SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 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 #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 Identification No.)
Incorporation or organization)
4500 West Tropicana Road, Las Vegas, Nevada 89103
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (702)365-7000
Securities Registered Pursuant To Section 12(B) of The Act: None
Securities Registered Pursuant To Section 12(G) of The Act: Common
Stock, $ .01 Par Value
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of the Registrant's Common Stock outstanding as of
March 29, 2002 was 1,461,177.94. The aggregate market value of the Common Stock
held by non-affiliates of the Registrant was $56,864,820 as of March 29, 2002.
COAST RESORTS, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2001
PAGE
----
PART I
Item 1. Business ................................................... 1
Item 2. Properties ................................................. 11
Item 3. Legal Proceedings .......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ........ 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................ 13
Item 6. Selected Historical Financial Data ......................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.. 26
Item 8. Financial Statements and Supplementary Data ................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 26
PART III
Item 10 Directors and Executive Officers of the Registrant ......... 27
Item 11. Executive Compensation ..................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................. 27
Item 13. Certain Relationships and Related Transactions ............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K ........................................................ 28
PART I
Item 1. Business
The Company
Coast Resorts, Inc. ("the Company" or "Coast Resorts") is a Nevada
corporation. Through our wholly owned subsidiary, Coast Hotels and Casinos, Inc.
("Coast Hotels"), we own and operate four Las Vegas hotel-casinos:
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 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 Barbary Coast Hotel and Casino, which opened in March 1979, is located
on the Las Vegas Strip.
The following chart provides certain information about our properties as of
December 31, 2001:
Casino Slots and
Hotel Square Video Gaming
Property Rooms Footage Poker Tables
- ------------- ----- ------- --------- ------
The Orleans.. 840 105,000 2,428 64
Gold Coast... 712 82,000 1,864 44
Suncoast..... 419 82,000 2,313 50
Barbary Coast 197 30,000 609 36
Our principal executive office is located at 4500 West Tropicana Road, Las
Vegas, Nevada 89103. The telephone number is (702) 365-7000.
Business and Marketing Strategy
Our business and marketing strategy is to attract gaming customers to our
casinos by offering consistently high quality gaming, hotel, entertainment and
dining experiences at affordable prices. We emphasize attracting and retaining
repeat customers. Our primary target market for The Orleans, the Gold Coast and
the Suncoast consists of value-oriented local middle-market customers who gamble
frequently. The Barbary Coast's customer base is primarily composed of visitors
to the Las Vegas area.
While a significant portion of our customers are local residents, the same
factors that appeal to local residents also appeal to visitors to Las Vegas,
including better odds on slot and video poker machines and lower minimum wager
limits on our table games than those traditionally found at Strip casinos. In
addition to the growing local resident market, Las Vegas is one of the fastest
growing entertainment markets in the United States.
1
Item 1. Business (continued)
Business and Marketing Strategy (continued)
We believe that the most important factors in successfully operating our
casinos are convenient locations with easy access, a friendly atmosphere, a
value-oriented approach and high quality entertainment and amenities.
Additionally, we offer Las Vegas visitors spacious, well-appointed and
competitively priced guest rooms.
o Convenient, Strategic Locations. The Orleans and the Gold Coast are easily
accessible and offer ample parking, providing our customers with convenient
alternatives to the congestion on the Strip. The Suncoast has a suburban
location conveniently located adjacent to the fast-growing Summerlin
master-planned community. The Barbary Coast is located on the corner of the
Strip and Flamingo Road.
o Friendly Atmosphere. A key element of our strategy is to provide patrons
with friendly, personal service that is designed to foster customer loyalty
and generate repeat business. Locals appreciate a friendly, casual gaming
environment where employees make them feel at home.
o Value. We offer value to our gaming patrons by providing slot and video
poker machines with better odds than those traditionally found at Strip
casinos. Locals' perception of value is also influenced by such things as
slot clubs that reward frequent play. We also offer value in our many
restaurants and bars, where patrons are served their favorite beverages and
generous portions of quality food at attractive prices.
o Entertainment, Movie Theaters and Amenities. We believe we compete
effectively with other locals-oriented casinos by offering amenities and
entertainment that our customers demand and that accentuate the perception
of value for our customers. Our properties offer a number of amenities that
generate significant foot traffic through our casinos, including movie
theaters, bowling centers, quality restaurants and a variety of musical
entertainment.
o Tourist Customers. Las Vegas is one of the fastest growing entertainment
markets in the United States. The same factors that appeal to local
residents also appeal to visitors to Las Vegas, including better odds and
lower minimum wager limits than those traditionally found at Strip casinos.
Additionally, our casinos are strategically situated to benefit from the
growing visitor market, with the Gold Coast and The Orleans each located
within two miles of the Strip and the Barbary Coast located at one of the
busiest corners on the Strip.
2
Item 1. Business (continued)
Casino Properties
The Orleans. The Orleans is strategically located on Tropicana Avenue, a
short distance from the Las Vegas Strip and McCarran International Airport. The
Orleans provides an upscale, off-Strip experience in an exciting New Orleans
French Quarter-themed environment.
The Orleans features an approximately 105,000 square foot casino, including
approximately 2,428 slot machines, 64 table games, a keno lounge, a poker parlor
and race and sports books. The Orleans has 840 hotel rooms, 18 "stadium seating"
first-run movie theaters, a 70-lane bowling center, approximately 40,000 square
feet of banquet and meeting facilities, including an approximately 17,000 square
foot grand ballroom, six full-service restaurants and a multi-station buffet,
specialty themed bars, a swimming pool, a barber shop, a beauty salon, a child
care facility, a video arcade and approximately 6,000 parking spaces. The
Orleans also includes an 850-seat showroom that features headliner entertainment
and other special events, allowing us to attract more tourists who would
otherwise gamble at Strip casinos.
In January 2001, we commenced an approximately $150.0 million expansion of
The Orleans. The project is expected to be paid for with operating cash flows
and borrowings under our senior secured credit facility and is expected to be
completed in phases through the second quarter of 2003. Featured in the
expansion are an additional 40,000 square feet of new gaming area and public
space, a multi-purpose special-events arena, an approximately 600-room hotel
tower, a 2,600-car parking garage, six additional movie theaters, two
restaurants and an Irish pub. Through December 31, 2001, we had spent
approximately $51.0 million and had opened the two restaurants, the Irish pub,
the movie theaters and a substantial portion of the parking garage. On March 8,
2002, we opened the additional 40,000 square feet of new gaming area and public
space.
Gold Coast. The Gold Coast is located on West Flamingo Road approximately
one mile west of the Las Vegas Strip and one-quarter mile west of Interstate 15,
the major highway linking Las Vegas and Southern California. Its strategic
location offers easy access from all four directions in the Las Vegas valley.
The Gold Coast features an approximately 82,000 square foot casino,
including approximately 1,864 slot machines, 44 table games, a keno lounge, a
160-seat race and sports book and a 700-seat bingo parlor. Our eleven-story
tower includes 712 hotel rooms and suites, a swimming pool and fitness center.
The Gold Coast features four full-service restaurants, a multi-station buffet
restaurant, a fast-food restaurant, a snack bar and an ice cream parlor.
Entertainment amenities include a 70-lane bowling center, approximately 16,000
square feet of banquet and meeting facilities, four bars, an entertainment
lounge and a showroom/dance hall featuring live musical entertainment. Other
amenities include a gift shop, a liquor store, a travel agency, an American
Express office, a Western Union office, a beauty salon, a barber shop, a child
care facility and approximately 3,000 parking spaces.
In the fourth quarter of 2000, we commenced an approximately $60.0 million
expansion and remodel of the Gold Coast. The project is expected to be paid for
with operating cash flows and borrowings under our senior secured credit
facility and is expected to be completed in phases through the third quarter of
2002. The expansion features a multi-station buffet, a sports bar, an
Asian-themed restaurant, an Italian restaurant, a parking garage and expanded
porte-cochere, 16,000 square feet of additional meeting space, 20,000 square
feet of new gaming area, a new bingo parlor, the conversion of our old bingo
parlor into a ballroom, the renovation of our standard hotel guest rooms and the
redesign of most of the Gold Coast's public areas. Through December 31, 2001, we
had spent approximately $31.0 million and had opened the multi-station buffet,
the sports bar, the two restaurants, 6,000-square feet of the 16,000 square feet
of additional meeting space and we had substantially completed the redesign of
the public areas.
3
Item 1. Business (continued)
Casino Properties (continued)
Suncoast. The Suncoast serves one of the fastest growing areas of the Las
Vegas valley and is located on approximately 50 acres in Peccole Ranch, a
master-planned community adjacent to Summerlin. The Suncoast is strategically
located at the intersection of Rampart Boulevard and Alta Drive, readily
accessible from most major points in Las Vegas, including downtown
(approximately eight miles) and the Strip (approximately nine miles).
The Suncoast is a Mediterranean-themed facility featuring approximately
82,000 square feet of casino space, including approximately 2,313 slot machines,
50 table games, a 150-seat race and sports book and a 600-seat bingo parlor. The
Suncoast has 419, including 216 rooms constructed in 2001, spacious hotel rooms
and suites, approximately 25,000 square feet of banquet and meeting facilities,
16 "stadium seating" movie theaters, four full-service restaurants, a
multi-station buffet restaurant, a 64-lane bowling center, a swimming pool and
approximately 6,000 parking spaces. In 2001, we spent approximately $15.5
million to add 216 new hotel rooms and a swimming pool and to expand the buffet
restaurant.
Barbary Coast. The Barbary Coast is located at the intersection of Flamingo
Road and Las Vegas Boulevard, one of the busiest intersections on the Strip,
along with Caesars Palace, Bally's Las Vegas and Bellagio. Historically, the
Barbary Coast has relied on foot traffic on the Las Vegas Strip for a
significant amount of its revenues. As a result, the Barbary Coast's primary
customer base is visitors to the Las Vegas area. In addition to its favorable
location on the Strip, the Barbary Coast has also benefited from its more
intimate gaming atmosphere, allowing it to develop a loyal base of table games
and slot customers.
The Barbary Coast features an approximately 30,000 square foot casino,
including approximately 609 slot machines, 36 table games, a race and sports
book and other amenities. Our eight-story tower includes 197 spacious rooms and
suites. The Barbary Coast is furnished and decorated in an elegant
turn-of-the-century Victorian theme and includes three bars and three
restaurants: Michael's gourmet restaurant, Drai's on the Strip (leased to and
operated by a third party) and the Victorian Room.
Gaming Security
Each of our casinos employs extensive supervision and accounting procedures
to control the handling of cash in their gaming operations. These measures
include security personnel, closed-circuit television observation of critical
areas of the casino, locked cash boxes, independent auditors and observers,
strict sign-in and sign-out procedures which ensure, to the extent practicable,
that gaming chips issued by, and returned to, the casino cashier's cages are
accurately accounted for, and procedures for the regular observation of gaming
employees. The accounting departments of each of our casinos, which employ
persons who have no involvement in the gaming operations, review on a daily
basis records compiled by gaming employees pertaining to cash flow and credit
extension. Moreover, regular periodic analysis of the results of our gaming
operations, including analyses of our compliance with the internal control
standards established by the Nevada State Gaming Control Board (the "Nevada
Board"), are performed by us and our independent auditors to detect significant
deviations from industry standards. Based on the results of these analyses,
management believes that its procedures are in compliance in all material
respects with the requirements established by the Nevada Gaming Commission (the
"Nevada Commission") and the Nevada Board.
4
Item 1. Business (continued)
Potential Future Developments
From time to time in our ordinary course of business we review proposals
for new developments, joint ventures and other strategic transactions. We cannot
assure you that any such new developments, ventures or transactions will be
pursued or, if pursued, will be successful.
Competition
There is intense competition among companies in the gaming industry. The
Orleans, the Gold Coast and the Suncoast compete primarily with Las Vegas
hotel-casinos and non-hotel gaming facilities that target local residents. Some
of these competitors have recently completed expansions or new projects,
including a hotel-casino recently opened adjacent to the Gold Coast.
Furthermore, there are several undeveloped properties in the immediate vicinity
of The Orleans, the Gold Coast and the Suncoast on which new gaming facilities
could be built. The construction of new properties and the expansion or
enhancement of existing properties near our hotel-casinos could have a negative
impact on our business.
