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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
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SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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
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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 May 15, 2001: 1,461,178
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
COAST RESORTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
March 31, December
2002 31,
(unaudited) 2001
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 36,056 $ 43,350
Accounts receivable, net................. 6,251 6,371
Other current assets..................... 21,204 20,339
----------- -----------
TOTAL CURRENT ASSETS..................... 63,511 70,060
PROPERTY AND EQUIPMENT, net................ 616,022 579,545
OTHER ASSETS............................... 9,453 7,807
----------- -----------
$ 688,986 $ 657,412
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................... $ 16,560 $ 13,138
Accrued liabilities...................... 40,949 41,061
Construction accounts payable............ 24,313 34,053
Current portion of long-term debt........ 162 148
----------- -----------
TOTAL CURRENT LIABILITIES................ 81,984 88,400
LONG-TERM DEBT, less current portion....... 394,716 369,376
DEFERRED INCOME TAXES...................... 19,674 19,251
DEFERRED RENT.............................. 24,712 23,868
----------- -----------
TOTAL LIABILITIES........................ 521,086 500,895
----------- -----------
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, 1,494,353 shares
issued and 1,461,178 shares
outstanding............................ 15 15
Treasury stock (33,175 shares)........... (3,333) (3,333)
Additional paid-in capital............... 95,398 95,398
Retained earnings ....................... 75,820 64,437
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 167,900 156,517
----------- -----------
$ 688,986 $ 657,412
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
COAST RESORTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2002 and 2001
(dollars in thousands, except share and per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
OPERATING REVENUES:
Casino............................. $ 100,908 $ 94,721
Food and beverage.................. 27,975 26,693
Hotel.............................. 10,089 9,945
Other.............................. 9,347 8,786
---------- ----------
GROSS OPERATING REVENUES......... 148,319 140,145
Less: promotional allowances...... (13,244) (12,597)
---------- ----------
NET OPERATING REVENUES........... 135,075 127,548
---------- ----------
OPERATING EXPENSES:
Casino............................. 44,322 43,169
Food and beverage.................. 20,665 18,865
Hotel.............................. 3,985 3,783
Other.............................. 6,915 6,699
General and administrative......... 24,795 22,915
Deferred rent...................... 844 884
Depreciation and amortization...... 9,279 8,568
---------- ----------
TOTAL OPERATING EXPENSES......... 110,805 104,883
---------- ----------
OPERATING INCOME..................... 24,270 22,665
---------- ----------
OTHER INCOME (EXPENSES):
Interest expense, net.............. (7,170) (7,981)
Interest capitalized .............. 588 62
(Loss) gain on disposal of assets . (318) 1,534
---------- ----------
TOTAL OTHER INCOME (EXPENSES)........ (6,900) (6,385)
---------- ----------
INCOME BEFORE INCOME TAXES........... 17,370 16,280
Income tax provision ................ 5,987 5,621
---------- ----------
NET INCOME........................... $ 11,383 $ 10,659
========== ==========
PER SHARE INFORMATION:
Basic net income per share of
common stock....................... $ 7.79 $ 7.28
========== ==========
Diluted net income per share of
common stock....................... $ 7.66 $ 7.11
========== ==========
Basic weighted-average shares
outstanding........................ 1,461,178 1,463,178
========== ==========
Diluted weighted-average shares
outstanding........................ 1,486,244 1,498,593
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COAST RESORTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2002 and 2001
(dollars in thousands)
(unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 11,383 $ 10,659
---------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization................. 9,279 8,568
Amortization of debt offering costs........... 277 294
Loss (gain) on disposal of assets............. 318 (1,534)
Deferred income taxes......................... 279 576
Deferred rent................................. 844 884
Changes in assets and liabilities:
Net (decrease) increase in accounts
receivable and other assets............... (725) 4,200
Net increase in accounts payable and
accrued liabilities....................... 3,310 2,812
---------- ----------
