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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, 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 HOTELS AND CASINOS, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0345706
(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 November 14, 2001: 1,000
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED BALANCE SHEETS
(amounts in thousands, except share data)
September 30,
2001 December 31,
(unaudited) 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 54,748 $ 43,560
Accounts receivable, net....................... 5,253 5,658
Due from Coast Resorts......................... 5,023 9,464
Other current assets........................... 21,313 18,619
-------------- -------------
TOTAL CURRENT ASSETS........................... 86,337 77,301
PROPERTY AND EQUIPMENT, net....................... 522,688 485,925
OTHER ASSETS...................................... 8,585 7,772
-------------- -------------
$ 617,610 $ 570,998
============== =============
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 12,638 $ 16,308
Accrued liabilities............................ 46,761 38,201
Construction accounts payable.................. 15,301 4,868
Current portion of long-term debt.............. 2,123 2,430
-------------- -------------
TOTAL CURRENT LIABILITIES...................... 76,823 61,807
LONG-TERM DEBT, less current portion.............. 349,376 353,337
DEFERRED INCOME TAXES............................. 17,901 11,417
DEFERRED RENT..................................... 22,983 20,330
-------------- -------------
TOTAL LIABILITIES.............................. 467,083 446,891
-------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 25,000 shares
authorized, 1,000 shares issued and
outstanding................................. 1 1
Additional paid-in capital..................... 86,903 86,903
Retained earnings.............................. 63,623 37,203
-------------- -------------
TOTAL STOCKHOLDER'S EQUITY..................... 150,527 124,107
-------------- -------------
$ 617,610 $ 570,998
============== =============
The accompanying notes are an integral part of these condensed financial
statements.
1
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2001 and 2000
(amounts in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATING REVENUES:
Casino..........................$ 96,396 $ 69,852 $ 285,080 $ 207,838
Food and beverage............... 26,276 20,258 79,411 59,065
Hotel........................... 9,304 8,054 28,782 24,561
Other........................... 9,007 7,520 26,941 21,646
--------- --------- --------- ---------
GROSS OPERATING REVENUES...... 140,983 105,684 420,214 313,110
Less: promotional allowances... (12,817) (9,240) (37,805) (27,333)
--------- --------- --------- ---------
NET OPERATING REVENUES........ 128,166 96,444 382,409 285,777
--------- --------- --------- ---------
OPERATING EXPENSES:
Casino.......................... 43,702 32,732 129,626 95,314
Food and beverage............... 19,183 15,076 57,801 42,386
Hotel........................... 3,910 3,569 11,565 9,932
Other........................... 6,788 6,064 20,281 17,569
General and administrative...... 24,584 17,750 71,481 49,972
Pre-opening expenses ........... -- 4,656 -- 5,798
Deferred rent................... 884 600 2,653 1,639
Depreciation and amortization... 9,028 5,637 26,345 17,151
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES...... 108,079 86,084 319,752 239,761
--------- --------- --------- ---------
OPERATING INCOME................... 20,087 10,360 62,657 46,016
--------- --------- --------- ---------
OTHER INCOME (EXPENSES)
Interest expense, net........... (7,325) (7,654) (23,007) (19,065)
Interest capitalized ........... 715 2,139 914 4,973
Loss on disposal of assets ..... (159) (14) (281) (5)
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSES)...... (6,769) (5,529) (22,374) (14,097)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES......... 13,318 4,831 40,283 31,919
Income tax provision .............. 4,583 1,701 13,863 11,127
--------- --------- --------- ---------
NET INCOME.........................$ 8,735 $ 3,130 $ 26,420 $ 20,792
========= ========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements.