In contrast to our other casinos, the Barbary Coast competes for customers
primarily with the hotel-casinos located on the Strip. The construction of new
properties and the expansion or enhancement of existing properties on the Strip
by competitors could materially adversely affect business and results of
operations of the Barbary Coast.
In addition, each of our properties competes, to a lesser extent, with all
other casinos and hotels in the Las Vegas area. A number of new hotel-casinos or
expansions have opened in Las Vegas over the last several years, and several new
hotel-casino projects and expansions have been announced or are under
construction in Las Vegas. This additional gaming and room capacity may have a
negative impact on our business.
We also compete with other legalized forms of gaming and gaming operations
in other parts of the state of Nevada and elsewhere. Certain states have
recently legalized, and several other states are currently considering
legalizing, casino gaming in designated areas. We also face competition from
casinos located on Native American reservations. We believe that the development
by Native Americans and other casino properties similar to those in Las Vegas in
areas close to Nevada, particularly California and Arizona, could have a
material adverse effect on our business and results of operations. California
law permits limited Las Vegas-style gaming activities to be conducted by
California Native American tribes. The governor has entered into compacts with
nearly 60 tribes that allow the tribes to operate slot and video poker machines,
banked card games and lotteries. An increase in gaming in California could have
a material adverse effect on our business and results of operations.
Employees
At December 31, 2001, we had approximately 7,147 employees. We have not
experienced any significant work stoppages and believe our labor relations are
good. The Las Vegas job market for qualified employees is very competitive.
Approximately 350 employees at the Barbary Coast are covered by a collective
bargaining agreement; none of our other employees are covered by a collective
bargaining agreement.
5
Item 1. Business (continued)
Nevada Regulation and Licensing
The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act"), and (ii) various local regulations.
Our gaming operations are subject to the licensing and regulatory control of the
Nevada Commission, the Nevada Board and the Clark County Liquor and Gaming
Licensing Board (the "Clark County Board"). The Nevada Commission, the Nevada
Board and the Clark County Board are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which seek to, among
other things, (i) prevent unsavory or unsuitable persons from having any direct
or indirect involvement with gaming at any time or in any capacity, (ii)
establish and maintain responsible accounting practices and procedures, (iii)
maintain effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada Gaming Authorities, (iv) prevent
cheating and fraudulent practices and (v) provide a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations
and procedures could have an adverse effect on our gaming operations.
Through our wholly owned subsidiary, we operate the Gold Coast, the Barbary
Coast, The Orleans and the Suncoast, and are licensed by the Nevada Gaming
Authorities. The gaming licenses require the periodic payment of fees and taxes
and are not transferable. Coast Resorts is registered with the Nevada Commission
as a publicly traded corporation (a "Registered Corporation") and has been found
suitable to own the stock of Coast Hotels. Coast Resorts, as a Registered
Corporation, and Coast Hotels, as a Corporate Licensee, are required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
request. No person may become a stockholder of, or receive any percentage of the
profits from, Coast Hotels without first obtaining licenses and approvals from
the Nevada Gaming Authorities. Coast Hotels and Coast Resorts have obtained from
the Nevada Gaming Authorities the various registrations, approvals, permits and
licenses required in order to engage in gaming activities at its hotel-casinos.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, Coast Hotels or Coast
Resorts in order to determine whether such individual is suitable or should be
licensed as a business associate of a Corporate Licensee or a Registered
Corporation. Officers, directors and certain key employees of Coast Hotels must
file applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of Coast Hotels who are actively and directly involved in
gaming activities may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause, which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
6
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
If the Nevada Gaming Authorities were to find an officer, director or key
employee of Coast Hotels or Coast Resorts unsuitable for licensing or unsuitable
to continue having a relationship with Coast Hotels or Coast Resorts, we would
have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company and Coast Hotels to terminate the employment
of any person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
Coast Hotels and Coast Resorts are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by Coast
Hotels must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Coast Hotels, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Coast Hotels, Coast Resorts and the persons involved could be subject
to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be appointed by
the Nevada Commission to operate our gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of our gaming properties) could be forfeited to
the State of Nevada. Limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect our gaming operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
a Registered Corporation's voting securities determined if the Nevada Commission
has reason to believe that such ownership would otherwise be inconsistent with
the declared policies of the State of Nevada. The applicant must pay all costs
of investigation incurred by the Nevada Gaming Authorities in conducting any
such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within 30 days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15% of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor will not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of a Registered Corporation, any change in a Registered Corporation's corporate
charter, bylaws, management, policies or operations, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making
7
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management policies or operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner if the owner, after request, fails to identify the
beneficial owner. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the voting securities of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. Coast Hotels is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with Coast Hotels or Coast
Resorts, we (i) pay that person any dividend or interest upon voting securities
of our company, (ii) allow that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pay
remuneration in any form to that person for services rendered or otherwise, or
(iv) fail to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities, including, if necessary, the immediate
purchase of such voting securities for cash at fair market value.
The Nevada Commission may, at its discretion, require the holder of any
debt security of a Corporate Licensee or a Registered Corporation to file
applications, be investigated and be found suitable to own the debt security. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Corporate Licensee or the
Registered Corporation can be sanctioned, including the loss of its licenses, if
without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction.
Coast Hotels is required to maintain a current stock ledger in Nevada,
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. Coast Hotels is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require our stock certificates to bear a legend
indicating that the securities are subject to the Nevada Act.
Licensed Corporations and Registered Corporations such as Coast Hotels and
Coast Resorts may not make public offering of their securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to require or extend obligations incurred for such purposes. The
Nevada Commission has previously granted exemptions from this prior approval
process for certain public offerings by Coast Hotels and Coast Resorts. Approval
of a public offering, if given, will not constitute a finding, recommendation or
approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
8
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and Nevada
Commission with respect to a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as a part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Licensed Corporations, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by a Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease at the discretion of the Nevada
Commission.
Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
9
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
Coast Hotels may pursue development opportunities in other jurisdictions
and expects that if it does so it will be subject to similar rigorous regulatory
standards in each other jurisdiction in which it seeks to conduct gaming
operations. There can be no assurance that regulations adopted, permits required
or taxes imposed, by other jurisdictions will permit profitable operations by
Coast Hotels in those jurisdictions.
Certain Forward-Looking Statements
This Form 10-K 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-K are forward-looking statements. In
addition, in those and other portions of this Form 10-K, the words
"anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends"
and similar expressions, as they relate to Coast Resorts or its management, are
intended to identify forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, and
have based these expectations on our beliefs as well as assumptions we have
made, such expectations may prove to be incorrect. Important factors that could
cause actual results to differ materially from such expectations are disclosed
in this Form 10-K, 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-K. We do not intend, and undertake no obligation,
to update these forward-looking statements.
10
Item 2. Properties
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.
We own the approximately 26 acres that the Gold Coast occupies on West
Flamingo Road. We also own an 8.33-acre site across the street from the Gold
Coast that contains an approximately 100,000 square foot warehouse. We use the
warehouse primarily as a storage facility.
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).
11
Item 3. Legal Proceedings
We are currently, and are from time to time, involved in litigation arising
in the ordinary course of our business. We are currently subject to lawsuits in
which the plaintiffs have sought punitive damages. We intend to continue to
defend the lawsuits vigorously. We do not believe that such litigation,
including the foregoing proceedings, will, individually or in the aggregate,
have a material adverse effect on our financial position, results of operations
or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our shareholders during the quarter ended
December 31, 2001.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
No equity securities of Coast Resorts are being, or have been, publicly
offered by us and there is no public trading market for our common stock. As of
March 29, 2002, Coast Resorts had 77 shareholders.
Coast Resorts was formed in September 1995 and has not declared or paid any
dividends. We intend to retain future earnings for use in the development of our
business and do not anticipate paying any cash dividends in the foreseeable
future. The payment of all dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. As a holding company, we are reliant upon the operations of Coast
Hotels for cash flow. The indenture under which our 9.5% senior subordinated
notes were issued and our senior secured credit facility (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" in Item 7) restrict the ability of Coast Hotels
to pay dividends or make other distributions to us. (See note 6 of "Notes to
Consolidated Financial Statements.")
13
Item 6. Selected Historical Financial Data
The following Selected Historical Financial Data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Form 10-K. The balance sheets and statements
of operations data as of and for each of the five years in the period ended
December 31, 2001 are derived from our audited consolidated financial statements
(except as indicated in footnote 1 to the following table). Our consolidated
financial statements as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001 are included in this report on Form
10-K. The historical results are not necessarily indicative of the results of
operations to be expected in the future.
Year Ended December 31,
-----------------------------------------------
1997(1) 1998(1) 1999(1) 2000(1) 2001(2)
--------- --------- --------- --------- ---------
(dollars in thousands)
STATEMENTS OF OPERATIONS
DATA:
Net revenues................. $292,360 $328,824 $358,324 $408,925 $517,984
Departmental operating
expenses(3)................ 195,677 205,610 216,082 237,796 295,036
General and administrative
expenses................... 52,526 54,926 60,480 69,443 91,558
Pre-opening expenses......... -- -- 235 6,161 --
Land leases.................. 4,220 4,280 3,770 3,396 5,060
Deferred rent................ 4,078 4,018 2,918 2,538 3,538
Depreciation and
amortization............... 18,278 20,607 21,613 25,375 36,549
--------- --------- --------- --------- ---------
Operating income............. 17,581 39,383 53,226 64,216 86,243
Interest expense, net(4)..... (25,225) (26,570) (21,441) (22,973) (29,182)
Other income (expense)....... 919 168 (192) (60) (1,815)
--------- --------- --------- --------- ---------
Income (loss) before
income taxes and
extraordinary item......... (6,725) 12,981 31,593 41,183 55,246
Provision for income taxes
(benefit).................. (2,115) 4,994 10,371 14,405 18,815
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item......... (4,610) 7,987 21,222 26,778 36,431
Extraordinary item - loss on
early retirement of debt,
net of applicable income tax
benefit ($14,543).......... -- -- (27,007) -- --
--------- --------- --------- --------- ---------
Net income (loss)............ $ (4,610) $ 7,987 $ (5,785) $ 26,778 $ 36,431
========= ========= ========= ========= =========
Basic income (loss) per
share of common stock before
extraordinary item........ $ (3.08) $ 5.34 $ 14.35 $ 18.20 $ 24.91
========= ========= ========= ========= =========
Diluted income (loss) per
share of common stock before
extraordinary item......... $ (3.08) $ 5.34 $ 14.35 $ 17.92 $ 24.32
========= ========= ========= ========= =========
Basic net income (loss) per
share of common stock...... $ (3.08) $ 5.34 $ (3.91) $ 18.20 $ 24.91
========= ========= ========= ========= =========
Diluted net income (loss)
per share of common stock.. $ (3.08) $ 5.34 $ (3.91) $ 17.92 $ 24.32
========= ========= ========= ========= =========
Basic weighted average
common shares outstanding.. 1,494,353 1,494,353 1,478,978 1,471,208 1,462,366
========= ========= ========= ========= =========
Diluted weighted average
common shares outstanding.. 1,494,353 1,494,353 1,478,978 1,494,066 1,497,781
========= ========= ========= ========= =========
See Footnotes to Selected Historical Financial Data.
14
Item 6. Selected Historical Financial Data (continued)
As of December 31,
------------------------------------------------
1997 1998 1999 2000(1) 2001
-------- -------- -------- -------- --------
(dollars in thousands)
Balance Sheet Data:
Cash and cash
equivalents............. $ 29,430 $ 41,598 $ 38,629 $ 43,560 $ 43,350
Total assets.............. $366,619 $366,827 $406,119 $567,199 $657,412
Total debt................ $215,249 $207,859 $237,239 $355,767 $369,524
Stockholder's equity...... $ 94,439 $102,426 $ 95,103 $120,301 $156,517
See Footnotes to Selected Historical Financial Data.