TOTAL ADJUSTMENTS............................... 13,582 15,800
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 24,965 26,459
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of amounts in
construction accounts payable................. (56,707) (13,234)
Proceeds from sale of assets.................... 903 9,415
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES........... (55,804) (3,819)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
including original issue premium, net of
financing costs............................... 103,191 49,071
Principal payments on long-term debt............ (146) (463)
Proceeds from borrowings under bank line of
credit........................................ 25,000 6,000
Repayments of borrowings under bank line of
credit........................................ (104,500) (63,000)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................... 23,545 (8,392)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (7,294) 14,248
CASH AND CASH EQUIVALENTS, at beginning of
period.......................................... 43,350 43,560
---------- ----------
CASH AND CASH EQUIVALENTS, at end of period....... $ 36,056 $ 57,808
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COAST RESORTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 2001 and For the Three Months
Ended March 31, 2002 (dollars in thousands, except share data)
Common Stock Additional
----------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- ------ ---------- -------- -------- --------
Balances at December 31, 2000... 1,463,178 $ 15 $ 95,398 $ 28,006 $(3,118) $120,301
Repurchase of common stock.... (2,000) -- -- -- (215) (215)
Net income.................... -- -- -- 36,431 -- 36,431
--------- ------ ---------- -------- -------- --------
Balances at December 31, 2001... 1,461,178 15 95,398 64,437 (3,333) 156,517
Net income (unaudited)........ -- -- -- 11,383 -- 11,383
--------- ------ ---------- -------- -------- --------
Balances at March 31, 2002
(unaudited)................... 1,461,178 $ 15 $ 95,398 $ 75,820 $(3,333) $167,900
========= ====== ========== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COAST RESORTS, INC.
NOTES TO CONDENSED 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 its wholly owned subsidiary, Coast Hotels,
the Company owns and operates four Las Vegas hotel-casinos:
o The Orleans Hotel and Casino, which is located approximately one mile west
of the Las Vegas Strip on Tropicana Avenue.
o Gold Coast Hotel and Casino, which is located approximately one mile west
of the Las Vegas Strip on Flamingo Road.
o The Suncoast Hotel and Casino, which is located in the west end of the Las
Vegas valley.
o Barbary Coast Hotel and Casino, which 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.
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, 2001. In the opinion
of management, all adjustments and normal recurring accruals considered
necessary for a fair presentation of the results for the interim periods have
been included. The interim results reflected in the unaudited consolidated
financial statements are not necessarily indicative of expected results for the
full year.
5
COAST RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 2002 and December
31, 2001:
March 31, December
2002 31,
(unaudited) 2001
---------- ----------
(in thousands)
9.5% senior subordinated notes due April 2009,
with interest payable semiannually on April 1
and October 1, including original issue
premium of $5,000 in 2002 and $0 in 2001...... $ 330,000 $ 225,000
Senior secured credit facility due September
2004, collateralized by substantially all of
the assets of Coast Hotels and Casinos, Inc... 64,500 144,000
Other notes payable............................. 378 524
---------- ----------
394,878 369,524
Less: current portion........................... 162 148
---------- ----------
$ 394,716 $ 369,376
========== ==========
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 credit
facility due 2004 to facilitate a refinancing. Availability under the credit
facility was increased to $200.0 million in September 1999, subject to automatic
reductions in availability from September 2001 through June 2004, as described
below. Coast Resorts is a guarantor of the indebtedness under both of these debt
agreements. 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 Coast Hotels' ratio of total
debt to EBITDA and can vary between 125 and 250 basis points. As of March 31,
2002, the premium over LIBOR was 1.75% (175 basis points) and the interest rate
was 3.65%. For the quarter ended March 31, 2002, the weighted average interest
rate for the senior secured credit facility was 3.62%. Coast Hotels incurs a
commitment fee, payable quarterly in arrears, on the unused portion of the
credit facility. This variable fee is currently at a rate of 0.375% per annum
times the average unused portion of the facility.
