_______________________________________________________________________________
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 June 30, 2001
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 August 14, 2001: 1,462,678
________________________________________________________________________________
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, December
2001 31,
(unaudited) 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 38,546 $ 43,560
Accounts receivable, net ......................... 6,328 5,658
Other current assets ............................. 21,247 24,284
--------- ---------
TOTAL CURRENT ASSETS ............................. 66,121 73,502
PROPERTY AND EQUIPMENT, net ........................ 501,849 485,925
OTHER ASSETS ....................................... 8,440 7,772
--------- ---------
$ 576,410 $ 567,199
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 15,225 $ 16,308
Accrued liabilities .............................. 37,372 38,208
Construction accounts payable .................... 9,950 4,868
Current portion of long-term debt ................ 2,123 2,430
--------- ---------
TOTAL CURRENT LIABILITIES ........................ 64,670 61,814
LONG-TERM DEBT, less current portion ............... 339,136 353,337
DEFERRED INCOME TAXES .............................. 12,519 11,417
DEFERRED RENT ...................................... 22,099 20,330
--------- ---------
TOTAL LIABILITIES ................................ 438,424 446,898
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 500,000
shares authorized, none issued and
outstanding .................................... -- --
Common stock, $.01 par value, 2,000,000
shares authorized, 1,463,178 shares issued
and outstanding................................. 15 15
Treasury stock ................................... (3,118) (3,118)
Additional paid-in capital ....................... 95,398 95,398
Retained earnings ................................ 45,691 28,006
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ....................... 137,986 120,301
--------- ---------
$ 576,410 $ 567,199
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2001 and 2000
(dollars in thousands, except share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATING REVENUES:
Casino......................... $ 93,963 $ 64,975 $ 188,684 $ 137,985
Food and beverage ............. 26,442 19,104 53,135 38,808
Hotel ......................... 9,533 8,192 19,478 16,506
Other ......................... 9,148 7,205 17,934 14,126
--------- --------- --------- ---------
GROSS OPERATING REVENUES .... 139,086 99,476 279,231 207,425
Less: promotional allowances .. (12,391) (8,729) (24,988) (18,093)
--------- --------- --------- ---------
NET OPERATING REVENUES ...... 126,695 90,747 254,243 189,332
--------- --------- --------- ---------
OPERATING EXPENSES:
Casino ........................ 42,755 29,700 85,924 62,582
Food and beverage ............. 19,753 13,964 38,618 27,310
Hotel ......................... 3,872 3,198 7,655 6,363
Other ......................... 6,794 5,913 13,493 11,505
General and administrative .... 23,982 15,959 46,897 32,246
Pre-opening expenses .......... -- 874 -- 1,142
Deferred rent ................. 885 519 1,769 1,039
Depreciation and amortization . 8,749 5,477 17,317 10,988
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES .... 106,790 75,604 211,673 153,175
--------- --------- --------- ---------
OPERATING INCOME ................ 19,905 15,143 42,570 36,157
--------- --------- --------- ---------
OTHER INCOME (EXPENSES)
Interest expense, net ......... (7,701) (6,199) (15,682) (11,937)
Interest capitalized .......... 137 1,865 199 2,835
Gain (loss) on disposal of
assets ...................... (1,656) 8 (122) 8
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSES) ... (9,220) (4,326) (15,605) (9,094)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ...... 10,685 10,817 26,965 27,063
Income tax provision ............ 3,659 3,817 9,280 9,426
--------- --------- --------- ---------
NET INCOME ...................... $ 7,026 $ 7,000 $ 17,685 $ 17,637
========= ========= ========= =========
PER SHARE INFORMATION:
Basic net income per share
of common stock................ $ 4.80 $ 4.73 $ 12.09 $ 11.93
========= ========= ========= =========
Diluted net income per share
of common stock................ $ 4.69 $ 4.62 $ 11.80 $ 11.65
========= ========= ========= =========
Basic weighted-average
shares outstanding............. 1,463,178 1,478,978 1,463,178 1,478,978
========= ========= ========= =========
Diluted weighted-average
shares outstanding............. 1,498,593 1,514,393 1,498,593 1,514,393
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2001 and 2000
(dollars in thousands)
(unaudited)
Six Months Ended
June 30,