Footnotes to Selected Historical Financial Data
(1) Financial data for 1997, 1998, 1999 and 2000 has been restated to reflect
the reclassification of certain cash incentives of (dollars in thousands)
$1,523, $3,539, $4,207 and $10,602, respectively, in connection with the
adoption of Emerging Issues Task Force Issue 00-22 ("EITF 00-22"). The
adoption of EITF 00-22 had no effect on net income. See "Item 14 -
Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial
Statements Index - Notes to Financial Statements - Note 1 - Background
Information and Basis of Presentation - Basis of Presentation".
(2) The Suncoast opened September 2000.
(3) Includes casino, food and beverage, hotel and other expenses.
(4) Includes interest income of (dollars in thousands) $98 (1997), $695 (1998),
$450 (1999), $470 (2000) and $405 (2001) and capitalized interest of $1,016
(1997), $58 (1998), $612 (1999), $4,511 (2000) and $1,048 (2001).
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies and Estimates
We have identified the following critical accounting policies that affect
our more significant judgments and estimates used in the preparation of our
financial statements. The preparation of our financial statements in conformity
with accounting principles generally accepted in the United States of America
requires that we make estimates and judgments that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate those
estimates, including those related to asset impairment, accruals for slot
marketing points, self-insurance, compensation and related benefits, revenue
recognition, allowance for doubtful accounts, contingencies, and litigation.
These estimates are based on the information that is currently available to us
and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results could vary from those estimates under different
assumptions or conditions.
We believe that the following critical accounting policies affect
significant judgments and estimates used in the preparation of our financial
statements:
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. The Issue
requires that prior periods be restated. We previously recorded incentives
as an operating expense and have reclassified prior period amounts.
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 continually evaluating individual customer receivables,
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,
additional allowances may be required.
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 Effective January 1, 1999, pre-opening costs related to the construction of
new projects are expensed as incurred. Pre-opening costs were expensed
during the years ended December 31, 1999 and 2000, respectively, in
connection with the development of the Suncoast. There were no pre-opening
costs during the year ended December 31, 2001.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Critical Accounting Policies and Estimates (continued)
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.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial information regarding the results of our operations:
Year Ended December 31,
1999 2000 2001
--------- --------- ---------
(dollars in thousands)
Net operating revenues............. $ 358,324 $ 408,925 $ 517,984
Operating expenses................. 305,098 344,709 431,741
--------- --------- ---------
Operating income................... $ 53,266 $ 64,216 $ 86,243
========= ========= =========
Net income (loss).................. $ (5,785) $ 26,778 $ 36,431
========= ========= =========
EBITDA (1)......................... $ 77,992 $ 98,290 $ 126,330
========= ========= =========
Cash provided by operating
activities....................... $ 64,491 $ 64,837 $ 88,902
========= ========= =========
Cash used in investing activities.. $ (48,805) $(176,854) $(101,725)
========= ========= =========
Cash provided by (used in)
financing activities............ $ (18,655) $ 116,948 $ 12,613
========= ========= =========
- -------
(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
pre-opening expenses, gains and losses on disposal of assets and
extraordinary loss on retirement of debt). 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.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2001 Compared to 2000
Net revenues and operating income increased in the year ended December 31,
2001 due primarily to the strong performance of the Suncoast, which opened in
September 2000. Construction disruption at the Gold Coast and The Orleans, a
slowdown in tourist visitation to Las Vegas after the September 11, 2001
terrorist attacks, recessionary economic trends and competition from new
locals-oriented hotel-casinos resulted in decreases in revenues and operating
income at The Orleans, the Gold Coast and the Barbary Coast. Combined net
revenues in 2001 were $518.0 million compared to $408.9 million in 2000, an
increase of 26.7%. Operating income was $86.2 million in 2001 compared to $64.2
million in 2000, an increase of 34.3%. Operating expenses increased by 25.3%,
primarily as a result of the full year of operations at the Suncoast compared to
only three and one-half months of Suncoast operations in 2000. Net income in
2001 increased 36.0% to $36.4 million compared to $26.8 million in 2000 due to
the full-year results of the Suncoast.
Casino. Casino revenues were $387.5 million in 2001, an increase of 29.9%
over 2000 casino revenues of $298.4 million. The increase was primarily due to
the first full year of operations of the Suncoast. Construction disruption
during a remodeling project contributed to a 2.7% decline in gaming revenues at
the Gold Coast and the general slowdown in tourism after September 11
contributed to flat casino revenues at The Orleans and a 2.8% decline at the
Barbary Coast. Casino expenses increased by 27.0% primarily because of the
Suncoast, resulting in a casino operating margin of 55.0% in 2001 compared to
54.0% in 2000.
Food and Beverage. For the year ended December 31, 2001, gross food and
beverage revenues were $106.9 million, an increase of $22.1 million (26.1%) over
2000 revenues of $84.8 million, primarily due to the full year of operations at
the Suncoast, which was only open for three and one-half months in 2000. Food
and beverage expenses increased $15.7 million (25.3%), in line with the increase
in revenues.
Hotel. Gross hotel room revenues were $38.4 million in 2001, an increase of
$4.7 million (14.0%) over 2000 room revenues of $33.7 million. The increase was
due to a full year of operations of the Suncoast, which was only open for three
and one-half months in 2000, and the expansion of available rooms at the
Suncoast in September 2001 from 232 to 419. This more than offset a decline in
occupancy at all four properties after the terrorist attacks on September 11.
The average daily room rate increased to $59.05 in 2001 from $58.56 in 2000 due
to the higher room rates achieved by the Suncoast and increases at both The
Orleans and Gold Coast. Guest room occupancy levels declined from 93.0% in 2000
to 89.0% in 2001 as a result of the events of September 11 and generally lower
occupancy levels at the Gold Coast. Hotel expenses increased 9.3%, primarily due
to the full year of Suncoast operations.
Other. Other revenues increased 17.8% in 2001 to $36.7 million compared to
$31.2 million in 2000, due to the full year of operations at the Suncoast. Costs
related to the other revenues increased by 12.9% for the same reason.
General and Administrative. General and administrative expenses were $91.6
million in 2001 compared to $69.4 million in 2000, an increase of 31.9% due
primarily to the full year of operations at the Suncoast. General and
administrative expenses at the other properties increased $5.2 million or 8.8%
partly due to increased utility costs of $2.4 million.
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2001 Compared to 2000 (continued)
Pre-opening, Rent and Depreciation. There were no pre-opening expenses in
2001 compared to $6.2 million in 2000 due to the opening of the Suncoast in
September 2000. Land lease expense and the related deferred rent expense were
both higher in 2001 because the rent on the Suncoast land was capitalized during
construction until it opened on September 12, 2000. Depreciation and
amortization expense was higher in 2001 due primarily to a full year of
operations at the Suncoast.
Other Expenses. Other expenses were $31.0 million in 2001, an increase of
34.6% over 2000 other expenses of $23.0 million, due primarily to higher average
debt levels and lower capitalized interest in 2001.
Fiscal 2000 Compared to 1999
Net revenues and operating income increased in the year ended December 31,
2000, primarily due to improved slot revenues at The Orleans and the opening in
September 2000 of the Suncoast. Net revenues in 2000 were $408.9 million
compared to $358.3 million in 1999, an increase of 14.1%. Operating income was
$64.2 million in 2000 compared to $53.2 million in 1999, an increase of 20.6%.
Operating expenses increased by 13.0%, in line with the increased revenues.
Net income in 2000 was $26.8 million compared to a net loss in 1999 of $5.8
million. The net loss in the prior year was primarily due to a one-time charge
of $27.0 million, net of income tax benefit, as a result of the early retirement
of debt in March 1999. Despite increased long-term debt due to construction of
the Suncoast, net interest expense increased by only $1.5 million (7.2%) as a
result of $4.5 million of interest being capitalized and in 2000. Capitalized
interest was $612,000 in 1999.
Casino. Casino revenues were $298.4 million in 2000, an increase of 14.1%
over 1999 casino revenues of $261.5 million. The increase was primarily due to
improved slot revenues at The Orleans and the opening in September 2000 of the
Suncoast. Because of the improvement in high-margin slot revenues, casino
expenses increased only 7.9% contributing to an improved casino operating margin
of 54.0% in 2000 compared to 51.4% in 1999.
Food and Beverage. For the year ended December 31, 2000, gross food and
beverage revenues were $84.8 million, an increase of $12.1 million (16.6%) over
1999 revenues of $72.7 million. The increase was primarily due to increased
customer volume at The Orleans and the opening of the Suncoast. Food and
beverage expenses increased $11.1 million, in line with the increase in
revenues.
Hotel. Gross hotel room revenues were $33.7 million in 2000, an increase of
$3.4 million (11.3%) over 1999 room revenues of $30.3 million. The increase was
primarily due to the opening of the Suncoast and an increase in the average
daily room rate from $52.87 in 1999 to $58.56 in 2000 that was offset by a
slight decrease in room occupancy percentage from 94.2% in 1999 to 93.0% in
2000. The increase in hotel expenses was commensurate with the increase in
revenues.
Other. Other revenues increased 7.1% in 2000 to $31.2 million compared to
$29.1 million in 1999, primarily due to the opening of the Suncoast. Costs
related to the other revenues decreased slightly (1.2%).
General and Administrative. General and administrative expenses were $69.4
million in 2000 compared to $60.5 million in 1999, an increase of 14.8% due
primarily to related expenses of the Suncoast.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2000 Compared to 1999 (continued)
Pre-opening, Rent and Depreciation. Pre-opening expenses were $6.2 million
in 2000 compared to $235,000 in 1999 due to the opening of the Suncoast. Land
lease expense and the related deferred rent expense were both lower in 2000
because the rent on the Suncoast land was capitalized during the construction
period, July 1, 1999 to September 12, 2000. Depreciation and amortization
expense was higher in 2000 because of the opening of the Suncoast.
Aggregate Indebtedness and Fixed Payment Obligations
Our total long-term indebtedness and fixed payment obligations on the land
leases are summarized by year below:
2002 2003 2004 2005 2006 Thereafter
-------- -------- -------- -------- -------- --------
(dollars in thousands)
Long-Term Indebtedness
Senior subordinated notes(1)... $ -- $ -- $ -- $ -- $ -- $225,000
Bank credit facility(1)........ -- 25,000 119,000 -- -- --
Other.......................... 148 162 177 3 3 31
Fixed Payment Obligations
for Land Leases
Barbary Coast - land lease..... 175 185 190 190 190 5,303
Barbary Coast - parking lot.... 125 125 -- -- -- --
The Orleans - land lease....... 2,650 2,700 2,700 2,700 2,950 195,811
Suncoast - land lease.......... 2,420 2,480 2,540 2,600 2,660 203,840
-------- -------- -------- -------- -------- --------
Total Indebtedness and Fixed
Payment Obligations.............. $ 5,518 $ 30,652 $124,607 $ 5,493 $ 5,803 $629,985
======== ======== ======== ======== ======== ========
(1) This excludes the March 19, 2002 issuance of an additional $100.0 million
of senior subordinated notes and related repayment of $103.0 million on our
bank credit facility.
During the year ended December 31, 2001 our wholly owned subsidiary, Coast
Hotels made principal payments of $32.0 million net of borrowings on the senior
secured credit facility and $4.2 million in principal payments on other
long-term debt. Coast Hotels has debt service payments due aggregating $148,000
in 2002 on other long-term debt obligations.
Coast Hotels also has fixed payments obligations due during 2002 of $5.4
million. Total remaining fixed payment obligations under leases is $432.5
million. The fixed payment obligations represent payments due under operating
lease agreements primarily for land on which three of our properties are
located.
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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. See also Item 2, "Properties" for a discussion of our properties.
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).
21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 $88.9 million in the year ended December 31, 2001, compared to $64.8 million
in 2000 and $64.5 million in 1999.
Cash used in investing activities in each of the years ended December 31,
1999, 2000 and 2001 was primarily for capital expenditures. During 2001, our
capital expenditures were $141.6 million, including construction accounts
payable of $34.1 million. $30.9 million was used in the expansion and remodel of
the Gold Coast, approximately $51.0 million was used in the expansion of The
Orleans, approximately $7.4 million was used in other projects at The Orleans
and $15.5 million was used at the Suncoast to add 216 hotel rooms and a swimming
pool and to complete other various projects. $11.9 million was used to purchase
three contiguous parcels of land totaling approximately 55 acres for possible
future development. The remaining $24.9 million was used for maintenance capital
expenditures.