The availability under the senior secured credit facility was reduced by
$6.0 million to $194.0 million on September 30, 2001, by $6.0 million to $188.0
million on December 31, 2001 and by $6.0 million to $182.0 million on March 31,
2002. It will be reduced by an additional $6.0 million on 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.
As of March 31, 2002, Coast Hotels had $117.5 million of availability under the
credit facility.
On February 2, 2001, Coast Hotels issued $50.0 million additional 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.
On March 19, 2002, Coast Hotels issued $100.0 million additional principal
amount of senior subordinated notes and received a $5.0 million original issue
premium in connection with the issuance. The net proceeds of approximately
$103.2 million were used to reduce borrowings under the credit facility. The
notes that were issued in 2001 and 2002 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.
6
COAST RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT (continued)
The loan agreement governing the senior secured 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. Additionally, the loan
agreement requires that Coast Hotels maintain certain financial ratios with
respect to its leverage and fixed charge coverage. The agreement was amended in
December 2001 and in March 2002 to increase the amount of certain capital
expenditures that may be made. 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. At March 31, 2002, Coast Hotels was
in compliance with all covenants and required ratios.
On April 2, 2002, Coast Hotels entered into an interest rate swap agreement
with a member of Coast Hotels' bank group wherein $100.0 million notional amount
of Coast Hotels' fixed rate debt has been converted to a floating rate. The
fixed rate paid to Coast Hotels is 5.77% and the floating rate paid to the bank
is based on six-month LIBOR and is set at 2.33% for the six months ending
September 30, 2002. The floating rate will be adjusted on October 1, 2002 and
will be adjusted each April 1 and October 1 until the swap expires on April 1,
2009, which is also the maturity date of the $325.0 million in senior
subordinated notes.
7
COAST RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 for the quarters ended March 31,
2002 and 2001:
March 31,
-----------------------
2002 2001
---------- ----------
(in thousands)
Complimentary revenues:
Food and beverage.................... $ 10,816 $ 10,619
Hotel................................ 1,632 1,480
Other................................ 796 498
---------- ----------
Promotional allowances............... $ 13,244 $ 12,597
========== ==========
The estimated cost of providing these complimentary services is as follows
for the quarters ended March 31, 2002 and 2001:
March 31,
-----------------------
2002 2001
---------- ----------
(in thousands)
Food and beverage.................... $ 10,745 $ 10,885
Hotel................................ 674 566
---------- ----------
$ 11,419 $ 11,451
========== ==========
The cost of promotional allowances has been allocated to expense as follows
for the quarters ended March 31, 2002 and 2001:
March 31,
-----------------------
2002 2001
---------- ----------
(in thousands)
Casino............................... $ 10,723 $ 10,433
Other................................ 696 1,018
---------- ----------
$ 11,419 $ 11,451
========== ==========
8
COAST RESORTS, INC.
NOTES TO CONDENSED 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 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 ended March 31, 2002 and 2001, are
as follows (in thousands, except share and per share data, unaudited):
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Net income applicable to computations..... $ 11,383 $ 10,659
========== ==========
Weighted-average common shares applicable
to net income per common share.......... 1,461,178 1,463,178
Effect of dilutive securities:
Stock option incremental shares......... 25,066 35,415
---------- ----------
Weighted-average common shares applicable
to net income per common share,
assuming dilution...................... 1,486,244 1,498,593
========== ==========
Basic net income per share of
common stock............................. $ 7.79 $ 7.28
========== ==========
Diluted net income per share of
common stock............................. $ 7.66 $ 7.11
========== ==========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies and Estimates
o We recognize revenue as net wins and losses occur in our casinos, upon the
occupancy of our hotel rooms, upon the delivery of food, beverage and other
services, and upon performance for entertainment revenue. Wagers received
on all sporting events are recorded as a liability until the final outcome
of the event when the payoffs, if any, can be determined. Effective January
1, 2001, we adopted Emerging Issues Task Force Issue 00-22 (the "Issue")
which requires cash discounts and certain other cash incentives related to
gaming play be recorded as a reduction to gross casino revenues.