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 17,685 $ 17,637
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization ........................ 17,317 10,988
Amortization of debt offering costs .................. 596 526
Loss on disposal of assets ........................... 122 --
Deferred income taxes ................................ 911 54
Deferred rent ........................................ 1,769 1,799
Other non-cash expenses .............................. -- 57
Changes in assets and liabilities:
Net decrease (increase) in accounts receivable
and other assets ................................. 2,224 (2,889)
Net decrease in accounts payable and accrued
liabilities ...................................... (1,919) (2,246)
-------- --------
TOTAL ADJUSTMENTS ...................................... 21,020 8,289
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 38,705 25,926
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of amounts in
construction accounts payable ........................ (37,697) (77,993)
Proceeds from disposal of assets ....................... 9,415 51
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................. (28,282) (77,942)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net
of issuance costs .................................... 49,071 --
Principal payments on long-term debt ................... (2,508) (350)
Proceeds from borrowings under bank line of credit ..... 6,000 43,600
Repayments of borrowings under bank line of credit ..... (68,000) --
Repurchase of common stock ............................. -- (1,580)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .... (15,437) 41,670
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................ (5,014) (10,346)
CASH AND CASH EQUIVALENTS, at beginning of period ........ 43,560 38,629
-------- --------
CASH AND CASH EQUIVALENTS, at end of period .............. $ 38,546 $ 28,283
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 2000 and
For the Six Months Ended June 30, 2001
(dollars in thousands, except share data)
Common Stock Additional
---------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- ------ --------- -------- -------- --------
Balances at December 31, 1999.... 1,478,978 $ 15 $ 95,398 $ 1,228 $(1,538) $ 95,103
--------- ------ --------- -------- -------- --------
Repurchase of common stock..... (15,800) -- -- -- (1,580) (1,580)
Net income................... -- -- -- 26,778 -- 26,778
--------- ------ --------- -------- -------- --------
Balances at December 31, 2000.... 1,463,178 15 95,398 28,006 (3,118) 120,301
Net income(unaudited)........ -- -- -- 17,685 -- 17,685
--------- ------ --------- -------- -------- --------
Balances at June 30,
2001 (unaudited)................. 1,463,178 $ 15 $ 95,398 $45,691 $(3,118) $137,986
--------- ------ --------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Background Information
Coast Resorts, Inc. ("Coast Resorts") is a Nevada corporation and serves
as a holding company for Coast Hotels and Casinos, Inc. ("Coast Hotels"),
which is also a Nevada corporation. Through Coast Hotels, the Company owns
and operates four Las Vegas hotel-casinos:
o The Suncoast Hotel and Casino, which opened in September 2000, is
located near Summerlin in the west end of the Las Vegas valley,
approximately nine miles from the Las Vegas Strip.
o The Orleans Hotel and Casino, which opened in December 1996, is located
approximately one and one-half miles west of the Las Vegas Strip on
Tropicana Avenue.
o The Gold Coast Hotel and Casino, which opened in December 1986, is
located approximately one mile west of the Las Vegas Strip on Flamingo
Road.
o The Barbary Coast Hotel and Casino, which opened in March 1979, is
located on the Las Vegas Strip.
Basis of Presentation
The accompanying consolidated 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. In addition, certain amounts in the 2000 financial statements
have been reclassified to conform to the 2001 presentation. The unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes included in our
annual report on Form 10-K for the year ended December 31, 2000. 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
consolidated financial statements are not necessarily indicative of expected
results for the full year.
Effective January 1, 2001, the Company adopted Emerging Issues Task Force
Issues 00-14 and 00-22 (the "Issues"). The Issues require that cash
discounts and other cash incentives related to gaming play be recorded as a
reduction to gross casino revenues. The Issues also require that prior
periods be restated to conform to this presentation. The Company previously
recorded such incentives as an operating expense and has reclassified prior
period amounts. There is no effect on previously reported net income.