Cash provided by financing activities was $12.6 million in 2001. Proceeds
from the issuance in February 2001 of $50.0 million principal amount of senior
subordinated notes and from borrowings under our senior secured credit facility
were partially 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 notes issuance. Cash provided by financing
activities was $116.9 million in 2000, primarily from borrowings under our
senior secured credit facility, and cash used in financing activities was $18.7
million in 1999 primarily as a result of the refinancing of our debt. In March
1999, we issued $175.0 million principal amount of 9.5% senior subordinated
notes and entered into a $75.0 million senior secured credit facility due 2004
to facilitate the refinancing. The senior secured credit facility was increased
to $200.0 million in September 1999 to finance the construction of the Suncoast.
In 1999, with the proceeds from our $175.0 million principal amount of 9.5%
senior subordinated notes and borrowings under the senior secured credit
facility, we repurchased substantially all of the $175.0 million principal
amount outstanding of 13% first mortgage notes and all $16.8 million principal
amount of 10-7/8% first mortgage notes. In December 2000 we redeemed the
remaining 13% first mortgage notes. In connection with the 1999 repurchase of
the 13% notes and the 10-7/8% notes, we incurred repurchase premiums of $31.0
million and $2.1 million, respectively. The repurchase premiums and the
write-offs of unamortized debt issuance costs and original issue discount
resulted in an extraordinary loss in 1999 of $27.0 million, net of applicable
income tax benefit of $14.5 million.
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 its 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 $103.0 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 certain capital improvement projects as
further described 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 outstanding $225.0 million principal amount of senior subordinated
notes. We have entered into an interest rate swap agreement with a member of our
bank group such that $100.0 million principal amount of our fixed rate debt has
been converted to a floating rate based upon LIBOR.
22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The availability under the senior secured credit facility was reduced by
$6.0 million to $194.0 million on September 30, 2001 and by $6.0 million to
$188.0 million on December 31, 2001 and will be reduced by an additional $6.0
million on each of 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. Advances under the
facility may be used for working capital, general corporate purposes, and
certain improvements to our existing properties. As of March 19, 2002, after
completion of the $100.0 million offering and use of proceeds to repay debt
outstanding under the senior secured credit facility, we had $49.0 million
outstanding under the senior secured credit facility. Borrowings under the
senior secured 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 December 31, 2001, the premium over
LIBOR was 2.0% (200 basis points) and the interest rate was 3.93%. The weighted
average interest rate on the senior secured credit facility was 6.09% in 2001.
The loan agreement governing the senior secured 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 senior subordinated notes, including, in part, limitations on certain
restricted payments, the incurrence of additional indebtedness and asset sales.
The agreement was amended in December 2001 and in March 2002 to increase the
limitations on certain capital expenditures. At December 31, 2001, we were in
compliance with all covenants and required ratios.
Capital Improvement Projects
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
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. Through March 28, 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.
In the fourth quarter of 2000, we commenced an approximately $60.0 million
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. We expect to complete the project by the fourth quarter of
2002 and to spend approximately $29.0 million in 2002.
23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Capital Improvement Projects (continued)
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 senior secured credit facility will provide sufficient
resources to meet our debt and lease payment obligations and foreseeable capital
expenditure requirements at our hotel-casino properties.
...
Other Matters
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133") entitled "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific conditions are met, a derivative may be specifically
designated as a hedge of specific financial exposures. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and, if used in hedging activities, its effective use as a hedge.
SFAS 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after December 31, 2000. SFAS 133 should not be applied retroactively
to financial statements for prior periods. We adopted SFAS 133 on January 1,
2001 as required.
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.
24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Other Matters (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.
We are currently evaluating the provisions of SFAS 141, SFAS 142, SFAS 143
and SFAS 144 and we do not anticipate that the effects of these changes will
have an impact on our financial position or results of operations.
Impact of Inflation and Other Economic Factors
Absent changes in competitive and economic conditions or in specific prices
affecting the industry, we do not expect that inflation will have a significant
impact on our operations. Change in specific prices, such as fuel and
transportation prices, relative to the general rate of inflation may have a
material adverse effect on the hotel and casino industry. We depend upon Las
Vegas and Southern California for a majority of our customers. Any economic
downturn in those areas could materially adversely affect our business and
results of operations and our ability to pay interest and principal on our debt.
Regulation and Taxes
Coast Hotels is subject to extensive regulation by the Nevada Gaming
Authorities. Changes in applicable laws or regulations could have a significant
impact on our operations.
The gaming industry represents a significant source of tax revenues,
particularly to the State of Nevada and its counties and municipalities. From
time to time, various state and federal legislators and officials have proposed
changes in tax law, or in the administration of such law, affecting the gaming
industry. Proposals in recent years that have not been enacted included a
federal gaming tax and increases in state or local taxes.
We believe that our recorded tax balances are adequate. However, it is not
possible to determine with certainty the likelihood of possible changes in tax
law or in the administration of such law. Such changes, if adopted, could have a
material adverse effect on our operating results.
25
Item 7A. 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 bank credit facility. Through December 31, 2001,
we had not invested in derivative- or foreign currency-based financial
instruments.
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:
Fair
2002 2003 2004 2005 2006 Thereafter Total Value(1)
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
LIABILITIES
Short-term debt
Fixed rate....... $ 148 $ -- $ -- $ -- $ -- $ -- $ 148 $ 148
Average interest
rate(2)........ 9.50% -- -- -- -- -- 9.50%
Long-term debt
Fixed rate....... $ -- $ 162 $ 177 $ 3 $ 3 $225,031 $225,376 $216,129
Average interest
rate(2)........ -- 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
Variable rate.... $ -- $ 25,000 $119,000 $ -- $ -- $ -- $144,000 $144,000
Average interest
rate(2)........ -- 3.93% 3.93% -- -- -- 3.93%
(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 December 31, 2001 for variable rate indebtedness.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources" and
see "Item 14 - Exhibits, Financial Statement Schedules and Reports on Form
8-K - Financial Statements Index - Notes to Financial Statements - Note 6 -
Long-Term Debt".
Item 8. Financial Statements and Supplementary Data
The report of independent accountants, financial statements and financial
statement schedule listed in the accompanying index are filed as part of this
report. See "Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K - Financial Statements, Financial Statement Schedules, and Exhibits".
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
Information in response to Item 10 is incorporated by reference from our
definitive proxy statement to be filed in connection with our 2002 Annual
Meeting of Stockholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
Information in response to Item 11 is incorporated by reference from our
definitive proxy statement to be filed in connection with our 2002 Annual
Meeting of Stockholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to Item 12 is incorporated by reference from our
definitive proxy statement to be filed in connection with our 2002 Annual
Meeting of Stockholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Information in response to Item 13 is incorporated by reference from our
definitive proxy statement to be filed in connection with our 2002 Annual
Meeting of Stockholders pursuant to Instruction G(3) of Form 10-K.
27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
PAGE
----
1. Financial Statements Index................................. F-1
2. Financial Statement Schedule Index:
Schedule I - Condensed Financial Information of Coast
Resorts, Inc. (Parent Company Only)........................ F-26
Schedule II - Valuation and Qualifying Accounts............ F-30
28
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of Coast Hotels and Casinos,
Inc. (5)
3.2 First Amended Bylaws of Coast Hotels and Casinos, Inc. (5)
3.3 Articles of Incorporation of Coast Resorts, Inc. (1)
3.4 First Amended Bylaws of Coast Resorts, Inc. (1)
4.1 Indenture dated as of March 23, 1999 among Coast Hotels and
Casinos, Inc., as issuer of 9-1/2% Senior Subordinated Notes
due 2009, Coast Resorts, Inc., as guarantor, and Firstar Bank
of Minnesota, N.A., as trustee (8)
4.2 First Supplemental Indenture dated as of November 20, 2000
among Coast Hotels and Casinos, Inc., as issuer, Coast
Resorts, Inc., as guarantor, and Firstar Bank of Minnesota,
N.A., as trustee (11)
4.3 Second Supplemental Indenture dated as of February 2, 2001,
among Coast Hotels and Casinos, Inc., as issuer, Coast
Resorts, Inc., as guarantor, and Firstar Bank of Minnesota,
N.A., as trustee (11)
4.4 Third Supplemental Indenture dated as of March 19, 2002, among
Coast Hotels and Casinos, Inc., as issuer, Coast Resorts,
Inc., as guarantor, and U.S. Bank, N.A., as trustee (12)
4.5 Form of 9-1/2% Note (included in Exhibit 4.1) (10)
10.1 Tax Sharing Agreement dated as of January 30, 1996 by and
among Coast Resorts, Inc., Coast Hotels and Casinos, Inc., and
Coast West, Inc. (4)
10.2 Ground Lease dated as of October 1, 1995, between The Tiberti Company,
a Nevada general partnership, and Coast Hotels and Casinos, Inc. (as
successor of Gold Coast Hotel and Casino, a Nevada limited partnership)
(3)
10.3 Lease Agreement dated May 1, 1992, by and between Empey Enterprises, a
Nevada general partnership, as lessor, and the Barbary Coast Hotel &
Casino, a Nevada general partnership, as lessee (1)
10.4 Ground Lease Agreement dated October 28, 1994 by and among 21 Stars,
Ltd., a Nevada limited liability company, as landlord, Barbary Coast
Hotel & Casino, a Nevada general partnership, as tenant, Wanda Peccole,
as successor trustee of the Peccole 1982 Trust dated February 15, 1982
("Trust), and The William Peter and Wanda Ruth Peccole Family Limited
Partnership, a Nevada limited partnership ("Partnership"), and,
together with Trust, as owner, as amended (1)
10.5 Form of Subordination Agreement between Coast Hotels and
Casinos, Inc. and certain former Gold Coast partners holding
Subordinated Notes (4)
10.6 Lease dated as of November 1, 1982, by and between Nevada Power
Company, a Nevada Corporation as landlord, and Barbary Coast Hotel and
Casino, a Nevada general partnership (1)
10.7 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated February 13, 1991, by and between the Barbary Coast Hotel and
Casino, a Nevada general partnership, First American Title Company of
Nevada, and Exber, Inc., a Nevada corporation (1)
10.8 Amended and Restated Loan Agreement dated as of September 16,
1999 among Coast Hotels and Casinos, Inc. as Borrower, the
Lenders referred to therein, and Bank of America National
Trust and Savings Association as Administrative Agent (9)
10.9 Security Agreement dated as of March 18, 1999 by Coast Hotels
and Casinos, Inc. in favor of Bank of American National Trust
and Savings Association as Administrative Agent (10)
29
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index (continued)
10.10 Security Agreement dated as of March 18, 1999 by Coast Resorts,
Inc. in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.11 Pledge Agreement dated as of September 1999 by Coast Resorts,
Inc. in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.12 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Orleans Hotel and Casino) (10)
10.13 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Gold Coast Hotel and Casino) (10)
10.14 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Suncoast) (10)
10.15 Guaranty dated March 18, 1999 by Coast Resorts, Inc. in favor
of Bank of America National Trust and Savings Association as
Administrative Agent
10.16 Trademark Security Interest Assignment dated as of March 18,
1999 by Coast Hotels and Casinos, Inc. and Coast Resorts, Inc.
in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.17 Registration Rights Agreement dated as of February 2, 2001,
among Coast Hotels and Casinos, Inc. as issuer, Coast Resorts,
Inc., as guarantor, and Banc of America Securities, LLC, as
Representative of the Placement Agents (11)
10.18 Registration Rights Agreement dated as of March 19, 2002, among
Coast Hotels and Casinos, Inc. as issuer, Coast Resorts, Inc.,
as guarantor, and Banc of America Securities, LLC, as
Representative of the Placement Agents (12)
10.19 Placement Agreement dated as of January 23, 2001, by and among
Coast Hotels and Casinos, Inc., Coast Resorts, Inc., Banc of
America Securities LLC and Morgan Stanley & Co. Incorporated
(11)
10.20 Placement Agreement dated as of March 11, 2002, by and among
Coast Hotels and Casinos, Inc., Coast Resorts, Inc., Banc of
America Securities LLC and Morgan Stanley & Co. Incorporated
(12)
10.21 Amendment No. 1 to the Amended and Restated Loan Agreement
dated as of December 1, 2001.
