<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________________ to___________________
Commission file number 333-4356
COAST HOTELS AND CASINOS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0345706
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization identification number)
4000 WEST FLAMINGO ROAD, LAS VEGAS, 89103
NEVADA (Zip code)
(Address of principal executive offices)
(702) 367-7111
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of November 14, 1996: 1,000
________________________________________________________________________________
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED BALANCE SHEETS
(amounts in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,351 $ 14,539
Restricted cash equivalents, in escrow account 11,164 --
Accounts receivable, net 2,377 1,990
Other current assets 11,366 6,506
-------- --------
TOTAL CURRENT ASSETS 56,258 23,035
PROPERTY AND EQUIPMENT, net 114,510 105,188
CONSTRUCTION IN PROGRESS, ORLEANS PROJECT 89,753 19,824
RESTRICTED CASH EQUIVALENTS, IN ESCROW ACCOUNT 45,214 --
OTHER ASSETS 8,573 4,169
-------- --------
$314,308 $152,216
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,346 $ 8,389
Accrued liabilities 30,446 14,426
Current portion of long-term debt 361 1,591
-------- --------
TOTAL CURRENT LIABILITIES 35,153 24,406
-------- --------
LONG-TERM DEBT, less current portion 171,965 83,357
-------- --------
DEFERRED RENT 2,212 1,119
-------- --------
OTHER LIABILITIES 2,500 --
-------- --------
STOCKHOLDER'S EQUITY:
Common Stock, $1.00 par value, 25,000 shares
authorized, 1,000 shares issued and outstanding 1 1
Additional paid - in capital 95,858 38,239
Retained earnings 6,619 5,094
-------- --------
TOTAL STOCKHOLDER'S EQUITY 102,478 43,334
-------- --------
$314,308 $152,216
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
-------------------- -------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino $36,324 $32,518 $107,624 $ 94,400
Food and beverage 9,248 9,337 28,637 28,545
Hotel 3,577 3,280 10,594 9,791
Other 2,597 2,508 7,511 7,130
------- ------- -------- --------
GROSS REVENUES 51,746 47,643 154,366 139,866
Less: promotional allowances (4,088) (4,018) (12,508) (11,908)
------- ------- -------- --------
NET REVENUES 47,658 43,625 141,858 127,958
------- ------- -------- --------
OPERATING EXPENSES:
Casino 18,661 17,550 52,503 51,185
Food and beverage 7,222 7,061 21,894 23,562
Hotel 1,753 1,769 5,238 5,135
Other 1,954 2,106 5,652 6,280
General and administrative 10,486 9,401 29,198 25,915
Depreciation and amortization 1,969 1,570 5,591 5,144
------- ------- -------- --------
TOTAL OPERATING EXPENSES 42,045 39,457 120,076 117,221
------- ------- -------- --------
OPERATING INCOME 5,613 4,168 21,782 10,737
------- ------- -------- --------
OTHER INCOME (EXPENSES)
Interest expense (5,884) (1,399) (16,061) (2,411)
Interest income 959 15 3,406 90
Interest capitalized 2,670 52 4,901 52
Gain on sale of equipment and securities 0 1 2 69
------- ------- -------- --------
TOTAL OTHER INCOME (EXPENSES) (2,255) (1,331) (7,752) (2,200)
------- ------- -------- --------
INCOME BEFORE INCOME TAX PROVISION 3,358 2,837 14,030 8,537
------- ------- -------- --------
INCOME TAX PROVISION 1,175 - 7,411 -
------- ------- -------- --------
NET INCOME $ 2,183 $ 2,837 $ 6,619 $ 8,537
======= ======= ======== ========
PRO FORMA DATA (reflecting change in tax
status):
Provision for income taxes 1,175 993 4,911 2,988
------- ------- -------- --------
Net income $ 2,183 1,844 $ 9,119 $ 5,549
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996 and 1995
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,619 $ 8,537
--------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 5,575 5,144
Amortization of original issue discount 355 -
Provision for bad debts 1,595 392
(Gain) loss on sale of assets (2) (69)
Deferred income taxes 2,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (491) (321)
(Increase) decrease in inventories 314 755
(Increase) decrease in prepaid expenses (1,770) 24
(Increase) decrease in other assets 713 (394)
Increase (decrease) in accounts payable (4,756) (2,362)
Increase (decrease) in accrued liabilities 15,947 861
--------- --------
TOTAL ADJUSTMENTS 19,980 4,030
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,599 12,567
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (82,617) (16,725)
Proceeds from sale of assets 21 172
Net additions to restricted cash equivalents,
in escrow accounts (56,378) -
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (138,974) (16,553)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of discounts and commissions 164,098 4,500
Principal payments on long-term debt (1,505) (1,912)
Proceeds from borrowings under bank line of credit 1,045 6,600
Principal payments on bank line of credit (29,200) (3,000)
Payments for debt issue costs (1,236) -
Advances (to) from affiliates (4,015) -
Distributions to former partners - (8,660)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 129,187 (2,472)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,812 (6,458)
CASH AND CASH EQUIVALENTS, at beginning of year 14,539 16,967
--------- --------
CASH AND CASH EQUIVALENTS, at end of period $ 31,351 $ 10,509
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Background Information
Coast Hotels and Casinos, Inc., a Nevada corporation (the "Company"), owns
and operates two hotel-casinos located in Las Vegas, the Gold Coast Hotel and
Casino (the "Gold Coast") and the Barbary Coast Hotel and Casino (the "Barbary
Coast"), and is in the process of constructing a third hotel-casino in Las
Vegas, The Orleans Hotel and Casino ("The Orleans"). The Company is a wholly
owned subsidiary of Coast Resorts, Inc., a Nevada corporation ("Coast Resorts").