o We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments,
which results in bad debt expense. We determine the adequacy of this
allowance by periodically evaluating individual customer receivables and
considering the customer's financial condition, credit history and current
economic conditions. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
we may increase the allowances.
o We maintain accruals for health and workers compensation self-insurance and
slot club point redemption, which are classified as accrued liabilities in
the balance sheets. We determine the adequacy of these accruals by
periodically evaluating the historical experience and projected trends
related to these accruals. If such information indicates that the accruals
are overstated or understated, we will adjust the assumptions utilized in
the methodologies and reduce or provide for additional accruals as
appropriate.
o We are subject to various claims and legal actions in the ordinary course
of business. Some of these matters include personal injuries to customers
and damage to customers' personal assets. We estimate guest claims and
accrue for such liability based on historical experience in accrued
liabilities in the balance sheets.
o Pre-opening costs related to the construction of new projects are expensed
as incurred. There were no pre-opening costs during the three months ended
March 31, 2002 and 2001.
o We have entered into lease agreements where the rental payments increase on
either a monthly or annual basis. We recognize the related rent expense on
the straight-line method over the term of the agreements. Deferred rent is
recorded to reflect the excess of rent expense over cash payments since the
inception of the leases.
10
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
March 31,
-----------------------
2002 2001
---------- ----------
(in thousands)
(unaudited)
Net operating revenues............................ $ 135,075 $ 127,548
Operating expenses................................ 110,805 104,883
---------- ----------
Operating income ................................. $ 24,270 $ 22,665
========== ==========
Net income ....................................... $ 11,383 $ 10,659
========== ==========
EBITDA (1)........................................ $ 34,393 $ 32,117
========== ==========
Cash provided by operating activities............. $ 24,965 $ 26,459
========== ==========
Cash used in investing activities................. $ (55,804) $ (3,819)
========== ==========
Cash provided by (used in) financing activities... $ 23,545 $ (8,392)
========== ==========
(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 equipment (for all periods presented, the only non-cash expense
was deferred rent and the only non-recurring items were 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
In the quarter ended March 31, 2002, we experienced increases in revenues,
operating income, net income and EBITDA, primarily due to continued improvement
in revenues at the Suncoast, which opened in September 2000. Net revenues in the
first quarter were $135.1 million compared to $127.5 million in 2001, an
increase of 5.9%. Net operating revenues at the Gold Coast and the Barbary Coast
were relatively flat compared to last year, but were down 7.0% at The Orleans
due to increased competition, continued construction disruption related to the
ongoing $150.0 million expansion project and lower hotel room occupancy levels
consistent with the general slowdown in tourism after the September 11, 2001
terrorist attacks. Operating income was $24.3 million in the quarter compared to
$22.7 million in 2000, an increase of 7.1%. Net income was $11.4 million
compared to 2001 first quarter net income of $10.7 million, an increase of 6.8%.
EBITDA was $34.4 million in the quarter, an increase of 7.1% over EBITDA of
$32.1 million for the first quarter of 2001.
Casino. Casino revenues were $100.9 million in the three months ended March
31, 2002 compared to $94.7 million in the same period in 2001, an increase of
6.5% due primarily to a 31.3% increase at the Suncoast. Gold Coast and Barbary
Coast casino revenues increased slightly in the quarter, but casino revenues at
The Orleans declined 7.2% due to the reasons discussed above.
Casino expenses increased $1.2 million (2.7%) in the first quarter,
primarily due to a 13.1% increase at he Suncoast because of the increased gaming
activity.