10.22 Amendment No. 2 to the Amended and Restated Loan Agreement
dated as of March 8, 2002.
21 List of Subsidiary of Coast Resorts, Inc. (8)
- -------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s General Form for Registration of Securities on
Form 10 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Amendment No. 1 to General Form for Registration
of Securities on Form 10 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Amendment No. 2 to General Form for Registration
of Securities on Form 10 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Annual Report on Form 10-K for the period ended
December 31, 1995 and incorporated herein by reference.
30
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index (continued)
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Registration Statement on Form S-4 filed May 2,
1996 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Annual Report on Form 10-K for the period ended
December 31, 1998 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Hotels and Casinos, Inc.'s Registration Statement on Form S-4
(File no. 333-79657) dated May 28, 1999 and incorporated herein by
reference.
(9) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Hotels and Casinos, Inc.'s Annual Report on Form 10-K for the
period ended December 31, 1999 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Hotels and Casinos, Inc.'s Registration Statement on Form S-4
(File no. 333-55170) dated February 7, 2001 and incorporated herein by
reference.
(12) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Hotels and Casinos, Inc.'s Form 8-K (File no. 333-04356) dated
March 21, 2002 and incorporated herein by reference.
(b) Reports on Form 8-K
On October 6, 2001, the Company filed a Form 8-K dated October 5, 2001
under Item 5, Other Events, with respect to the its participation in a live
audio webcast to discuss the effects of the September 11, 2001 terrorist
attacks.
31
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of Nevada, on
March 29, 2002.
COAST RESORTS, INC.
By: /s/ MICHAEL J. GAUGHAN
---------------------------------------
Michael J. Gaughan,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ------------------------------------ --------------
/s/ MICHAEL J. GAUGHAN Chairman of the Board of Directors April 1, 2002
- ------------------------ and Chief Executive Officer -------------
Michael J. Gaughan (Principal Executive Officer)
and Director
/s/ GAGE PARRISH Director and Chief Financial Officer April 1, 2002
- ------------------------ (Principal Financial and -------------
Gage Parrish Accounting Officer)
/s/ HARLAN D. BRAATEN Director April 1, 2002
- ------------------------ -------------
Harlan D. Braaten
/s/ JERRY HERBST Director April 1, 2002
- ------------------------ -------------
Jerry Herbst
/s/ J. TITO TIBERTI Director April 1, 2002
- ------------------------ -------------
J. Tito Tiberti
/s/ CHARLES SILVERMAN Director April 1, 2002
- ------------------------ -------------
Charles Silverman
/s/ F. MICHAEL CORRIGAN Director April 1, 2002
- ------------------------ -------------
F. Michael Corrigan
/s/ JOSEPH A. BLASCO Director April 1, 2002
- ------------------------ -------------
Joseph A. Blasco
/s/ FRANKLIN TOTI Director April 1, 2002
- ------------------------ -------------
Franklin Toti
32
Index to Consolidated Financial Statements
COAST RESORTS, INC. AND SUBSIDIARY
PAGE
-----
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets of Coast Resorts, Inc. and Subsidiary
as of December 31, 2000 and 2001....................................... F-3
Consolidated Statements of Operations of Coast Resorts, Inc. and
Subsidiary for the years ended December 31, 1999, 2000 and 2001........ F-4
Consolidated Statements of Stockholders' Equity of Coast Resorts, Inc.
and Subsidiary for the years ended December 31, 1999, 2000 and 2001... F-5
Consolidated Statements of Cash Flows of Coast Resorts, Inc. and
Subsidiary for the years ended December 31, 1999, 2000 and 2001....... F-6
Notes to Consolidated Financial Statements........................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of Coast Resorts, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Coast
Resorts, Inc. and Subsidiary as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 5, 2002, except for Note 6
as to which the date is March 19, 2002
F-2
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(dollars in thousands, except share data)
2000 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 43,560 $ 43,350
Accounts receivable, less allowance for doubtful
accounts $713 (2000) and $873 (2001)............ 5,658 6,371
Inventories....................................... 7,220 7,327
Prepaid expenses.................................. 7,526 7,305
Other current assets.............................. 9,538 5,707
-------- --------
TOTAL CURRENT ASSETS............................ 73,502 70,060
PROPERTY AND EQUIPMENT, net........................ 485,925 579,545
OTHER ASSETS....................................... 7,772 7,807
-------- --------
$567,199 $657,412
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 16,308 $ 13,138
Accrued liabilities............................... 38,208 41,061
Construction accounts payable..................... 4,868 34,053
Current portion of long-term debt................. 2,430 148
-------- --------
TOTAL CURRENT LIABILITIES....................... 61,814 88,400
LONG-TERM DEBT, less current portion................ 353,337 369,376
DEFERRED INCOME TAXES............................... 11,417 19,251
DEFERRED RENT....................................... 20,330 23,868
-------- --------
TOTAL LIABILITIES............................... 446,898 500,895
-------- --------
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, 1,463,178 (2000) and 1,461,178 (2001)
shares issued and outstanding................... 15 15
Treasury stock.................................... (3,118) (3,333)
Additional paid-in capital........................ 95,398 95,398
Retained earnings................................. 28,006 64,437
-------- --------
TOTAL STOCKHOLDERS' EQUITY............ 120,301 156,517
-------- --------
$567,199 $657,412
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999, 2000 and 2001 (dollars in
thousands, except share data)
1999 2000 2001
--------- --------- ---------
OPERATING REVENUES:
Casino................................... $ 261,546 $ 298,421 $ 387,513
Food and beverage........................ 72,697 84,752 106,898
Hotel.................................... 30,296 33,711 38,446
Other.................................... 29,110 31,183 36,740
--------- --------- ---------
GROSS OPERATING REVENUES.............. 393,649 448,067 569,597
Less: promotional allowances............. (35,325) (39,142) (51,613)
--------- --------- ---------
NET OPERATING REVENUES................ 358,324 408,925 517,984
--------- --------- ---------
OPERATING EXPENSES:
Casino................................... 127,195 137,195 174,236
Food and beverage........................ 50,923 62,063 77,785
Hotel.................................... 12,923 13,788 15,071
Other.................................... 25,041 24,750 27,944
General and administrative............... 60,480 69,443 91,558
Pre-opening expenses..................... 235 6,161 --
Land leases.............................. 3,770 3,396 5,060
Deferred rent............................ 2,918 2,538 3,538
Depreciation and amortization............ 21,613 25,375 36,549
--------- --------- ---------
TOTAL OPERATING EXPENSES.............. 305,098 344,709 431,741
--------- --------- ---------
OPERATING INCOME...................... 53,226 64,216 86,243
--------- --------- ---------
OTHER INCOME (EXPENSES):
Interest expense......................... (22,503) (27,954) (30,635)
Interest income.......................... 450 470 405
Interest capitalized..................... 612 4,511 1,048
Loss on disposal of assets............... (192) (60) (1,815)
--------- --------- ---------
TOTAL OTHER INCOME (EXPENSES)......... (21,633) (23,033) (30,997)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM.......................... 31,593 41,183 55,246
PROVISION FOR INCOME TAXES.................... 10,371 14,405 18,815
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM.............. 21,222 26,778 36,431
EXTRAORDINARY ITEM - loss on early
retirement of debt, net of applicable
income tax benefit ($14,543)................ (27,007) -- --
--------- --------- ---------
NET INCOME (LOSS) ............................ $ (5,785) $ 26,778 $ 36,431
========= ========= =========
Basic income per share of common stock
before extraordinary item................... $ 14.35 $ 18.20 $ 24.91
========= ========= =========
Diluted income per share of common stock
before extraordinary item................... $ 14.35 $ 17.92 $ 24.32
========= ========= =========
Basic net income (loss) per share of
common stock................................ $ (3.91) $ 18.20 $ 24.91
========= ========= =========
Diluted net income (loss) per share of
common stock................................ $ (3.91) $ 17.92 $ 24.32
========= ========= =========
Basic weighted average shares outstanding..... 1,478,978 1,471,208 1,462,366
========= ========= =========
Diluted weighted average shares outstanding... 1,478,978 1,494,066 1,497,781
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
COAST RESORTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1999, 2000 and 2001
(dollars in thousands)
Common Stock
--------------- Additional Treasury Retained
Shares Amount Paid-In Cap Stock Earnings Total
--------- ------ ----------- --------- -------- --------
Balances at December 31, 1998... 1,494,353 $ 15 $ 95,398 $ 7,013 $ -- $102,426
Repurchase of common stock.... (15,375) -- -- -- (1,538) (1,538)
Net loss...................... -- -- -- (5,785) -- (5,785)
--------- ------ ----------- --------- -------- --------
Balances at December 31, 1999... 1,478,978 15 95,398 1,228 (1,538) 95,103
Repurchase of common stock.... (15,800) -- -- -- (1,580) (1,580)
Net income.................... -- -- -- 26,778 -- 26,778
--------- ------ ----------- --------- -------- --------
Balances at December 31, 2000... 1,463,178 15 95,398 28,006 (3,118) 120,301
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
========= ====== =========== ========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
COAST RESORTS, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999, 2000 and 2001
(dollars in thousands)
1999 2000 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (5,785) $ 26,778 $ 36,431
-------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization................ 21,613 25,375 36,549
Provision for bad debts...................... 248 129 (160)
Loss on early retirement of debt............. 41,550 -- --
Loss on disposal of equipment................ 192 60 1,815
Deferred rent................................ 3,708 3,598 3,538
Deferred income taxes........................ (3,099) 7,543 7,389
Amortization of debt offering costs.......... 124 1,053 1,226
(Increase) decrease in operating assets:
Accounts receivable........................ (159) (1,317) (873)
Refundable income taxes.................... (870) (5,005) 3,831
Inventories................................ (569) (1,739) (107)
Prepaid expenses and other assets.......... (117) (1,635) (420)
Increase (decrease) in operating liabilities:
Accounts payable........................... 1,850 4,570 (3,170)
Accrued liabilities........................ 5,805 5,427 2,853
-------- -------- --------
TOTAL ADJUSTMENTS........................ 70,276 38,059 52,471
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 64,491 64,837 88,902
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of amounts in
accounts payable............................. (49,242) (176,956) (112,178)
Proceeds from sale of assets................... 437 102 10,453
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.... (48,805) (176,854) (101,725)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of issuance costs........................ 167,808 -- 49,071
Early retirement of debt....................... (223,017) -- --
Principal payments on long-term debt........... (15,545) (2,472) (4,243)
Repurchase of common stock..................... (1,538) (1,580) (215)
Proceeds from borrowings under bank line of
credit, net of financing costs.............. 67,637 131,600 36,000
Repayments of borrowings under bank
line of credit.............................. (14,000) (10,600) (68,000)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................... (18,655) 116,948 12,613
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (2,969) 4,931 (210)
CASH AND CASH EQUIVALENTS, at beginning of year.. 41,598 38,629 43,560
-------- -------- --------
CASH AND CASH EQUIVALENTS, at end of year........ $ 38,629 $ 43,560 $ 43,350
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Background Information and Basis of Presentation
Background Information
Coast Resorts, Inc. (the "Company" or "Coast Resorts") is a Nevada
corporation and serves as a holding company for Coast Hotels and Casinos, Inc.
("Coast Hotels"), also a Nevada corporation. Through its wholly owned
subsidiary, Coast Hotels, the Company owns and operates the following
hotel-casinos in Las Vegas, Nevada:
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 western Las Vegas
valley. The Suncoast opened September 12, 2000.
o Barbary Coast Hotel and Casino, which is located on the Las Vegas Strip.
On July 21, 1998, the Company contributed the capital stock of Coast West
to Coast Hotels, as a result of which Coast West became a wholly owned
subsidiary of Coast Hotels. In March 1999, Coast West was merged into Coast
Hotels.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries through March 23, 1999, the date on which Coast West was
contributed to Coast Hotels. The financial statements include the accounts of
the Company and Coast Hotels and, from July 21, 1998 through March 23, 1999, its
subsidiary, Coast West. All intercompany balances and transactions have been
eliminated for all periods presented.