Coast Resorts also has another wholly owned subsidiary, Coast West, Inc. ("Coast
West"), which has no operations but which holds a long-term lease (the "Coast
West Lease") on approximately fifty acres of land in Las Vegas on which Coast
West may develop and operate a future hotel-casino.
The Gold Coast and the Barbary Coast had previously been owned and operated
independently by two partnerships, Gold Coast Hotel and Casino, a Nevada limited
partnership, and Barbary Coast Hotel and Casino, a Nevada partnership,
respectively (collectively, the "Predecessor Partnerships"). On January 1, 1996,
the partners of the Predecessor Partnerships completed a reorganization (the
"Reorganization") with Coast Resorts, which was formed in September 1995 for the
purpose of effecting the Reorganization. Coast Resorts and the Predecessor
Partnerships were all related through common ownership and management control.
In the Reorganization, the partners of the Predecessor Partnerships each
transferred to Coast Resorts their respective partnership interests in the
Predecessor Partnerships in exchange for an aggregate of 1,000,000 shares of
common stock, par value $.01 per share, of Coast Resorts ("Coast Resorts Common
Stock"). Coast Resorts immediately contributed to the Company all of the assets
and liabilities of the Predecessor Partnerships other than those relating to the
Coast West Lease, which Coast Resorts contributed to Coast West. Coast Resorts
retained the liability for an aggregate principal amount of $51.0 million in
notes payable to former partners and retained the liability for $1.5 million
relating to demand notes due to a related party (the "Exchange Liabilities"). On
January 16, 1996, the Exchange Liabilities were exchanged for 494,353 shares of
Coast Resorts Common Stock, based upon management's estimate of the fair market
value of such Coast Resorts Common Stock.
Basis of Presentation
Prior to the Reorganization, the Gold Coast and the Barbary Coast hotel-
casinos historically operated under a high degree of common control. The former
Managing General Partner of the Gold Coast Hotel and Casino was also a general
partner, and the principal manager, of the Barbary Coast Hotel and Casino. Due
to common control of the Predecessor Partnerships and the continuation of
ownership by the former partners, the Reorganization was accounted for as a
reorganization of entities under common control. Accordingly, the financial
statements of the Company for all periods are presented as if the Reorganization
occurred at the beginning of the earliest period presented and include the
accounts of all entities involved on a historical cost basis, in a manner
similar to a pooling of interests.
5
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION--(CONTINUED)
The accompanying financial statements reflect the Exchange Liabilities as
obligations of the Company at December 31, 1995, as the exchange for Coast
Resorts Common Stock had not yet occurred. The exchange was accounted for
subsequent to the completion of the Reorganization, through the issuance of
Coast Resorts Common Stock in the approximate amount of $52.5 million reflecting
the historical cost basis of the Exchange Liabilities.
The accompanying financial statements are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The unaudited
financial statements should be read in conjunction with the audited financial
statements and footnotes for the year ended December 31, 1995. In the opinion of
management, all adjustments and normal recurring accruals considered necessary
for a fair presentation of the results for the interim period have been
included. The interim results reflected in the unaudited financial statements
are not necessarily indicative of expected results for the full year.
NOTE 2 - THE ORLEANS CONSTRUCTION COMMITMENTS
During 1995, the Company commenced construction of The Orleans. The plans
for The Orleans have been developed with a theme of the French Quarter in New
Orleans, and include an approximately 92,000 square foot casino, 840 hotel
rooms, a 70-lane bowling center and five restaurants. The Orleans has a
construction and development budget of approximately $172.6 million, including
contingencies but excluding capitalized interest, pre-opening expenditures, and
opening bankroll. In January 1996, the Company entered into a guaranteed maximum
price contract for the construction of the buildings and site improvements.