2
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(amounts in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------
2001 2000
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 26,420 $ 20,792
---------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................. 26,345 17,151
Amortization of debt offering costs....................... 916 790
Loss on disposal of assets................................ 281 --
Deferred income taxes..................................... 6,241 (32)
Deferred rent............................................. 2,653 2,699
Other non-cash expenses................................... -- 143
Changes in assets and liabilities:
Net increase in accounts receivable and other assets..... (2,908) (6,283)
Net increase in accounts payable and accrued liabilities. 4,890 8,473
---------- ---------
TOTAL ADJUSTMENTS........................................... 38,418 22,941
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 64,838 43,733
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of amounts in construction
accounts payable.......................................... (62,744) (126,585)
Proceeds from disposal of assets............................ 9,850 101
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... (52,894) (126,484)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net of
issuance costs............................................ 49,071 --
Principal payments on long-term debt........................ (2,268) (431)
Proceeds from borrowings under bank line of credit.......... 16,000 108,600
Repayments of borrowings under bank line of credit.......... (68,000) (3,100)
Decrease (increase) in due from Coast Resorts............... 4,441 (720)
---------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......... (756) 104,349
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 11,188 21,598
CASH AND CASH EQUIVALENTS, at beginning of period.............. 43,560 38,616
---------- ---------
CASH AND CASH EQUIVALENTS, at end of period.................... $ 54,748 $ 60,214
========== =========
The accompanying notes are an integral part of these condensed financial
statements.
3
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Background Information
Coast Hotels and Casinos, Inc. ("Coast Hotels") is a Nevada corporation and
a wholly owned subsidiary of Coast Resorts, Inc. ("Coast Resorts"). Coast Hotels
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 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 financial statements should be
read in conjunction with the audited 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 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 certain 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.
4
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION (continued)
Basis of Presentation (continued)
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets". SFAS 141 is effective as follows: (a) use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001 that were accounted for by the
purchase method. SFAS 142 is effective for fiscal years beginning after December
15, 2001 and applies to all goodwill and other intangible assets recognized in
an entity's statement of financial position at that date, regardless of when
those assets were initially recognized.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets". The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and, generally, is to be applied prospectively.
The Company is currently evaluating the provisions of SFAS 141, SFAS 142,
SFAS 143 and SFAS 144 and has not yet determined the effects of these changes on
the Company's financial position or results of operations.
5
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of the following as of September 30, 2001 and
December 31, 2000:
September 30,
2001 December 31,
(unaudited) 2000
----------- -----------
Related parties: (in thousands)
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................... $ 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
Reducing revolving credit facility due April 2004,
collateralized by substantially all
of the assets of Coast Hotels and Casinos, Inc... 124,000 176,000
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................................ 524 659
----------- -----------
351,499 355,767
Less: current portion.............................. 2,123 2,430
----------- -----------
$ 349,376 $ 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 ("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
September 30, 2001, the premium over LIBOR was 2.00% (200 basis points) and the
interest rate was 4.66%. For the nine months ended September 30, 2001 the
weighted-average interest rate for the credit facility was 6.76%. Coast Hotels
incurs a commitment fee, payable quarterly in arrears, on the unused portion of
the credit facility. As of September 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 HOTELS AND CASINOS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT (continued)
The availability under the credit facility was reduced by $6.0 million to
$194.0 million on September 30, 2001 and will be reduced by an additional $6.0
million on each of December 31, 2001, March 31, 2002 and June 30, 2002. The
reduction will increase to $8.5 million on each of September 30, 2002, December
31, 2002, March 31, 2003 and June 30, 2003; and to $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 September 30, 2001, Coast Hotels had $70.0
million of availability under the credit facility.
The loan agreement governing the 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 September
30, 2001, Coast Hotels spent approximately $70.0 million on non-maintenance
capital expenditures. 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 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
September 30, 2001, Coast Hotels was in compliance with all covenants and
required ratios.