Effective January 1, 2001, the Company 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. The Issue requires that prior periods be restated. The Company
previously recorded incentives as an operating expense and has reclassified
prior period amounts of $4,207,000 (1999) and $10,602,000 (2000). There is no
effect on previously reported net income.
F-7
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies
Inventories
Inventories, which consist primarily of food and beverage, liquor store,
and gift shop merchandise, are valued at the lower of cost or market value
(which is determined using the first-in, first-out and the average cost methods)
except for the base stocks of bar glassware and restaurant china which are
stated at original cost with subsequent replacements charged to expense.
Original Issue Discount and Debt Issue Costs
Original issue discount is amortized over the life of the related
indebtedness using the effective interest method. Costs associated with the
issuance of debt are deferred and amortized over the life of the related
indebtedness also using the effective interest method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized, and expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the accounts
and the resulting gain or loss is included in income. Depreciation is computed
by the straight-line method over the estimated useful lives of property and
equipment, which range from 5 to 15 years for equipment and 25 to 40 years for
buildings and improvements.
During construction, the Company capitalizes interest and other direct and
indirect development costs. Interest is capitalized monthly by applying the
effective interest rate on certain borrowings to the average balance of
expenditures. The interest that was capitalized was $612,000 (1999), $4,511,000
(2000) and $1,048,000 (2001).
Pre-opening and Related Promotional Expense
Prior to January 1, 1999, costs associated with the opening of new
hotel-casinos or major additions to an existing hotel-casino, including
personnel, training, certain marketing and other costs, were capitalized and
charged to expense over management's estimate of the period of economic benefit
associated with such costs. Management believes that such period, with respect
to major hotel-casinos, is within one fiscal quarter of the date of opening.
Effective January 1, 1999, pre-opening costs are expensed as incurred.
Pre-opening costs of $235,000 and $6,161,000 were expensed during the years
ended December 31, 1999 and 2000, respectively, in connection with the
development of the Suncoast. There were no pre-opening costs during the year
ended December 31, 2001.
F-8
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
warrant such a review. The carrying value of a long-lived or intangible asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost to dispose.
Advertising Costs
Costs for advertising are expensed as incurred, except costs for
direct-response advertising, which are capitalized and amortized over the period
of the related program which normally does not exceed two to three months.
Direct-response advertising costs consist primarily of mailing costs associated
with direct mail programs. Capitalized advertising costs were immaterial at
December 31, 1999, 2000 and 2001. Advertising expense was approximately $5.4
million, $6.5 million and $8.3 million for the years ended December 31, 1999,
2000 and 2001, respectively.
Casino Revenue
In accordance with common industry practice, the Company recognizes as
casino revenue the net win from gaming activities which is the difference
between amounts wagered and amounts paid to winning patrons.
Deferred 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.
Progressive Jackpot Payouts
The Company has a number of progressive slot machines, progressive poker
games and a progressive keno game. As coins are played on the progressive slot
machines, the amount available to win increases, to be paid out when the
appropriate jackpot is hit. The keno game and poker game payouts also increases
with the amount of play, to be paid out when hit. In accordance with common
industry practice, the Company has recorded the progressive jackpot as a
liability with a corresponding charge against casino revenue.
F-9
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies (continued)
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 years ended December 31,
1999, 2000 and 2001:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Complimentary revenues: (in thousands)
Food and beverage.......... $ 29,369 $ 32,242 $ 42,294
Hotel...................... 4,736 5,157 6,657
Other...................... 1,220 1,743 2,662
-------- -------- --------
Promotional allowances... $ 35,325 $ 39,142 $ 51,613
======== ======== ========
The estimated cost of providing these complimentary services is as follows
for the years ended December 31, 1999, 2000 and 2001:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Hotel......................... $ 2,167 $ 2,199 $ 2,789
Food and beverage............. 28,593 32,044 43,348
-------- -------- --------
$ 30,760 $ 34,243 $ 46,137
======== ======== ========
The cost of promotional allowances has been allocated to expense as follows
for the years ended December 31, 1999, 2000 and 2001:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Casino....................... $ 28,106 $ 32,052 $ 43,834
Other........................ 2,654 2,191 2,303
-------- -------- --------
$ 30,760 $ 34,243 $ 46,137
======== ======== ========
Slot Club Promotion
Coast Resorts has established promotional slot clubs to encourage repeat
business from frequent and active slot customers. Members in the clubs earn
points based on slot activity accumulated in the members' account. Points can be
redeemed for certain consumer products (typically household appliances), travel,
food and beverage and cash. The Company accrues for slot club points expected to
be redeemed in the future based on the average cost of items expected to be
redeemed.
F-10
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies (continued)
Income Taxes
Coast Resorts accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents
Coast Resorts considers all highly liquid investments with a remaining
maturity at acquisition of three months or less to be cash equivalents. Cash in
excess of daily requirements is typically invested in U.S. Government-backed
repurchase agreements with maturities of 30 days or less. Such investments are
generally made with major financial institutions having a high credit rating. At
times, the Company's cash deposited in financial institutions may be in excess
of federally insured limits. These instruments are stated at cost, which
approximates fair value because of their short maturity.
Net Income (Loss) Per Common Share
Basic earnings per share is computed based on weighted average shares
outstanding while diluted earnings per share reflects the additional dilution
for all potential dilutive securities, such as stock options and warrants.
Short-term Investments
Short-term investments purchased with an original maturity of over three
months but less than one year are stated at cost, which approximates fair value
because of their short maturity. There were no short-term investments at
December 31, 2000 or 2001.
Concentration of Credit Risk
The Company extends credit to patrons after background checks and
investigations of creditworthiness and does not require collateral. The Company
has a concentration of credit risk in Southern Nevada. The Company records
provisions for potential credit losses and such losses have been within
management's expectations. Management believes that as of December 31, 2001, no
significant concentration of credit risk exists for which an allowance has not
already been determined and recorded.
F-11
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, management evaluates those estimates,
including those related to asset impairment, accruals for slot marketing points,
self-insurance, compensation and related benefits, revenue recognition,
allowance for doubtful accounts, contingencies, and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Stock Options
The Financial Accounting Standards Board has issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). This Statement
defines a fair value based method of accounting for an employee stock option in
which companies account for stock options by recognizing, as compensation
expense in the statement of operations, the fair value of stock options granted
over the vesting period of the option. The statement also permits companies to
continue accounting for stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company
has elected to account for stock options under APB No. 25 and to disclose the
pro forma impact on net income and earning per share as if the Company had used
the fair value method recommended by SFAS No. 123.
Reclassifications
Certain amounts in the 1999 and 2000 financial statements have been
reclassified to conform with the 2001 presentation.
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133") entitled "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific conditions are met, a derivative may be specifically
designated as a hedge of specific financial exposures. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and, if used in hedging activities, its effective use as a hedge.
SFAS 133 as amended is effective for all fiscal quarters of fiscal years
beginning after December 31, 2000. SFAS 133 is not applied retroactively to
financial statements for prior periods. The Company adopted SFAS 133 on January
1, 2001 as required.
F-12
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Summary of Significant Accounting Policies (continued)
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.
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 it does not anticipate that the effects of these
changes will have an impact on its financial position or results of operations.
NOTE 3 -- Property and Equipment
Major classes of property and equipment consist of the following as of
December 31, 2000 and 2001:
December 31,
2000 2001
-------- --------
(in thousands)
Building........................ $371,142 $401,325
Furniture and fixtures.......... 231,643 267,847
-------- --------
602,785 669,172
Less accumulated depreciation... (138,014) (157,870)
-------- --------
464,771 511,302
Land............................ 15,232 20,651
Construction in progress........ 5,922 47,592
-------- --------
Net property and equipment...... $485,925 $579,545
======== ========
F-13
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--Leases
The Barbary Coast building is located on land that is leased. The initial
lease term runs through May 2003, and the Company has notified the landlord of
its intention to exercise the first of two 30-year renewal options. In addition,
the parking lot adjacent to the building is being leased under a 10-year lease
that runs through January 2003. The annual rental payments under these leases
will total $300,000 in 2002 and $310,000 in 2003.
During December 1995, Coast Hotels entered into a ground lease for the land
underlying The Orleans. The land is owned by The Tiberti Company, a Nevada
general partnership, of which a stockholder of Coast Resorts is the managing
partner. The stockholder is also the president and a director and stockholder of
the general contractor for the construction of The Orleans and the Suncoast, as
more fully described in Note 10. The lease provides for an initial term of fifty
years with a twenty-five year renewal option and includes a purchase option,
exercisable by Coast Hotels, at fair market value during the twentieth and
twenty-first years of the lease. Lease payments range from $175,000 to $250,000
per month during the first sixteen years of the lease increasing by 3% per annum
thereafter. The total amount of the base rent payments on The Orleans lease is
being charged to expense on the straight-line method over the term of the lease.
Coast Hotels has recorded deferred rent to reflect the excess of rent expense
over cash payments since the inception of the lease.
The Suncoast lease was entered into in September 1995 for a parcel of land
located in the western area of Las Vegas to be used for future development
opportunities. The Suncoast lease term runs through December 31, 2055, with
three 10-year renewal options. Monthly payments started at $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 lease includes a put option exercisable by
the landlord requiring the purchase of the land at fair market value at the end
of the 20th through 24th years of the lease, provided that the purchase price
shall not be less than ten times, nor more than fifteen times, the annual rent
at such time. Based on the terms of the lease, the potential purchase price
commitment ranges from approximately $31,000,000 to approximately $51,000,000 in
the years 2014 through 2018. The total amount of the base rent payments on the
Suncoast lease are being charged to expense (or capitalized during the
construction period) on the straight-line method over the term of the lease. The
Company has recorded deferred rent to reflect the excess of rent expense over
cash payments since the inception of the lease.
F-14
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--Leases (continued)
Future Minimum Lease Payments
The following is an annual schedule of future minimum cash lease payments
required under operating leases that have initial or remaining noncancelable
terms in excess of one year as of December 31, 2001:
Operating Leases
Year Ending December 31, Payments
- -------------------------------- --------
(in thousands)
2002............................ $ 5,370
2003............................ 5,490
2004............................ 5,430
2005............................ 5,490
2006............................ 5,800
Later years..................... 404,954
--------
Total minimum lease payments.... $432,534
========
NOTE 5 -- Accrued Liabilities
Rent Expense
Rent expense for the years ended December 31, 1999, 2000 and 2001 is as
follows:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Occupancy rentals... $ 6,688 $ 5,934 $ 8,598
Other equipment..... 120 146 42
-------- -------- --------
$ 6,808 $ 6,080 $ 8,640
======== ======== ========
Major classes of accrued liabilities consist of the following as of
December 31, 2000 and 2001:
December 31,
------------------
2000 2001
-------- --------
(in thousands)
Slot club liability.................... $ 7,293 $ 6,806
Compensation and benefits.............. 12,651 14,284
Progressive jackpot payouts............ 4,532 4,687
Customer deposits and unpaid winners... 5,594 5,366
Deferred sports book revenue........... 1,500 1,488
Taxes.................................. 911 983
Accrued interest expense............... 4,364 5,400
Outstanding chip and token liability... 948 1,645
Other.................................. 415 402
-------- --------
$ 38,208 $ 41,061
======== ========
F-15
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -- Long-Term Debt
Long-term debt consists of the following as of December 31, 2000 and 2001:
December 31,
------------------
2000 2001
-------- --------
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
uncollateralizedand are payable to the former
partners of Barbary Coast and Gold Coast................ $ 1,975 $ --
Non-related parties:
9.5% senior subordinated notes due April 2009, with
interest payable semiannually on April 1 and
October 1............................................... 175,000 225,000
Senior secured credit facility due September 2004,
collateralized by substantially all of the assets
of Coast Hotels and Casinos, Inc........................ 176,000 144,000
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....................................... 659 524
-------- --------
355,767 369,524
Less: current portion..................................... 2,430 148
-------- --------
$353,337 $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. Coast Resorts is a
guarantor of the indebtedness under both of these debt agreements. Borrowings
under the credit facility bear interest, at Coast Hotel's 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 December 31, 2001,
the premium over LIBOR was 2.0% (200 basis points) and the interest rate was
3.93%. For the year ended December 31, 2001, the weighted average interest rate
for the senior secured credit facility was 6.09%. Coast Hotels incurs a
commitment fee, payable quarterly in arrears, on the unused portion of the
credit facility. This variable fee is currently at the maximum rate of 0.5% per
annum times the average unused portion of the facility.