5
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of the following as of June 30, 2001 and December
31, 2000:
June 30, December
2001 31,
(unaudited) 2000
-------- --------
(in thousands)
Related parties:
7.5% notes, payable in monthly installments of interest
only, with all principal and any unpaid interest due
December 31, 2001. The notes are uncollateralized
and are payable to the former partners of Barbary
Coast and Gold Coast .................................. $ 1,975 $ 1,975
Non-related parties:
9.5% senior subordinated notes due April 2009, with
interest payable semiannually on April 1 and
October 1 ............................................. 225,000 175,000
$200.0 million reducing revolving credit facility due
April 2004, collateralized by substantially all of the
assets of Coast Hotels and Casinos, Inc. .............. 114,000 176,000
8.6% note due August 11, 2007, payable in monthly
installments of $26,667 principal plus interest on
remaining principal balance, collateralized by 1980
Hawker aircraft ....................................... -- 2,133
Other notes payable ..................................... 284 659
-------- --------
341,259 355,767
Less: current portion ................................... 2,123 2,430
-------- --------
$339,136 $353,337
======== ========
In March 1999, Coast Hotels issued $175.0 million principal amount of 9.5%
senior subordinated notes with interest payable on April 1 and October 1
beginning October 1, 1999 and entered into a $75.0 million senior secured
revolving credit facility due 2004 to facilitate a refinancing. Availability
under the credit facility was increased to $200.0 million in September 1999.
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 senior
secured credit facility. The notes were issued under the same indenture and
have the same terms, interest rate and maturity date as the $175.0 million
principal amount of senior subordinated notes issued in 1999.
Coast Resorts is a guarantor of the indebtedness under both the indenture
and the credit facility. Borrowings under the credit facility bear interest,
at Coast Hotels' option, at a premium over the one-, two-, three- or
six-month London Interbank Offered Rate ("LIBOR"). The premium varies between
125 and 250 basis points, depending on Coast Hotels' ratio of total debt to
EBITDA. As of June 30, 2001, the premium over LIBOR was 2.00% (200 basis
points) and the interest rate was 5.75%. For the six months ended June 30,
2001 the weighted-average interest rate for the senior secured credit
facility was 7.31%. Coast Hotels incurs a commitment fee, payable quarterly
in arrears, on the unused portion of the credit facility. As of June 30,
2001, this variable fee was at the maximum rate of 0.5% per annum times the
average unused portion of the facility.
6
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT (continued)
The availability under the $200.0 million credit facility will be reduced
quarterly beginning in the fiscal quarter ending September 30, 2001. The
reductions will be $6.0 million on each of September 30, 2001, December 31,
2001, March 31, 2002 and June 30, 2002; $8.5 million on each of September 30,
2002, December 31, 2002, March 31, 2003 and June 30, 2003; and $11.5 million
on each of September 30, 2003, December 31, 2003, March 31, 2004 and June 30,
2004. Advances under the credit facility may be used for working capital,
general corporate purposes and certain improvements to The Orleans, the Gold
Coast, the Suncoast and the Barbary Coast. As of June 30, 2001, Coast Hotels
had $86.0 million of availability under the $200.0 million credit facility.
The loan agreement governing the $200.0 million senior secured revolving
credit facility contains covenants that, among other things, limit the
ability of Coast Hotels to pay dividends or make advances to Coast Resorts,
to make certain capital expenditures, to repay certain existing indebtedness,
to incur additional indebtedness or to sell material assets of Coast Hotels.
The loan agreement limits the amount of capital expenditures (other than
maintenance capital expenditures) to a maximum of approximately $109.0
million during the term of the agreement. Through June 30, 2002, Coast
Hotels spent approximately $53.9 million. Currently, planned capital
expenditures through 2002 would cause Coast Hotels to exceed this maximum
permitted by the loan agreement. At the appropriate time, management
anticipates seeking an amendment to the facility to amend the capital
expenditure covenant and increase the revolving line of credit to accommodate
the additional planned capital expenditures.
Additionally, the loan agreement governing the $200.0 million senior
secured revolving credit facility requires that Coast Hotels maintain certain
financial ratios with respect to its leverage and fixed charge coverage.
Coast Hotels is also subject to certain covenants associated with the
indenture governing the senior subordinated notes, including, in part,
limitations on certain restricted payments, the incurrence of additional
indebtedness and asset sales. Management believes that, at June 30, 2001,
Coast Hotels was in compliance with all covenants and required ratios.
NOTE 3 - TREASURY STOCK
In May 1999, Coast Resorts' board of directors authorized the potential
repurchase of up to 50,000 shares of common stock from stockholders at a
maximum aggregate repurchase price of $5.0 million. As of June 30, 2001,
31,175 shares of common stock had been repurchased from shareholders at a
total purchase price of $3.1 million. On July 6, 2001, another 500 shares
were repurchased from a shareholder for a total purchase price of $50,000.