Food and Beverage. Food and beverage revenues were $28.0 million in the
first quarter of 2002 compared to $26.7 million in 2001, an increase of 4.8% due
to increases at the Suncoast and at the Gold Coast as a result of its new,
expanded buffet. The increases were partially offset by a 7.7% decrease in food
and beverage revenues at The Orleans, in line with an overall 7.0% decrease in
revenues at The Orleans discussed above. Food and beverage expenses increased
9.5% to $20.7 million in 2002 compared to $18.9 million in 2001, primarily due
to the additional expenses related to the larger new buffet at the Gold Coast
and to increased expenses at the Suncoast, in line with the increase in business
there.
Hotel. Hotel room revenues were $10.1 million in the first quarter of 2002
compared to $9.9 million in 2001, an increase of 1.5%. Lower room occupancy
percentages due to a slowdown in tourism after September 11, 2001 led to
decreases at the Gold Coast, Barbary Coast and The Orleans. The decreases were
offset by increases at the Suncoast, which opened 216 additional hotel rooms in
August 2001. Room occupancy at all four properties improved over the fourth
quarter of 2001, but had still not reached the levels of the first quarter of
2001.
Other. Other revenues were $9.3 million in the first quarter of 2002
compared to $8.8 million in 2001, an increase of 6.4% primarily due to increases
at the Suncoast. Slight increases at the Gold Coast and Barbary Coast were
offset by a 5.9% decrease at The Orleans.
General and Administrative. General and administrative expenses were $24.8
million in the first quarter of 2002 compared to $22.9 million in 2001, an
increase of 8.2%, primarily due to increases in salaries, property taxes and
property and liability insurance costs.
Depreciation and Amortization. Depreciation and amortization expense was
$9.3 million in the first quarter of 2002 compared to $8.6 million in 2001, an
increase of 8.3% due to remodeling and equipment purchases at the Gold Coast and
additional rooms and slot machines at the Suncoast.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
(continued)
Other Income (Expenses). Net interest expense decreased in the first
quarter of 2002 due to a lower weighted-average interest rate on our debt. Net
interest expense was $7.2 million in the quarter compared to $8.0 million in the
first quarter of 2001. Capitalized interest was $588,000 in the first quarter,
compared to $62,000 in the first quarter of 2001 due to ongoing expansion
projects at the Gold Coast and The Orleans.
Aggregate Indebtedness and Fixed Payment Obligations
Our total long-term indebtedness and fixed payment obligations on the land
leases for the twelve-month periods ended March 31 are summarized by year below:
2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- ----------
(dollars in thousands)
Long-Term Indebtedness
Senior subordinated notes..... $ -- $ -- $ -- $ -- $ -- $325,000
Bank credit facility.......... -- -- 64,500 -- -- --
Other......................... 162 177 3 3 3 30
Fixed Payment Obligations
for Land Leases
Barbary Coast - land lease.... 175 189 190 190 190 5,256
Barbary Coast - parking lot... 125 94 -- -- -- --
The Orleans - land lease...... 2,700 2,700 2,700 2,725 3,000 195,186
Suncoast - land lease......... 2,435 2,495 2,555 2,615 2,675 203,235
-------- -------- -------- -------- -------- --------
Total Indebtedness and
Fixed Payment Obligations $ 5,597 $ 5,655 $ 69,948 $ 5,533 $ 5,868 $728,707
======== ======== ======== ======== ======== ========
During the quarter ended March 31, 2002, we issued $100.0 million principal
amount of senior subordinated notes and received a $5.0 million premium in
connection with the issuance, made principal payments of $79.5 million, net of
borrowings, on the senior secured credit facility and made principal payments of
$146,000 on other long-term debt. We have debt service payments due aggregating
$162,000 during the next twelve months on other long-term debt obligations. We
also have fixed payment obligations due during the next twelve months of $5.4
million. Total remaining fixed payment obligations under leases is $431.4
million. The fixed payment obligations represent payments due under operating
lease agreements primarily for land on which three of our properties are
located.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Aggregate Indebtedness and Fixed Payment Obligations (continued)
The Orleans occupies a portion of an approximately 80-acre site located on
West Tropicana Avenue, approximately one mile south of the Gold Coast. We lease
the real property under a ground lease entered into by Coast Hotels and the
Tiberti Company, a Nevada general partnership of which J. Tito Tiberti, a
director of Coast Hotels, is managing partner. The lease had an effective
commencement date of October 1, 1995, an initial term of 50 years, and includes
an option, exercisable by us, to extend the initial term for an additional 25
years. The lease provides for monthly rental payments of $200,000 per month
through February 2002, $225,000 per month during the 48-month period thereafter,
and $250,000 per month during the 60-month period thereafter. In March 2011,
annual rental payments will increase on a compounding basis at a rate of 3.0%
per annum. In addition, we have been granted an option to purchase the real
property during the two-year period commencing in February 2016. The lease
provides that the purchase price will be the fair market value of the real
property at the time we exercise the option, provided that the purchase price
will not be less than 10 times, nor more than 12 times, annual rent at such
time.
