and in the nine months ended September 30, 1998 (39.1%),
primarily as a result of increased slot machine activity. Increased customer
volume led to an increase in food and beverage revenues of 25.0% in the quarter
ended September 30, 1998 and an increase of 24.3% in the nine months ended
September 30, 1998. Hotel revenues increased slightly in the quarter and
year-to-date, primarily as a result of increased occupancy. Other revenues
increased in the third quarter and year-to-date due primarily to higher showroom
revenue. Operating expenses increased 24.6% in the third quarter of 1998,
primarily due to company-wide employee wage increases in July and increased
casino promotional activities. Additionally, the opening in December 1997 of
twelve movie theaters and additional gaming space, coupled with higher summer
utility rates, caused an increase in utilities expenses. Operating expenses in
the nine months ended September 30, 1998 increased 15.2% compared to the first
three quarters in 1997, primarily due to increased casino promotions. Other
expenses were up 26.3% for the nine months due to the higher-priced headliner
entertainers in the showroom. Despite the increase in operating expenses,
operating income increased by $4.7 million in the quarter and by $16.5 million
year-to-date.
Gold Coast. Net revenues in the three months ended September 30, 1998
increased $1.1 million (3.5%) to $31.1 million compared to $30.0 million in the
third quarter of 1997, primarily as a result of increased slot machine activity.
For the nine months ended September 30, 1998 net revenues were relatively flat
compared to the same period in 1997, increasing 0.6% to $94.5 million compared
to $94.0 million in 1997. A 3.7% increase in casino revenues was partially
offset by slight decreases in food, beverage and hotel revenues. Operating
income in the third quarter of 1998 was $5.1 million, an increase of 5.9% over
third quarter 1997 operating income of $4.8 million. The increased revenues were
partially offset by increased casino promotional expenses as well as company-
wide employee wage increases in July 1998. Operating income in the first nine
months of 1998 was $18.1 million, an increase of 7.6% over operating income of
$16.8 million in the first nine months of 1997. Reduced staffing and lower food
and beverage cost of sales contributed to lower operating expenses in the nine
months.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Barbary Coast. Net revenues in the three months ended September 30, 1998
decreased 3.5% to $10.5 million compared to $10.9 million in the three months
ended September 30, 1997, primarily as a result of a decrease in table games win
percentages, the removal of live keno and lower wagering volume in the race
book. For the nine months ended September 30, 1998, net revenues were $31.9
million, down $1.6 million (4.9%) compared to the same period in 1997 primarily
due to a lower-than-expected table games win percentage. For the third quarter,
the Barbary Coast had an operating loss of $152,000 compared to operating income
of $611,000 in the third quarter of 1997. For the nine months ended September
30, 1998, operating income was $541,000 compared to $518,000 in the same period
in 1997. Operating expenses increased $387,000 (3.8%) in the third quarter of
1998 compared to the same period in 1997, primarily due to increased promotional
expenses in the slot machine area. For the nine months ended September 30, 1998,
operating expenses decreased $1.7 million (5.1%), primarily due to lower race
book expenses attributable to a reduction in business in that area.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have consisted of cash
provided by operating activities and debt financing. Cash provided by operating
activities was $28.6 million in the first nine months of 1998, an increase of
$21.5 million over the same period in 1997, primarily due to the Company's
increased profitability discussed above.
In January 1996, Coast Hotels issued $175.0 million principal amount of
13% first mortgage notes due 2002 ("13% First Mortgage Notes"). Additionally, in
November 1997, the Company issued $16.8 million principal amount of 10 7/8%
first mortgage notes due 2001 ("10 7/8% First Mortgage Notes"). The indentures
pursuant to which the 13% First Mortgage Notes and the 10 7/8% First Mortgage
Notes were issued ("the Indentures") contain covenants that, among other things,
limit the ability of Coast Hotels to pay dividends or make advances to the
Company, repay subordinated indebtedness, incur additional indebtedness, or sell
material assets as defined in the Indentures.
The Company's cash requirements, in addition to interest which is
anticipated to be approximately $27.0 million in 1998, include annual principal
payments of approximately $7.5 million on the equipment notes payable, land
lease payments of approximately $4.3 million, ongoing maintenance capital
expenditures at its existing facilities and periodic enhancements to those
facilities. The Company's maintenance capital expenditures for 1997 were
approximately $9.2 million. Management expects that maintenance capital
expenditures for 1998 will be approximately $10.5 million. Management believes
that existing cash balances and operating cash flow will provide the Company
with sufficient resources to meet its existing debt and lease payment
obligations and foreseeable capital expenditure requirements at the Company's
existing properties.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Coast Hotels agreed to provide advances to Coast West sufficient to make
payments on the Coast West Lease and other obligations, including project
development and site improvement. Pursuant to the Indenture under which the 13%
First Mortgage Notes were issued, the advances to Coast West could not exceed
$8.0 million in aggregate principal amount at any time outstanding unless Coast
West became a subsidiary of Coast Hotels. Based on the cash requirements of
Coast West for lease payments and anticipated development costs, it was likely
that by September 1998 Coast West would require cash from Coast Hotels that,
when added to the outstanding advances from Coast Hotels, would exceed $8.0
million. On July 21, 1998, The Company contributed the capital stock of Coast
West to Coast Hotels, as a result of which Coast West became a wholly owned
subsidiary of Coast Hotels. Coast West remains a guarantor of the 13% First
Mortgage Notes. Pursuant to the terms of the Indenture, Coast Hotels may make
advances to its wholly owned subsidiaries without limit.