NOTE 3 - PROMOTIONAL ALLOWANCES
The retail value of hotel accommodations and food and beverage items
provided to customers without charge is included in gross revenues and then
deducted as promotional allowances, to arrive at net revenues. The following is
a breakdown of these complimentary revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Complimentary revenues:
Food and beverage........ $ 10,607 $ 7,701 $ 31,408 $ 22,623
Hotel.................... 1,530 1,118 4,510 3,508
Other.................... 680 421 1,887 1,202
---------- ---------- ---------- ----------
Promotional allowances. $ 12,817 $ 9,240 $ 37,805 $ 27,333
========== ========== ========== ==========
7
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 Nine Months Ended
September 30, September 30,
--------------------- --------------------
2001 2000 2001 2000
---------- --------- --------- ---------
(in thousands) (in thousands)
(unaudited) (unaudited)
Net operating revenues....... $ 128,166 $ 96,444 $ 382,409 $ 285,777
Operating expenses........... 108,079 86,084 319,752 239,761
---------- --------- --------- ---------
Operating income ............ $ 20,087 $ 10,360 $ 62,657 $ 46,016
========== ========= ========= ==========
Net income................... $ 8,735 $ 3,130 $ 26,420 $ 20,792
========== ========= ========= =========
EBITDA (1)................... $ 29,999 $ 21,253 $ 91,655 $ 70,604
========== ========= ========= =========
(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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000 and Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Three of our hotel-casinos cater primarily to residents of Las Vegas and
the fourth, the Barbary Coast, caters to tourists on the Las Vegas Strip. In the
aftermath of the terrorist attacks on September 11, 2001, the Barbary Coast was
impacted in all revenue areas because of a decrease in foot traffic on the
Strip. Our locals-oriented properties experienced a noticeable drop in room
occupancy, but were largely unaffected in the areas of gaming, food and beverage
and other revenues. In the quarter ended September 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 third quarter were $128.2 million
compared to $96.4 million in 2000, an increase of 32.9%. Revenues at The
Orleans, the Barbary Coast and the Gold Coast were relatively flat in the
quarter compared to the prior year. Operating income was $20.1 million in the
quarter compared to $10.4 million in 2000, an increase of 93.9%. Net income was
$8.7 million compared to $3.1 million, an increase of 179.1%. 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 $30.0 million in the
quarter, an increase of 41.2% over 2000 third quarter EBITDA of $21.3 million.
In the nine months ended September 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 nine months of 2001 were $382.4 million
compared to $285.8 million in the first nine months of 2000. Revenues from the
Suncoast and an increase at The Orleans were partially offset by a revenue
decrease at the Gold Coast due to construction disruption and the possible
competitive impact of the opening in December 2000 of a locals-oriented
hotel-casino within close proximity to the Gold Coast. Revenues at the Barbary
Coast were also down slightly, possibly due to the economic downturn and the
disruption in travel and tourism resulting from the September 11, 2001 terrorist
attacks. Operating income for the first nine months of 2001 was $62.7 million
compared to $46.0 million in the first nine months of 2000. Net income was up
27.1% in the period and EBITDA increased 29.8% to $91.7 million compared to
$70.6 million in the first nine months of 2000.
Casino. Casino revenues were $96.4 million in the three months ended
September 30, 2001 compared to $69.9 million in the same period in 2000, an
increase of 38.0% due primarily to the opening of the Suncoast in September
2000. Casino revenues were also higher at our other three properties, The
Orleans, the Gold Coast and the Barbary Coast. In the nine months ended
September 30, 2001, casino revenues increased 37.2% to $285.1 million compared
to $207.8 million in 2000. Most of the increase was due to the Suncoast, but
revenues at The Orleans were also up year-to-date. Casino revenues at the Gold
Coast and the Barbary Coast declined slightly in the nine-month period.
Casino expenses increased $11.0 million (33.5%) in the quarter, primarily
due to the Suncoast operations. The casino operating margin improved to 54.7% in
the quarter compared to 53.1% in the third quarter of 2000. Year-to-date, casino
expenses increased $34.3 million due to the Suncoast and the casino operating
margin improved to 54.5% compared to 54.1% in 2000.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Food and Beverage. Food and beverage revenues were $26.3 million in the
third quarter of 2001 compared to $20.3 million in 2000, an increase of 29.7%
due primarily to the Suncoast. Year-to-date, revenues were $79.4 million, an
increase of 34.4% compared to $59.1 million in the nine months ended September
30, 2000, primarily due to the Suncoast. Food and beverage expenses in the third
quarter increased $4.1 million (27.2%), primarily due to the Suncoast.
Year-to-date, food and beverage expenses increased $15.4 million (36.4%)
compared to the same period in 2000, primarily due to the Suncoast.