The Suncoast occupies the approximately 50-acre site located at the corner
of Rampart Boulevard and Alta Drive in the west end of the Las Vegas valley that
we lease pursuant to a Ground Lease Agreement dated as of October 28, 1994. The
initial term of the lease expires on December 31, 2055. The lease contains three
options, exercisable by us, to extend the term of the lease for 10 years each.
The lease provided for monthly rental payments of $166,667 for the year ended
December 31, 1995. Thereafter, the monthly rent increases by the amount of
$5,000 in January of each year. The landlord has the option to require us to
purchase the property at the end of 2014, 2015, 2016, 2017 and 2018, at the fair
market value of the real property at the time the landlord exercises the option,
provided that the purchase price will not be less than 10 times nor more than 15
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. We have a right of
first refusal in the event the landlord desires to sell the property at any time
during the lease term.
The Barbary Coast occupies approximately 1.8 acres at the intersection of
Flamingo Road and the Strip and occupies real property that we lease pursuant to
a lease dated May 1, 1993. The lease provides for rental payments of $175,000
per year during the initial term of the lease that expires on May 1, 2003. We
have given notice to the landlord of our intention to exercise the first of two
30-year options, with rental payments increasing to $190,000 per year during the
first ten years of the renewal period. We have an option to purchase the leased
property at any time during the six month period prior to the expiration of the
initial term of the lease, provided that certain conditions are met, at a
purchase price equal to the greater of $3.5 million or the then appraised value
of the real property. Should the landlord desire to sell the real property
during the initial term of the lease, we have a right of first refusal. We also
lease approximately 2.5 additional acres of real property located adjacent to
the Barbary Coast. The lease expires on December 31, 2003. The lease provides
for rental payments of $125,000 per annum. We use the 2.5-acre property as a
parking lot for our employees and for valet parking. The landlord has the right
to terminate the lease upon six months prior notice to us if it requires the use
of the property for its own business purposes (which excludes leaving the
property vacant or leasing it to third parties prior to January 1, 2003).
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 $25.0 million in the three months ended March 31, 2002 and $26.5 million in
the three months ended March 31, 2001.
Cash used in investing activities in the quarters ended March 31, 2002 and
2001 was $55.8 million and $3.8 million, respectively, and was primarily for
capital expenditures. Expenditures of approximately $13.2 million in the first
quarter of 2001, primarily for capital improvement projects at the Gold Coast,
The Orleans and the Suncoast, were offset in part by proceeds received from the
sale of assets, including the sale of approximately 29 acres of land in North
Las Vegas that had been held for possible future development.
Cash provided by financing activities was $23.5 million in the first
quarter of 2002 primarily from borrowings under our line of credit. Net proceeds
of $103.2 million from the issuance on March 19, 2002 of $100.0 million
principal amount of senior subordinated notes were used to repay borrowings
under the line of credit. In the first quarter of 2001, cash used in financing
activities was $8.4 million, primarily from borrowings under our credit facility
offset by our $50.0 million note issuance which was completed in February 2001.