7
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EARNINGS PER SHARE
Basic net income per common share excludes dilution and is computed by
dividing income applicable to common shareholders by the weighted-average
number of common shares outstanding. Diluted net income per common share
assumes dilution and is computed based on the weighted-average number of
common shares outstanding after consideration of the dilutive effect of stock
options.
The computations of basic net income per common share and diluted net
income per common share for the three months and six months ended June 30,
2001 and 2000, are as follows (in thousands, except share data, unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income applicable to
computations...................... $ 7,026 $ 7,000 $ 17,685 $ 17,637
========= ========= ========= =========
Weighted-average common shares
applicable to net income per
common share...................... 1,463,178 1,478,978 1,463,178 1,478,978
Effect of dilutive securities:
Stock option incremental shares... 35,415 35,415 35,415 35,415
--------- --------- --------- ---------
Weighted-average common
shares applicable to net income
per common share, assuming
dilution.......................... 1,498,593 1,514,393 1,498,593 1,514,393
========= ========= ========= =========
Basic net income per share
of common stock................... $ 4.80 $ 4.73 $ 12.09 $ 11.93
========= ========= ========= =========
Diluted net income per
share of common stock............. $ 4.69 $ 4.62 $ 11.80 $ 11.65
========= ========= ========= =========
8
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 our results of operations:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands) (in thousands)
(unaudited) (unaudited)
Net operating revenues ......... $126,695 $ 90,747 $254,243 $189,332
Operating expenses ............. 106,790 75,604 211,673 153,175
-------- -------- -------- --------
Operating income ............... $ 19,905 $ 15,143 $ 42,570 $ 36,157
======== ======== ======== ========
Net income ..................... $ 7,026 $ 7,000 $ 17,685 $ 17,637
======== ======== ======== ========
EBITDA (1) ..................... $ 29,539 $ 22,013 $ 61,656 $ 49,326
======== ======== ======== ========
(1) "EBITDA" means earnings before interest, taxes, depreciation,
amortization, deferred (non-cash) rent expense, other non-cash
expenses and certain non-recurring items, including pre-opening
expenses and gains and losses on disposal of assets (for all periods
presented, the only non-cash expense was deferred rent and the only
non-recurring items were pre-opening expenses and gains and losses on
disposal of assets.) EBITDA is defined in our senior secured credit
facility and in the indenture governing our senior subordinated
notes. EBITDA is presented as supplemental disclosure because the
calculation of EBITDA is necessary to determine our compliance with
certain covenants under these financing agreements and because
management believes that it is a widely used measure of operating
performance in the gaming industry. EBITDA should not be construed as
an alternative to operating income or net income (as determined in
accordance with generally accepted accounting principles) as an
indicator of our operating performance, or as an alternative to cash
flows generated by operating, investing and financing activities (as
determined in accordance with generally accepted accounting
principles) as an indicator of cash flows or a measure of liquidity.
All companies do not calculate EBITDA in the same manner. As a result,
EBITDA as presented here may not be comparable to the similarly titled
measures presented by other companies.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
and Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
In the quarter ended June 30, 2001, we experienced increases in revenues,
operating income, operating cash flows and EBITDA, primarily due to
contributions from our newest hotel-casino, the Suncoast, which opened in
September 2000. Net revenues in the second quarter were $126.7 million
compared to $90.7 million in 2000, an increase of 39.6%. Operating income
was $19.9 million in the quarter compared to $15.1 million in 2000, an
increase of 31.4%. Despite the increase in operating income, net income was
flat compared to the second quarter of 2000 at $7.0 million due to a loss on
the disposal of certain gaming equipment assets as well as an increase in
interest expense. Net interest expense is higher in 2001 due to a higher
average balance of outstanding indebtedness after the completion of the
Suncoast. EBITDA (earnings before interest, taxes, depreciation,
amortization, deferred rent, other non-cash expenses and certain
non-recurring items, including pre-opening expenses and gains and losses on
disposal of assets) was $29.5 million in the quarter, an increase of 34.2%
over 2000 second quarter EBITDA of $22.0 million.