Hotel. Hotel room revenues were $9.3 million in the third quarter of 2001
compared to $8.1 million in 2000, an increase of 15.5% primarily due to the
Suncoast. Hotel occupancy was down to 88.6% in the quarter compared to 95.3% in
the third quarter of 2000 due to a tourism slowdown in Las Vegas after the
September 11, 2001 terrorist attacks. The hotel operating margin increased to
58.0% in the quarter compared to 55.7% in the third quarter of 2000. For the
nine months ended September 30, 2001, hotel room revenues were $28.8 million
compared to $24.6 million in the same period in 2000. The hotel operating margin
was 59.8% compared to 59.6% in the prior year.
During October 2001 there was no significant improvement in hotel occupancy
levels. With the continued uncertainty due to the economic downturn and the
impact on tourism of the September terrorist attacks, we expect that occupancy
levels will remain soft for November and December 2001.
Other. Other revenues include bowling, showroom, special events, retail and
miscellaneous other revenues. Other revenues were $9.0 million in the third
quarter of 2001 compared to $7.5 million in 2000, an increase of 19.8% 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 $6.1 million in
2000, an increase of 11.9%. In the nine months ended September 30, 2001, other
revenues were $26.9 million compared to $21.6 million in the same period in
2000, an increase of 24.5% due primarily to the Suncoast. Other expenses were
$20.3 million in the first nine months of 2001 compared to $17.6 million in
2000, an increase of 15.4%.
General and Administrative. General and administrative expenses were $24.6
million in the third quarter of 2001 compared to $17.8 million in 2000, an
increase of 38.5%, 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
$665,000 (33.5%) compared to the third quarter of 2000.
For the nine months ended September 30, 2001, general and administrative
expenses were $71.5 million compared to $50.0 million in 2000, an increase of
43.0%, primarily due to the Suncoast as well as an increase in utilities
expenses. Excluding the Suncoast, which was not open in the first nine months of
2000, utilities expenses increased by $2.2 million (47.7%) compared to the first
nine months of 2000.
Pre-opening Costs. Pre-opening costs related to the development of the
Suncoast were expensed as incurred. Pre-opening expenses were $4.7 million in
the third quarter of 2000 and $5.8 million for the nine months ended September
2000. There were no pre-opening expenses in the three months or nine months
ended September 30, 2001.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
Deferred Rent. Deferred rent in the third quarter of 2001 was $884,000
compared to $600,000 in the third 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 nine months of 2001, deferred rent was
$2.7 million compared to $1.6 million in 2000.
Depreciation and Amortization. Depreciation and amortization expense was
$9.0 million in the third quarter of 2001 compared to $5.6 million in 2000. The
increase was primarily due to the opening of the Suncoast. Year-to-date,
depreciation and amortization expense was $26.3 million compared to $17.2
million in the first nine months of 2000.
Other Income (Expenses). Net interest expense increased in the third
quarter of 2001 due a decrease in capitalized interest since the opening in
September 2000 of the Suncoast. Net interest expense was $6.6 million in the
quarter compared to $5.5 million in the third quarter of 2000. Capitalized
interest decreased by $1.4 million. For the first nine months of 2001, net
interest expense was $22.1 million compared to $14.1 million in the first nine
months of 2000. Capitalized interest decreased by $4.1 million in the period
compared to the first nine months 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 $64.8 million in the nine months ended September 30, 2001 and $43.7 million
in the nine months ended September 30, 2000. The increases in 2001 are due
primarily to operations at the Suncoast.
Cash used in investing activities in the nine months ended September 30,
2001 and 2000 was $52.9 million and $126.5 million, respectively, and was
primarily for capital expenditures. Capital expenditures of approximately $62.7
million in the first nine months of 2001, including amounts in construction
accounts payable, were for maintenance capital expenditures ($19.1 million) and
for capital improvement projects at the Gold Coast, The Orleans and the
Suncoast. Expenditures in the first nine months of 2000 were primarily for the
construction of the Suncoast.
Cash used in financing activities was $756,000 in the first nine months 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 outstanding 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
$104.3 million in the first nine months of 2000, primarily from borrowings under
our credit facility for construction of the Suncoast, offset in part by
repayments under the credit facility.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The availability under the credit facility was reduced by $6.0 million to
$194.0 million on September 30, 2001 and will be reduced by an additional $6.0
million on each of December 31, 2001, March 31, 2002 and June 30, 2002. The
quarterly reduction will increase to $8.5 million on each of September 30, 2002,
December 31, 2002, March 31, 2003 and June 30, 2003; and to $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
September 30, 2001, we had $124.0 million outstanding under the 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 September 30, 2001, the premium
over LIBOR was 2.00% (200 basis points) and the interest rate was 4.66%. For the
quarter ended September 30, 2001 the weighted-average interest rate for the
credit facility was 5.67%.