Our primary cash requirements for the next twelve months include the
payment of principal and interest on our debt, maintenance capital expenditures,
the completion of the expansion and remodeling project at the Gold Coast and the
continued expansion of The Orleans (see Capital Expenditures below).
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 and
entered into a $75.0 million senior secured credit facility due 2004 to
facilitate a refinancing. Availability under the credit facility was increased
to $200.0 million in September 1999, subject to automatic reductions in
availability from September 2001 through June 2004, as described below. Coast
Resorts is a guarantor of the indebtedness under both of these debt agreements.
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 Coast Hotels' ratio of total debt to
EBITDA and can vary between 125 and 250 basis points. As of March 31, 2002, the
premium over LIBOR was 1.75% (175 basis points) and the interest rate was 3.65%.
For the quarter ended March 31, 2002, the weighted average interest rate for the
senior secured credit facility was 3.62%. Coast Hotels incurs a commitment fee,
payable quarterly in arrears, on the unused portion of the credit facility. This
variable fee is currently at a rate of 0.375% per annum times the average unused
portion of the facility.
The availability under the senior secured credit facility was reduced by
$6.0 million to $194.0 million on September 30, 2001, by $6.0 million to $188.0
million on December 31, 2001 and by $6.0 million to $182.0 million on March 31,
2002. It will be reduced by an additional $6.0 million on 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
March 31, 2002, we had $117.5 million of availability under the credit facility.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources (continued)
On February 2, 2001, we issued $50.0 million additional principal amount of
senior subordinated notes. The net proceeds of approximately $49.1 million were
used to reduce borrowings under our senior secured credit facility. On March 19,
2002, we issued $100.0 million additional principal amount of our senior
subordinated notes. The notes were issued at a premium and the net proceeds of
approximately $103.2 million were used to reduce borrowings under our senior
secured credit facility. As a result, we have additional availability under the
credit facility to complete our capital improvement projects described under
"Capital Expenditures" below. The notes that were issued in 2001 and 2002 were
issued under the same indenture and have the same terms, interest rate and
maturity date as our the $175.0 million principal amount of senior subordinated
notes issued in March 1999.
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. The agreement was
amended in December 2001 and in March 2002 to increase the amount of certain
capital expenditures that may be made. We are also subject to certain covenants
associated with the indenture governing our $325.0 million principal amount of
senior subordinated notes, including, in part, limitations on certain restricted
payments, the incurrence of additional indebtedness and asset sales. At March
31, 2002, we were in compliance with all covenants and required ratios.
On April 2, 2002, Coast Hotels entered into an interest rate swap agreement
with a member of Coast Hotels' bank group wherein $100.0 million notional amount
of Coast Hotels' fixed rate debt was converted to a floating rate. The fixed
rate paid to Coast Hotels is 5.77% and the floating rate paid to the bank is
based on six-month LIBOR and is set at 2.33% for the six months ending September
30, 2002. The floating rate will be adjusted on October 1, 2002 and will be
adjusted each April 1 and October 1 until the swap expires on April 1, 2009,
which is also the maturity date of the $325.0 million in senior subordinated
notes.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Expenditures
In January 2001, we commenced an expansion of The Orleans. The project has
an estimated cost of $150.0 million and is expected to be paid for with
operating cash flows and borrowings under our senior secured credit facility.
The expansion includes a special-events arena, a 600-room hotel tower, a
2600-car parking garage, six additional movie theaters, two restaurants, an
Irish pub and approximately 40,000 square feet of new gaming and public area.
Through March 31, 2002, we had completed the movie theaters, the parking garage,
the restaurants, Irish pub and the additional gaming and public area. We
anticipate that 2002 cash outlays for the project will total approximately $80.0
million, of which $33.2 million had been spent to in the quarter ended March 31,
2002.