The Company has no agreements, arrangements or understandings with respect
to financing the development of future properties. Any future development would
be subject to, among other things, the Company's ability to obtain necessary
financing.
YEAR 2000
Many currently installed computer systems and other equipment with
embedded computer chips cannot recognize dates after December 31, 1999.
Beginning in the year 2000, companies with such systems, software or equipment
may experience difficulties due to their reliance on them. This situation
involving the year 2000 is commonly referred to as the "Y2K" problem.
The Company utilizes computer systems in virtually all areas of its hotel-
casino operations. Should the Company or certain of its vendors not be "Y2K
compliant," the operations of its hotel-casinos could be disrupted for an
indeterminate period of time, potentially having a material adverse impact on
its results of operations. Possible consequences of the Company not being Y2K
compliant include, but are not limited to, problems with the compiling of
financial information in the Company's back-office accounting, purchasing,
inventory and payroll systems. Additionally, disruptions could occur to hotel
reservations operations, hotel check-in/check-out procedures, point-of-sale
transactions in food, beverage and retail areas, race and sports book wagering
and the updating and accumulation of slot machine player marketing information.
Additionally, embedded microchips in certain systems such as elevators,
escalators and the heating, ventilation and air conditioning could lead to
interruptions in service. All of these problems could inconvenience hotel and
casino customers, resulting in a loss of business.
The Company could also be exposed to Y2K problems should certain of its
suppliers have disruptions to their operations due to Year 2000 problems. The
Company does not consider these problems to be as significant as those with its
own systems because in most instances it could find alternate vendors for its
supplies, but Y2K problems for certain suppliers, such as utility providers,
could result in disruptions to hotel-casino operations for an indeterminate
period of time. Additionally, should providers of financial services such as
ATM's, credit card processing and credit card cash advance experience Y2K
problems, the Company's operations could be adversely affected.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
The Company recognizes the need to ensure its operations will not be
adversely affected by Y2K and has taken steps to update its systems, where
necessary, including replacing or updating software and equipment. Since 1997,
the Coast Hotels' Management Information Systems department has attempted to
identify all areas where Y2K could pose a problem. To assist them in their
effort and to further help identify potential problem areas, in October 1998 the
Company retained the services of an advisor to review the Company's Y2K
program.
As of November 1, 1998, the Company has identified and updated or is in the
process of updating those systems and programs that it deems most critical to
the day-to-day operations of its hotel-casinos. The Company currently uses Year
2000 compliant J.D. Edwards software for its accounting, human resources,
payroll, inventory and purchasing systems. Based on representations from its
vendors, the Company anticipates that its other essential computer systems,
including its hotel front desk and reservations, retail point of sale, bowling
center, race and sports wagering and casino player tracking and marketing
systems, will be Y2K compliant by July 1999, although no assurances can be made
to that effect. It is estimated that the total cost to identify and correct
potential Y2K problems will be approximately $2.0 million, approximately
$200,000 of which has been spent to date. All costs related to software
modification, as well as all costs associated with the Company's Y2K project,
are being expensed as incurred and are included in the cost estimate referred to
above. Although the Company has not developed a Y2K contingency plan to date, it
will continue to assess Y2K risk to determine if such a plan is necessary.
ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. SFAS 130 requires a separate statement
to report components of comprehensive income for each period presented. The
provisions of SFAS 130 are effective for fiscal years beginning after December
15, 1997. Management believes that the Company currently does not have items
that would require presentation in a separate statement of comprehensive income.
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. SFAS 131 will not have a material
effect on the Company's financial statements as the required information is
either currently being presented by the Company or it is not applicable to the
Company.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that the Company expense its pre-opening and
related promotional expense as incurred rather than capitalize it and amortize
it over the estimated period of economic benefit of such costs as has been the
Company's policy in the past. Effective January 1, 1998, the Company adopted SOP
98-5. The adoption had no impact on the financial position, results of
operations or cash flows of the Company as all start-up costs previously
capitalized had been expensed in prior periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FORWARD LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis which are not
historical fact are forward looking statements that are made pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The statements are subject to risks and uncertainties, including, but not
limited to, increased competition, both in Nevada and other jurisdictions,
dependence on the Las Vegas area and the Southern California region for a
majority of the Company's customers, uncertainties associated with the Y2K
problem and uncertainties associated with construction projects, including the
related disruption of operations and the availability of financing, if
necessary, which could cause actual results to vary materially from those
discussed herein.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
-----------------
None.
Item 2: Changes in Securities.
---------------------
None.
Item 3: Defaults Upon Senior Securities.
-------------------------------
None.
Item 4: Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5: Other Information.
-----------------
None.
Item 6: Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the three months
ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 16, 1998 COAST RESORTS, INC., a Nevada corporation
By: /s/ Gage Parrish
--------------------------------------
Gage Parrish
Vice President and Chief Financial Officer
15