The loan agreement governing the 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 September 30, 2001, we were in
compliance with all covenants and required ratios.
Capital Expenditures
In January 2001, we announced an expansion project at The Orleans. The
project includes a 9,000-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. To date, two of the restaurants
and the Irish pub have opened. The movie theaters and half of the parking garage
are expected to open in December 2001, and the second half of the garage is
expected to open in April 2002. The hotel tower and the additional restaurants
are expected to open in October 2002 and the special-events center is expected
to open in March 2003. We anticipate that 2001 cash outlays for the project will
total approximately $50.0 million, of which $30.7 million had been expended in
the first nine months.
In the fourth quarter of 2000, we commenced an approximately $51.0 million
expansion and remodel of the Gold Coast. The project includes a new, expanded
buffet, 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, 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. To
date, the new buffet and much of the redesign of the public areas have been
completed. The remaining work is expected to be completed through the fall of
2002. We anticipate that 2001 cash outlays for the project will total
approximately $28.0 million, of which approximately $17.0 million had been
expended in the first nine months.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Capital Expenditures (continued)
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 completed them in the third
quarter of 2001 at a 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 $22.0 million in 2001, including
approximately $10.0 million for new "ticket-in, ticket-out" slot machines at The
Orleans, the Gold Coast and the Suncoast. Through September 30, 2001, we had
expended approximately $19.1 million for maintenance capital expenditures.
The loan agreement governing our revolving line of credit limits the amount
of our capital expenditures, as defined and excluding maintenance capital
expenditures, to a maximum of approximately $109.0 million during the term of
the agreement. Through September 30, 2001, we had spent approximately $70.0
million for non-maintenance capital expenditures. Currently, our planned capital
expenditures through 2002 will cause us to exceed this maximum permitted by the
loan agreement. We anticipate seeking an amendment to the facility to
accommodate our additional planned capital expenditures. If such an amendment
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.
Impact of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets". SFAS 141 is effective as follows: (a) use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001 that were accounted for by the
purchase method. SFAS 142 is effective for fiscal years beginning after December
15, 2001 and applies to all goodwill and other intangible assets recognized in
an entity's statement of financial position at that date, regardless of when
those assets were initially recognized.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Impact of New Accounting Pronouncements (continued)
In August 2001, the Financial Accounting Standards Board issued Statement
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets". The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and, generally, is to be applied prospectively.
The Company is currently evaluating the provisions of SFAS 141, SFAS 142,
SFAS 143 and SFAS 144 and has not yet determined the effects of these changes on
the Company's financial position or results of operations.
Subsequent Event
Subsequent to September 30, 2001, we purchased land on Las Vegas Boulevard,
just east of Interstate 15 and approximately six miles south of Tropicana
Avenue. The land totals approximately 50 acres and was purchased for a total
price of $11.4 million. We have an additional commitment of $3.5 million for
off-site improvements, to be paid in the future as they are completed. The site
may be developed as a hotel-casino at a later date, although there are no
specific plans to do so at this time.
14
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" 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:
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;
o the impact on the travel and leisure industry, and Las Vegas in particular,
of the September 11, 2001 terrorist attacks and the United States' response
to the attacks; 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 credit facility. At September 30, 2001, the
interest rate on our variable rate debt was 4.66%. Assuming that the amount of
our variable rate debt remained constant at $124.0 million during the next
twelve months, a hypothetical 1% increase in our variable interest rate would
increase our interest expense by $1.2 million in that period. To date, we have
not invested in derivative- or foreign currency-based financial instruments.
16
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.
17
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 14, 2001 COAST HOTELS AND CASINOS, INC.,
a Nevada corporation
By: /s/ Gage Parrish
-----------------------
Gage Parrish
Vice President and
Chief Financial Officer
18