In the fourth quarter of 2000, we commenced an expansion and remodel of the
Gold Coast. The project was originally designed to include a new, expanded
buffet restaurant, a sports bar, an Asian-themed restaurant, an Italian
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. In 2001 we expanded the scope of the project to include an
additional approximately 20,000 square feet of slot and table games area, a new
bingo room, an expanded porte-cochere, a parking garage and a moving walkway.
Through March 31, 2002, we had spent approximately $38.8 million and had opened
the multi-station buffet, the sports bar, the restaurants and 6,000 of the
16,000 square feet of additional meeting space and we had substantially
completed the redesign of the public areas. We expect to complete the project by
the fourth quarter of 2002 and to spend approximately $29.0 million in 2002, of
which $7.8 million had been expended in the quarter ended March 31, 2002.
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 $25.0 million in 2002.
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;
o delays in obtaining or inability to obtain all required licenses, permits
and authorizations; and
o disruption of our operations at our hotel-casinos by construction
activities.
We believe that existing cash balances, operating cash flow and available
borrowings under our credit facility will provide sufficient resources to meet
our debt and lease payment obligations and foreseeable capital expenditure
requirements at our hotel-casino properties.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other Matters
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 which 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 adoption of SFAS 141, SFAS 142 and SFAS 144 had no impact on our
financial position or results of operations. We do not expect the impact of the
adoption of SFAS 143 to be material to our financial position, results of
operations or cash flows.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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 uncertainties related to the cost and/or availability of electricity and
natural gas, and
o the impact on the travel and leisure industry, and Las Vegas in particular,
of any terrorist attack or threat of terrorist attack, and of the United
States' response to an attack or threat.
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.
19
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. On April 2,
2002, Coast Hotels entered into an interest rate swap agreement with a member of
the Company's bank group wherein $100.0 million notional amount of the Company's
fixed rate debt has been converted to a floating rate. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources".)
The table below provides information about our financial instruments that
are sensitive to changes in interest rates. For debt obligations, the table
presents notional amounts and weighted average interest rates by contractual
maturity dates for the twelve-month period ended March 31,:
Fair
2003 2004 2005 2006 2007 Thereafter Total Value(1)
-------- -------- -------- -------- -------- ---------- -------- --------
(dollars in thousands)
LIABILITIES
Short-term debt
Fixed rate................. $ 162 $ -- $ -- $ -- $ -- $ -- $ 162 $ 162
Average interest rate(2)... 9.50% -- -- -- -- -- 9.50% --
Long-term debt
Fixed rate................. $ -- $ 177 $ 3 $ 3 $ 3 $325,030 $325,216 $343,091
Average interest rate(2)... -- 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% --
Variable rate.............. $ -- $ -- $ 64,500 $ -- $ -- $ -- $ 64,500 $ 64,500
Average interest rate(2) -- -- 3.65% -- -- -- 3.65% --
<FN>
(1)The fair values are based on the borrowing rate currently available for debt
instruments with similar terms and maturities, and market quotes of our
publicly traded debt.
(2)Based upon contractual interest rates for fixed indebtedness or the LIBOR
rate at March 31, 2002 for variable rate indebtedness.
</FN>
20
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.
On March 9, 2002, Coast Hotels filed a Form 8-K dated March 8, 2002 under
Item 5, Other Events, with respect to the preliminary release of unaudited
fourth quarter results and the amendment of its senior secured credit
facility.
On March 22, 2002, Coast Hotels filed a Form 8-K dated March 21, 2002
under Item 5, Other Events, with respect to the March 19, 2002 issuance of
$100.0 million principal amount of 9 1/2% Senior Subordinated Notes due
2009.
21
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: May 15, 2002 COAST RESORTS, INC.,
a Nevada corporation
By: /s/ Gage Parrish
------------------------
Gage Parrish
Vice President and
Chief Financial Officer
22