In the six months ended June 30, 2001, we had increases in revenues,
operating income, net income, operating cash flows and EBITDA, primarily due
to the Suncoast. Net revenues in the first half of 2001 were $254.2 million
compared to $189.3 million in the first six months of 2000. Revenues from
our newest property, the Suncoast, and increases at The Orleans were
partially offset by a decrease at the Gold Coast due to construction
disruption and the competitive impact of a recently opened locals-oriented
hotel-casino within close proximity to the Gold Coast. Revenues at the
Barbary Coast were down slightly, possibly due to the recent economic
downturn. Operating income for the first six months of 2001 was $42.6
million compared to $36.2 million in the first six months of 2000. Net
income was up slightly (0.3%) in the period and EBITDA increased 25.0% to
$61.7 million compared to $49.3 million in the first half of 2000.
Casino. Casino revenues were $94.0 million in the three months ended June
30, 2001 compared to $65.0 million in the same period in 2000, an increase of
44.6% due primarily to the opening of the Suncoast in September 2000. In the six
months ended June 30, 2001, casino revenues increased 36.7% to $188.7 million
compared to $138.0 million in 2000. Gold Coast casino revenues declined in the
quarter and year-to-date due to disruption from the on-going renovation of its
interior and the recent opening of a new locals-oriented casino in close
proximity to the Gold Coast.
Casino expenses increased $13.1 million (44.0%) in the quarter, primarily
due to the Suncoast operations. The casino operating margin was relatively
flat at 54.5% compared to 54.3% in the second quarter of 2000. Year-to-date,
the casino operating margin was 54.5% compared to 54.6% in 2000.
Food and Beverage. Food and beverage revenues were $26.4 million in the
second quarter of 2001 compared to $19.1 million in 2000, an increase of
38.4% due primarily to the Suncoast. Food and beverage expenses increased
41.5% to $19.8 million in 2001 compared to $14.0 million in 2000, primarily
due to the additional expenses of the Suncoast. For the six months ended
June 30, 2001, food and beverage revenues were $53.1 million compared to
$38.8 million in 2000, an increase of 36.9%. Food and beverage expenses were
$38.6 million in the first six months of 2001 compared to $27.3 million in
2000.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Hotel. Hotel room revenues were $9.5 million in the second quarter of
2001 compared to $8.2 million in 2000, an increase of 16.4% primarily due to
the Suncoast. The hotel operating margin declined slightly in the quarter
due to lower-than-expected occupancy rates at our hotels. For the six months
ended June 30, 2001, hotel room revenues were $19.5 million compared to $16.5
million in the same period in 2000. The hotel operating margin decreased
slightly due to lower-than-expected occupancy rates.
Other. Other revenues include bowling, showroom, special events, retail
and miscellaneous other revenues. Other revenues were $9.1 million in the
second quarter of 2001 compared to $7.2 million in 2000, an increase of 27.0%
primarily due to the Suncoast. Expenses related to the other revenues also
increased because of the Suncoast to $6.8 million in 2001 compared to $5.9
million in 2000, an increase of 14.9%. In the six months ended June 30,
2001, other revenues were $17.9 million compared to $14.1 million in the same
period in 2000, an increase of 27.0%. Other expenses were $13.5 million in
the first half of 2001 compared to $11.5 million in 2000, an increase of
17.3%.
General and Administrative. General and administrative expenses were
$24.0 million in the second quarter of 2001 compared to $16.0 million in
2000, an increase of 50.3%, primarily due to the Suncoast expenses.
Additionally, utilities expenses increased substantially in the quarter.
Excluding the Suncoast, which opened in September 2000, electricity and gas
expenses increased $641,000 (42.6%) compared to the second quarter of 2000.
Included in general and administrative expenses for the second quarter were
cash rent expenses of $1.3 million in 2001 and $675,000 in 2000. During the
construction of the Suncoast and until it opened in September 2000, rent
expense was capitalized as a cost of the project.
For the six months ended June 30, 2001, general and administrative
expenses were $46.9 million compared to $32.2 million in 2000, an increase of
45.4%, primarily due to the Suncoast. Excluding the Suncoast, which was not
open in the first half of 2000, utilities expenses increased by $1.5 million
(46.8%) compared to the first half of 2000.
Pre-opening Costs. Pre-opening costs related to the development of the
Suncoast were expensed as incurred. Pre-opening expenses were $874,000 in
the second quarter of 2000. There were no pre-opening expenses in the second
quarter of 2001. For the first six months of 2000, pre-opening expenses were
$1.1 million. There were no pre-opening expenses in the first six months of
2001.
Deferred Rent. Deferred rent in the second quarter of 2001 was $885,000
compared to $519,000 in the second quarter of 2000. During the construction
of the Suncoast and until it opened in September 2000, rent expense was
capitalized as a cost of the project. For the first six months of 2001,
deferred rent was $1.8 million compared to $1.0 million in 2000.