F-16
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--Long-Term Debt (continued)
The availability under the senior secured credit facility was reduced by
$6.0 million to $194.0 million on September 30, 2001 and by $6.0 million to
$188.0 million on December 31, 2001 and will be reduced by an additional $6.0
million on each of 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 initial advance
of $47.0 million under the credit facility was used in connection with the
repurchase of the 13% first mortgage notes and the 10-7/8% first mortgage notes
and is more fully described below. Subsequent advances under the credit facility
may be used for working capital, general corporate purposes, construction of the
Suncoast, and certain improvements to The Orleans, the Gold Coast and the
Barbary Coast. As of December 31, 2001, Coast Hotels had $44.0 million of
availability under the credit facility.
In 1999, with the proceeds from the issuance of $175.0 million principal
amount of 9.5% senior subordinated notes and borrowings under the credit
facility, Coast Hotels repurchased substantially all of the $175.0 million
principal amount outstanding of 13% first mortgage notes. The remaining
approximately $2.0 million in principal amount of the 13% first mortgage notes
was redeemed on December 15, 2000 at a redemption price of 106.5% of the
principal amount, plus any accrued and unpaid interest. In connection with the
repurchase of the 13% notes and the 10-7/8% notes, Coast Hotels incurred
repurchase premiums of $31.0 million and $2.1 million, respectively.
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. 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. The
agreement was amended in December 2001 and in March 2002 to increase the
limitations of the Company to make certain capital expenditures. Management
believes that, at December 31, 2001 Coast Hotels was in compliance with all
covenants and required ratios.
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 its senior secured credit facility.
On March 19, 2002 Coast Hotels issued $100.0 million additional principal amount
of senior subordinated notes. The net proceeds were used to reduce borrowings
under its senior secured credit facility by $103.0 million. As a result, Coast
Hotels has additional availability 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 Company's $175.0 million
principal amount of senior subordinated notes issued in 1999. Coast Hotels has
entered into an interest rate swap agreement with a member of the Company's bank
group such that $100.0 million of the Company's fixed rate debt has been
converted to a floating rate based upon LIBOR.
F-17
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--Long-Term Debt (continued)
Maturities on long-term debt are as follows:
Year Ending December 31, Maturities
- ------------------------ ----------
(in thousands)
2002.................... $ 148
2003.................... 25,162
2004.................... 119,177
2005.................... 3
2006.................... 3
Thereafter.............. 225,031
--------
$369,524
========
NOTE 7--Income Taxes
The components of the income tax provision (benefit) for the years ended
December 31, 1999, 2000 and 2001 were as follows:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Federal: (in thousands)
Current......... $ (1,073) $ 6,862 $ 11,426
Deferred........ (3,099) 7,543 7,389
-------- -------- --------
$ (4,172) $ 14,405 $ 18,815
======== ======== ========
The income tax provision (benefit) before consideration of the
extraordinary loss for the years ended December 31, 1999, 2000 and 2001 differs
from that computed at the federal statutory corporate tax rate as follows:
December 31,
------------------------
1999 2000 2001
------ ------ ------
Federal statutory rate... 35.0% 35.0% 35.0%
Other.................... (2.2%) -- (0.9%)
------ ------ ------
Effective tax rate....... 32.8% 35.0% 34.1%
====== ====== ======
F-18
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--Income Taxes (continued)
The tax effects of significant temporary differences representing net
deferred tax assets and liabilities at December 31, 2000 and 2001 are as
follows:
December 31,
------------------
2000 2001
-------- --------
(in thousands)
Deferred tax assets:
Current:
Accrued vacation..................... $ 887 $ 1,302
Allowance for doubtful accounts...... 319 323
Accrued slot club points............. 120 27
Progressive liabilities.............. 1,060 1,072
Accrued medical and other benefits... 567 674
-------- --------
Total current...................... 2,953 3,398
-------- --------
Non-current:
FICA, alternative minimum
tax and other tax credits.......... 583 --
Deferred rent........................ 7,116 8,354
-------- --------
Total non-current.................. 7,699 8,354
-------- --------
Total deferred tax assets................ 10,652 11,752
-------- --------
Deferred tax liabilities:
Non-current:
Property, plant and equipment........ (19,116) (27,605)
-------- --------
Total deferred tax liabilities..... (19,116) (27,605)
-------- --------
Net deferred tax liability............... $ (8,464) $(15,853)
======== ========
NOTE 8 -- Fair Value of Financial Instruments
The following estimated fair values of Coast Hotels' financial instruments
have been determined by the Company using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair values
due to the short-term maturities of these instruments. The carrying amounts and
estimated fair values of the Company's other financial instruments at December
31, 2000 and 2001 are as follows:
December 31,
--------------------------------------
2000 2001
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands) (in thousands)
Liabilities:
Current portion of long-term debt... $ 2,430 $ 2,430 $ 148 $ 148
======== ======== ======== ========
Senior secured credit facility...... $176,000 $176,000 $144,000 $144,000
======== ======== ======== ========
9.5% senior subordinated notes...... $175,000 $168,438 $225,000 $215,753
======== ======== ======== ========
Other long-term debt................ $ 2,337 $ 2,508 $ 376 $ 376
======== ======== ======== ========
F-19
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- Fair Value of Financial Instruments (continued)
For the current portion of long-term debt, the carrying amount approximates
fair value due to the short-term nature of such debt. The carrying amount on the
senior secured credit facility is a reasonable estimate of fair value because
this debt is carried with a floating interest rate. The fair value of the 9.5%
senior subordinated notes was determined based upon market quotes. For all other
long-term debt, the fair value is estimated using a discounted cash flow
analysis, based on the incremental borrowing rates currently available to the
Company for debt with similar terms and maturity.
NOTE 9 -- Commitments and Contingencies
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
The Company has commenced certain capital improvement projects at the Gold
Coast and The Orleans for which budgeted expenditures are estimated to total
approximately $210.0 million. The Company anticipates the projects will be
completed in phases during 2002 and 2003.
NOTE 10 -- Related Party Transactions
Coast Hotels' advertising services are provided by LGT Advertising, a
company owned by several stockholders of Coast Resorts. LGT purchases
advertising for Coast Hotels from third parties and passes along any discounts
they receive. LGT and its owners receive no compensation or profit for these
services, as Coast Hotels is invoiced for actual costs incurred. Advertising
expense paid to LGT amounted to approximately $5.4 million, $6.5 million and
$8.3 million for the years ended December 31, 1999, 2000 and 2001, respectively.
Coast Hotels purchases certain of its equipment and inventory for its
operations from RJS, a company owned by the father of a major stockholder and
director of Coast Resorts and a director and officer of Coast Hotels and the
Company's restaurant manager. RJS invoices Coast Hotels based on actual costs
incurred. For the fiscal years ended December 31, 1999, 2000 and 2001, Coast
Hotels incurred expenses payable to RJS of approximately $2.1 million, $6.5
million and $2.7 million, respectively.
Coast Hotels purchases wallboards and parlay cards for its race and sports
books from Nevada Wallboards, Inc. A major stockholder and director of Coast
Resorts and a director and officer of Coast Hotels is the majority stockholder
of Nevada Wallboards, Inc. For the fiscal years ended December 31, 1999, 2000
and 2001, the Company incurred expenses payable to Nevada Wallboards of
approximately $180,000, $192,000 and $252,000, respectively.
A director of the Company is the president and sole stockholder of
Yates-Silverman, Inc. which was retained by the Company as the designer of The
Orleans and the Suncoast. For the fiscal years ended December 31, 1999, 2000 and
2001, Coast Hotels incurred expenses payable to Yates-Silverman of approximately
$721,000, $548,000 and $947,000, respectively.
F-20
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- Related Party Transactions (continued)
Coast Hotels maintains numerous racetrack dissemination contracts with Las
Vegas Dissemination, Inc. ("LVDC"). The son of a major stockholder and director
of Coast Resorts and a director and officer of Coast Hotels is the president and
sole shareholder of LVDC. LVDC has been granted a license by the Nevada gaming
authorities to disseminate live racing for those events and tracks for which it
contracts and has been granted the exclusive right to disseminate all
pari-mutuel services and race wire services in the State of Nevada. Under these
dissemination contracts, Coast Hotels pays to LVDC an amount based on the wagers
accepted for races held at the racetracks covered by the respective contracts.
Coast Hotels also pays to LVDC a monthly fee for race wire services. For the
fiscal years ended December 31, 1999, 2000 and 2001, Coast Hotels incurred
expenses payable to LVDC of approximately $1.3 million, $1.6 million and $1.4
million, respectively.
J.A. Tiberti Construction Company ("Tiberti Construction") has served as
the general contractor for the original construction of the Gold Coast and for
certain expansions thereof, for the original construction of the Barbary Coast
and all expansions thereof and for the original construction and Phase II
expansion of The Orleans. Tiberti Construction is also the general contractor
for the construction of the Suncoast. The president of Tiberti Construction is a
stockholder and director of Coast Resorts and a director of Coast Hotels. For
the years ended December 31, 1999, 2000 and 2001, the Company paid approximately
$27.9 million, $108.5 million and $63.4 million, respectively, to Tiberti
Construction in connection with such construction services.
As more fully described in Note 4, Coast Hotels is a party to a ground
lease with the Tiberti Company with respect to the land underlying The Orleans.
The president of The Tiberti Company is a director and stockholder of Coast
Resorts. Amounts paid to the Tiberti Company with respect to the lease were $2.4
million per year for the fiscal years ended December 31, 1999, 2000 and 2001.
For the years ended December 31, 1999, 2000 and 2001, Coast Hotels spent
$300,000, $180,000 and $332,000, respectively, to promote The Orleans by
advertising on a racecar operated by the son of a major shareholder of Coast
Resorts.
The foregoing transactions are believed to be on terms no less favorable to
the Company than could have been obtained from unaffiliated third parties and
were approved by a majority of the disinterested directors.
NOTE 11 -- Benefit Plans
401(k) Plans
Coast Hotels offers separate defined contribution 401(k) plans for eligible
employees. All employees of the Gold Coast, The Orleans and the Suncoast, and
all employees of the Barbary Coast not covered by a collective bargaining
agreement, are eligible to participate. The employees may elect to defer up to
15% of their yearly compensation, subject to statutory limits. Coast Hotels
makes matching contributions of 50% of the first 6% of the employees'
contributions. Contribution expense was $1.1 million, $1.6 million and $1.7
million for the years ended December 31, 1999, 2000 and 2001, respectively.
F-21
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 -- Benefit Plans (continued)
Defined Benefit Plan
Certain employees at the Barbary Coast are covered by a union-sponsored,
collectively bargained, multi-employer, defined benefit pension plan. The
Barbary Coast contributed $310,000, $309,000 and $303,000 during the years ended
December 31, 1999, 2000 and 2001, respectively, to the plan. These contributions
are determined in accordance with the provisions of negotiated labor contracts
and generally are based on the number of hours worked.
Stock Incentive Plan
In December 1996, the Board of Directors adopted the 1996 Stock Incentive
Plan (the "Plan") which authorizes the issuance of (i) shares of Coast Resorts
Common Stock or any other class of security of the Company which is convertible
into shares of Coast Resorts Common Stock or (ii) a right or interest with an
exercise or conversion privilege at a price related to Coast Resorts Common
Stock or with a value derived from the value of such common stock. Awards under
the Plan are not restricted to any specified form or structure and may include,
without limitation, sales or bonuses of stock, restricted stock, stock options,
reload stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation rights,
limited stock appreciation rights, phantom stock, dividend equivalents,
performance units or performance shares. Officers, key employees, directors
(whether employee directors or non-employee directors) and consultants of the
Company and its subsidiary are eligible to participate in the Plan.
Under the terms of the Plan, the aggregate number of shares issued and
issuable pursuant to all awards (including all incentive stock options) granted
under the Plan shall not exceed 220,000 at any time. In addition, the aggregate
number of shares subject to awards granted during any calendar year to any one
eligible person (including the number of shares involved in awards having a
value derived from the value of shares) shall not exceed 40,000.