Depreciation and Amortization. Depreciation and amortization expense was
$8.7 million in the second quarter of 2001 compared to $5.5 million in 2000.
The increase was primarily due to the opening of the Suncoast. Year-to-date,
depreciation and amortization expense was $17.3 million compared to $11.0
million in the first half of 2000.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Other Income (Expenses). Net interest expense increased in the second
quarter of 2001 due to the higher debt related to the financing of the
construction of the Suncoast. Net interest expense was $7.6 million in the
quarter compared to $4.3 million in the second quarter of 2000. Capitalized
interest decreased by $1.7 million due to the completion of the Suncoast
construction in September 2000. For the first six months of 2001, net
interest expense was $15.5 million compared to $9.1 million in the first six
months of 2000. Capitalized interest decreased by $2.6 million in the period
compared to the first half of 2000.
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 $38.7 million in the six months ended June 30, 2001 and $25.9
million in the six months ended June 30, 2000.
Cash used in investing activities in the six months ended June 30, 2001
and 2000 was $28.3 million and $77.9 million, respectively, and was primarily
for capital expenditures. Expenditures of approximately $42.8 million in the
first half of 2001, including amounts in construction accounts payable, were
for maintenance capital expenditures ($8.5 million) and for capital
improvement projects at the Gold Coast, The Orleans and the Suncoast.
Expenditures in the first half of 2000 were primarily for the construction of
the Suncoast.
Cash used in financing activities was $15.4 million in the first half of
2001. Proceeds from the issuance on February 2, 2001 of $50.0 million
principal amount of senior subordinated notes and from borrowings under our
revolving line of credit were offset by reductions of amounts under the
credit facility with cash flows from operations and approximately $49.1
million of net proceeds from the senior subordinated note issuance. The
senior subordinated notes were issued under the same indenture and have the
same terms, interest rate and maturity date as our $175.0 million principal
amount of senior subordinated notes issued in 1999. Cash provided by
financing activities was $41.7 million in the first half of 2000, primarily
from borrowings under our $200.0 million senior secured credit facility due
to construction of the Suncoast.
The availability under our $200.0 million senior secured credit facility
will be reduced in quarterly amounts beginning in the fiscal quarter ending
September 30, 2001. The reductions will be $6.0 million on each of September
30, 2001, December 31, 2001, March 31, 2002 and June 30, 2002; $8.5 million
on each of September 30, 2002, December 31, 2002, March 31, 2003 and June 30,
2003; and $11.5 million on each of September 30, 2003, December 31, 2003,
March 31, 2004 and June 30, 2004. The advances under the facility may be
used for working capital, general corporate purposes, and certain
improvements to our existing properties. As of June 30, 2001, we had $114.0
million outstanding under the $200.0 million credit facility. Borrowings
under the credit facility bear interest, at our option, at a premium over the
one-, two-, three- or six-month London Interbank Offered Rate ("LIBOR"). The
premium varies depending on our ratio of total debt to EBITDA and can vary
between 125 and 250 basis points. As of June 30, 2001, the premium over LIBOR
was 2.00% (200 basis points) and the interest rate was 5.75%. For the quarter
ended June 30, 2001 the weighted-average interest rate for the senior secured
credit facility was 7.31%.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The loan agreement governing the $200.0 million senior secured revolving
credit facility contains covenants that, among other things, limit our
ability to pay dividends or make advances to Coast Resorts, to make certain
capital expenditures, to repay certain existing indebtedness, to incur
additional indebtedness or to sell material assets. Additionally, the loan
agreement requires that we maintain certain financial ratios with respect to
its leverage and fixed charge coverage. We are also subject to certain
covenants associated with the indenture governing our $225.0 million
principal amount of senior subordinated notes, including, in part,
limitations on certain restricted payments, the incurrence of additional
indebtedness and asset sales. We believe that, at June 30, 2001, we were in
compliance with all covenants and required ratios.
Capital Expenditures
In January 2001, we announced a proposed expansion of The Orleans. The
project includes a 10,000-seat special-events center, a 620-room hotel tower,
a 2,600-car parking garage, six additional movie theaters, two restaurants,
an Irish pub and approximately 40,000 square feet of new gaming area and
public space. Various enhancements to the scope of the special-events
center, hotel tower, parking garage and movie theaters and the addition of
two more restaurants and a bar have increased the estimated cost of the
expansion from $100.0 million to approximately $130.0 million. One of the
restaurants and the Irish pub opened in the second quarter of 2001, and
construction of the second restaurant and the movie theaters began in that
quarter. We anticipate that 2001 cash outlays for the project will total
approximately $50.0 million, of which $15.0 million had been expended in the
first six months.
In the fourth quarter of 2000, we commenced an approximately $20.5 million
first phase expansion and remodel of the Gold Coast. The project will include
a new, expanded buffet, a sports bar, an Asian-themed restaurant, 10,000
square feet of additional meeting space, the refurbishing of our standard
hotel guest rooms and the redesign of most of the Gold Coast's public areas.
We expect to complete the project by the fourth quarter and to spend
approximately $18.5 million in 2001, of which $12.0 million had been expended
in the first six months.
In the second quarter of 2001, we commenced construction of the $30.0
million second phase of the Gold Coast remodel. The project includes a
2,000-car parking garage, a 10,000 square foot expansion of the convention
and banquet facilities, 30,000 square feet of additional casino space,
relocation of the bingo parlor and various other improvements. 2001 cash
outlays for the project are expected to be approximately $10.0 million.
The Suncoast hotel room tower was originally built to accommodate
approximately 200 additional hotel rooms. We began construction of these
additional rooms in the first quarter of 2001 and expect to complete them in
the third quarter of 2001 at an estimated cost of $11.0 million.
In the ordinary course of operating our hotel-casinos, it is necessary to
upgrade or replace fixtures and equipment and to make improvements that will
extend the life of our physical plants. We anticipate that these maintenance
capital expenditures will total approximately $12.0 million in 2001, of which
approximately $8.5 million had been expended in the first six months.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Capital Expenditures (continued)
Our expansion and remodel projects are expected to be funded in 2001 with
existing cash balances, operating cash flow and available borrowings under
our credit facility. We believe those sources will provide sufficient
resources to meet our debt and lease payment obligations and capital
expenditure requirements for 2001. The loan agreement governing our $200.0
million revolving line of credit limits the amount of our capital
expenditures (other than maintenance capital expenditures) to a maximum of
approximately $109.0 million during the term of the agreement. Through June
30, 2002, we have spent approximately $53.9 million. Currently, our planned
capital expenditures through 2002 would cause us to exceed this maximum
permitted by the loan agreement. At the appropriate time, we anticipate
seeking an amendment to the facility to amend the capital expenditure
covenant and increase the revolving line of credit to accommodate our
additional planned capital expenditures. If such an amendment and increase
cannot be obtained, it may become necessary to delay certain of the capital
projects or to seek alternative financing.
A key element of our business strategy is the expansion or renovation of
our existing properties as described above. The completion of these projects
is subject to certain risks, including but not limited to:
o general construction risks, including cost overruns, shortages of
materials or skilled labor, labor disputes, unforeseen environmental
or engineering problems, work stoppages, fire and other natural
disasters, construction scheduling problems and weather interference;
o change orders and plan or specification modifications;
o changes and concessions required by governmental or regulatory
authorities; and
o delays in obtaining or inability to obtain all required licenses,
permits and authorizations.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" 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 Resorts 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:
o increased competition, both in Nevada and other states, including
increased competition from California Native American gaming;
o dependence on the Las Vegas area and Southern California for a majority
of our customers;
o substantial leverage and uncertainty that we will be able to service our
debt;
o uncertainties associated with construction projects, including the
related disruption of operations and the availability of financing, if
necessary;
o changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies;
o uncertainties related to the economy; and
o uncertainties related to the cost and/or availability of electricity and
natural gas.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety
by our cautionary statements. The forward-looking statements included are
made only as of the date of this Form 10-Q. We do not intend, and undertake
no obligation, to update these forward-looking statements.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our long-term debt. We attempt to limit our exposure to
interest rate risk by managing the mix of our long-term fixed-rate borrowings
and short-term borrowings under our revolving bank credit facility. To date,
we have not invested in derivative- or foreign currency-based financial
instruments.
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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.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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: August 14, 2001 COAST RESORTS, INC., a Nevada corporation
By: /s/ Gage Parrish
-----------------------
Gage Parrish
Vice President and
Chief Financial Officer
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