No awards may be made under the Plan after the tenth anniversary of the
adoption of the Plan. Although shares may be issued after the tenth anniversary
of the adoption of the Plan pursuant to awards made prior to such date, no
shares may issued under the Plan after the twentieth anniversary of adoption of
the Plan.
Effective January 1, 1999, the Company issued options to purchase 30,415
shares of its common stock to its chief operating officer. The options are fully
vested at December 31, 2001. The options expire on December 31, 2008. Effective
June 14, 1999, the Company issued options to purchase 5,000 shares of its common
stock to its chief financial officer. The options are fully vested at December
31, 2001. The exercise price on the options is at $100 per share, which is
equivalent to the estimated fair value of the Company's common stock at the
grant date, as estimated by the Company from recent sales of common stock
between shareholders. The options expire on June 13, 2009.
F-22
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 -- Benefit Plans (continued)
Stock Incentive Plan (continued)
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its stock option plan under the fair-value-based method of that Statement. The
fair value for these options was estimated at the date of grant using the
minimum value method (which is appropriate for valuing options of companies
without publicly traded stock) with the following weighted-average assumptions:
risk-free rate of return of approximately 5.0%, expected life of the options of
5 years and a 0% dividend yield. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized over the respective vesting
periods of the options. For fiscal 1999, the pro forma net loss would have been
$6,013,000, and for fiscal 2000 and 2001 the pro forma net income would have
been $26,531,000 and $36,184,000, respectively. The pro forma net loss per
common share for fiscal 1999 would have been $4.07. The fully diluted pro forma
net income per common share would have been $17.76 and $24.16 for fiscal 2000
and 2001, respectively.
NOTE 12 - Treasury Stock
In May 1999, the Company's board of directors authorized the potential
repurchase of up to 50,000 shares of common stock from stockholders at a maximum
aggregate repurchase price of $5.0 million. In August 2001, the board of
directors increased the maximum aggregate repurchase price to $5.5 million. As
of December 31, 2001, the Company had repurchased a total of 33,175 shares of
common stock from shareholders at a total purchase price of $3.3 million.
NOTE 13 -- Supplemental Cash Flows Information
For the years ended December 31, 1999, 2000 and 2001 supplemental cash
flows information amounts are as follows:
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Interest paid............................ $ 19,387 $ 27,913 $ 29,599
======= ======== ========
Income taxes paid........................ $ -- $ 12,600 $ 14,446
======= ======== ========
Supplemental schedule of non-cash
investing and financing activities:
Property and equipment acquisitions
included in accounts payable or
financed through notes payable......... $ 8,304 $ 4,868 $ 34,053
======== ======== ========
F-23
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- Regulation of Gaming Operations
The gaming operations of the Company are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the Nevada Commission), the
Nevada State Gaming Control Board (the Nevada Control Board) and the Clark
County Liquor and Gaming Board (the Clark County Board) (collectively, the
Nevada Gaming Authorities). These agencies issue gaming licenses based upon,
among other considerations, evidence that the character and reputation of
principal owners, officers, directors, and certain other key employees are
consistent with regulatory goals. The necessary licenses have been secured by
the Company. The licenses are not transferable and must be renewed periodically
upon the payment of appropriate taxes and license fees. The Nevada Gaming
Authorities have broad discretion with regard to the renewal of the licenses
which may at any time revoke, suspend, condition, limit or restrict a license
for any cause deemed reasonable by the issuing agency. Officers, directors and
key employees of the Company must be approved by the Nevada Control Board and
licensed by the Nevada Commission and Clark County Board.
NOTE 15 - Net Income (Loss) Per Common Share
The computations of basic net income (loss) per common share and diluted
net income (loss) per common share for the years ended December 31, 1999, 2000
and 2001, are as follows (in thousands, except share and per share data):
Year Ended December 31,
-------------------------------
1999 2000 2001
--------- --------- ---------
Net income (loss) applicable to
computations......................... $ (5,785) $ 26,778 $ 36,431
Weighted-average common shares ========= ========= =========
applicable to net income (loss)
per common share................... 1,478,978 1,471,208 1,462,366
Effect of dilutive securities:
Stock option incremental shares.... -- 22,858 35,415
--------- --------- ---------
Weighted-average common shares
applicable to net income per
common share, assuming dilution.... 1,478,978 1,494,066 1,497,781
========= ========= =========
Basic net income (loss) per share of
common stock......................... $ (3.91) $ 18.20 $ 24.91
========= ========= =========
Diluted net income (loss) per share
of common stock...................... $ (3.91) $ 17.92 $ 24.32
========= ========= =========
F-24
COAST RESORTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- Quarterly Financial Information (Unaudited)
The following unaudited information shows selected items (in thousands,
except per share data), for each quarter in the years ended December 31, 2000
and 2001:
2000
------------------------------------------------
First Second Third Fourth Year
-------- -------- -------- -------- --------
Gross revenues........ $107,950 $ 99,476 $105,684 $134,957 $448,067
Less promotional
allowances.......... (9,364) (8,729) (9,240) (11,809) (39,142)
-------- -------- -------- -------- --------
Net revenues........ 98,586 90,747 96,444 123,148 408,925
-------- -------- -------- -------- --------
Operating income.... 20,751 15,143 10,365 17,957 64,216
-------- -------- -------- -------- --------
Net income ......... $ 10,638 $ 7,000 $ 3,135 $ 6,005 $ 26,778
======== ======== ======== ======== ========
Basic net income per
share............... $ 7.19 $ 4.73 $ 2.14 $ 4.14 $ 18.20
======== ======== ======== ======== ========
Diluted net income
per share........... $ 7.12 $ 4.68 $ 2.10 $ 4.02 $ 17.92
======== ======== ======== ======== ========
2001
------------------------------------------------
First Second Third Fourth Year
-------- -------- -------- -------- --------
Gross revenues........ $140,145 $139,086 $140,983 $149,383 $569,597
Less promotional
allowances.......... (12,597) (12,391) (12,817) (13,808) (51,613)
-------- -------- -------- -------- --------
Net revenues........ 127,548 126,695 128,166 135,575 517,984
-------- -------- -------- -------- --------
Operating income.... 22,665 19,905 20,082 23,591 86,243
-------- -------- -------- -------- --------
Net income ......... $ 10,659 7,026 8,730 10,016 36,431
======== ======== ======== ======== ========
Basic net income per
share............... $ 7.28 $ 4.80 $ 5.97 $ 6.86 $ 24.91
======== ======== ======== ======== ========
Diluted net income
per share........... $ 7.11 $ 4.69 $ 5.83 $ 6.69 $ 24.32
======== ======== ======== ======== ========
F-25
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULES
To the Directors and Stockholders of Coast Resorts, Inc. and Subsidiary
Our audits of the consolidated financial statements referred to in our opinion
dated February 5, 2002, except for Note 6 as to which the date is March 19,
2002, appearing in this Annual Report on Form 10-K of Coast Resorts, Inc. also
included an audit of the financial statement schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 5, 2002
F-26
SCHEDULE I
COAST RESORTS, INC.
CONDENSED FINANCIAL INFORMATION OF THE COMPANY
The following condensed financial statements reflect the parent company
(Coast Resorts, Inc.) only, accounting for its wholly owned subsidiary on the
equity method of accounting. All footnote disclosures have been omitted since
the information has been included in the Company's consolidated financial
statements included elsewhere in this Form 10-K.
COAST RESORTS, INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
December 31, 2000 and 2001
(dollars in thousands, except share data)
2000 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ -- $ 3
Refundable income taxes............... 5,875 1,603
Other current assets.................. -- --
-------- --------
TOTAL CURRENT ASSETS................ 5,875 1,606
INVESTMENT IN SUBSIDIARY................ 124,107 160,585
-------- --------
$129,982 $162,191
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to Coast Hotels................... $ 9,464 $ 5,464
Accrued liabilities................... 217 210
-------- --------
TOTAL CURRENT LIABILITIES........... 9,681 5,674
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
500,000 shares authorized,
none issued and outstanding......... -- --
Common stock, $.01 par value,
2,000,000 shares authorized,1,463,178
(2000) and 1,461,178 (2001) shares
issued and outstanding............. 15 15
Treasury stock........................ (3,118) (3,333)
Additional paid-in capital............ 95,398 95,398
Retained earnings..................... 28,006 64,437
-------- --------
TOTAL STOCKHOLDERS' EQUITY........ 120,301 156,517
-------- --------
$129,982 $162,191
======== ========
F-27
SCHEDULE I
COAST RESORTS, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999, 2000 and 2001
(dollars in thousands)
1999 2000 2001
-------- --------- ---------
Equity interest in income (loss)
from subsidiary....................... $ (5,761) $ 26,950 $ 36,478
General and administrative expenses... (35) (35) (47)
-------- --------- ---------
Income (loss) before income taxes..... (5,796) 26,915 36,431
Income tax provision (benefit)........ (11) 137 --
--------- --------- ---------
NET INCOME (LOSS)..................... $ (5,785) $ 26,778 $ 36,431
======== ========= =========
Basic net income (loss) per share of
common stock........................ $ (3.91) $ 18.20 $ 24.91
========= ========= =========
Diluted net income (loss) per share of
common stock........................ $ (3.91) $ 17.92 $ 24.32
========= ========= =========
Basic weighted average common
shares outstanding.................. 1,478,978 1,471,208 1,462,366
========= ========= =========
Diluted weighted average common
shares outstanding.................... 1,478,978 1,494,066 1,497,781
========= ========= =========
F-28
SCHEDULE I
COAST RESORTS, INC.
(Parent Company Only)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 2000, and 2001
(dollars in thousands)
Common Stock
---------------- Additional Treasury Retained
Shares Amount Paid-In Cap Stock Earnings Total
--------- ------ ----------- -------- -------- --------
Balances at December 31, 1998... 1,494,353 $ 15 $ 95,398 $ 7,013 $ -- $102,426
Repurchase of common stock.... (15,375) -- -- -- (1,538) (1,538)
Net loss...................... -- -- -- (5,785) -- (5,785)
--------- ------ ----------- -------- -------- --------
Balances at December 31, 1999... 1,478,978 15 95,398 1,228 (1,538) 95,103
Repurchase of common stock.... (15,800) -- -- -- (1,580) (1,580)
Net income.................... -- -- -- 26,778 -- 26,778
--------- ------ ----------- -------- -------- --------
Balances at December 31, 2000... 1,463,178 15 95,398 28,006 (3,118) 120,301
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
========= ====== =========== ======== ======== ========
F-29
SCHEDULE I
COAST RESORTS, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999, 2000 and 2001
(dollars in thousands)
1999 2000 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (5,785) $ 26,778 $ 36,431
-------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Equity interest in net (income) loss from
subsidiary................................... 5,761 (26,950) (36,478)
Non-cash tax expense........................... -- 136 --
Other current assets........................... (660) (5,215) 4,272
Accrued liabilities............................ (30) 217 (7)
-------- -------- --------
TOTAL ADJUSTMENTS............................ 5,071 (31,812) (32,213)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................... (714) (5,034) 4,218
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to Coast Hotels............................ 2,262 6,601 (4,000)
Repurchase at common stock..................... (1,538) (1,580) (215)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES................... 724 5,021 (4,215)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 10 (13) 3
CASH AND CASH EQUIVALENTS, at beginning of year.. 3 13 --
-------- -------- --------
CASH AND CASH EQUIVALENTS, at end of year........ $ 13 $ -- $ 3
======== ======== ========
F-30
SCHEDULE II
COAST RESORTS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1999, 2000 and 2001
(dollars in thousands)
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
---------- ---------- ---------- ---------- ----------
Allowance for doubtful
accounts (casino
receivables):
Year ended December 31, 1999... $ 594 $ 1,281 $ -- $ 1,033 $ 842
========== ========== ========== ========== ==========
Year ended December 31, 2000... $ 842 $ 556 $ -- $ 685 $ 713
========== ========== ========== ========== ==========
Year ended December 31, 2001... $ 713 $ 1,707 $ -- $ 1,547 $ 873
========== ========== ========== ========== ==========
F-31