During the course of construction, the Company has elected to upgrade and
improve the quality of furnishings, systems and materials and to position The
Orleans for future expansion. The Company also made certain changes designed to
enhance the overall experience of The Orleans. Such changes include the addition
of an Italian restaurant and improvements to the ballroom to allow it to be used
for live entertainment and to permit greater flexibility in the types of events
for which it may be used. Changes to the original budget have been made
primarily to accommodate quality enhancements in the project and changes in the
scope of the project, as well as increased architectural and design fees and
other costs resulting from additional pending and anticipated change orders and
modifications. Such project enhancements, changes and modifications are expected
to result in change orders for (and have a budget allocation of) an additional
$12.5 million under the construction contract and a corresponding increase in
the guaranteed maximum price under the construction contract to $112.5 million
in accordance with the terms of the construction contract and the related
disbursement agreement. The balance of the increase in the revised budget of
approximately $2.0 million is expected to be allocated to increased
architectural and design fees and to the budget for furniture, fixtures,
equipment, additional signage and certain interior and other improvements. As of
September 30, 1996, the Company had paid approximately $89.8 million of
construction and development costs, including approximately $75.8 million that
is
6
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
NOTE 2 - THE ORLEANS CONSTRUCTION COMMITMENTS--(CONTINUED)
subject to the construction contract, approximately $5.5 million of
architectural and design fees and approximately $8.5 million of other
construction and development costs.
NOTE 3 - INCOME TAXES
Prior to the Reorganization, the Company operated as individual
partnerships which did not pay federal income taxes. The partners of the
Predecessor Partnerships were taxed on their proportionate share of each of
their respective partnership's taxable income or loss. Effective January 1, 1996
and in connection with the Reorganization, the Predecessor Partnerships were
terminated. The change in status to a "C" corporation resulted in the
recognition of net deferred tax liabilities, and a corresponding charge to
earnings through the income tax provision of approximately $2.5 million in the
first quarter of 1996. In addition, upon termination of the partnership tax
status on January 1, 1996, all undistributed earnings of the Predecessor
Partnerships were reclassified to paid-in-capital.
The income statements for the quarter ended September 30, 1995 and nine
months ended September 30, 1995 do not include any provision or liability for
corporate income taxes due to the partnership status. The pro forma provision
for income taxes and the related pro forma net income reflect adjustments to
income taxes assuming that the change in corporate income tax status occurred as
of January 1, 1995. The pro forma provision for income taxes and the related pro
forma net income for the nine months ended September 30, 1996 exclude the $2.5
million charge incurred in the first quarter of 1996 discussed in the preceding
paragraph.
NOTE 4 - PRIVATE PLACEMENT FINANCING
On January 30, 1996, the Company completed a private placement offering of
$175.0 million principal amount of 13% First Mortgage Notes Due December 15,
2002 (the "First Mortgage Notes"). Interest on the First Mortgage Notes is
payable semi-annually on June 15, and December 15. The First Mortgage Notes are
unconditionally guaranteed by Coast Resorts, Coast West and certain future
subsidiaries of the Company. Net proceeds from the offering (after deducting
original issue discount and commissions) were approximately $164.1 million. Of
that amount, (i) approximately $114.8 million was deposited in a construction
disbursement account restricted for use by the Company to finance in part the
cost of developing, constructing, equipping and opening The Orleans, (ii)
approximately $19.3 million was used by the Company to purchase U.S. Government
Obligations which were deposited into an interest escrow account restricted to
fund the interest payable on the First Mortgage Notes through December 15, 1996
and (iii) approximately $29.2 million was used by the Company to repay all
outstanding indebtedness under its revolving credit facility, which was
terminated upon repayment. The balance of approximately $800,000 was used to
pay, in part, the offering expenses of approximately $2.4 million.
The indenture governing the First Mortgage Notes contains covenants that,
among other things, limit the ability of the Company to pay dividends, repay
existing indebtedness, incur additional indebtedness, or sell material assets as
defined in the indenture. Additionally, if on the twentieth day of the month
following the first month in which The Orleanshas been operating for 18 months,
the Fixed Charge Coverage Ratio (as defined in the indenture) of the
7
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A Wholly Owned Subsidiary of Coast Resorts, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
NOTE 4 - PRIVATE PLACEMENT FINANCING--(CONTINUED)
Company for the most recently ended four full fiscal quarters is less than
1.5 to 1, the Company is required to consummate an asset sale of the Barbary
Coast Hotel and Casino within one year. The proceeds from such asset sale shall
be used by the Company to repurchase First Mortgage Notes at a price equal to
101% of the principal amount of such First Mortgage Notes.
NOTE 5 - ADVANCES TO COAST WEST
The Company has agreed to provide advances to Coast West sufficient to make
payments on the Coast West Lease and other obligations, up to a maximum of $8
million. The Coast West Lease relates to a parcel of land located in the western
area of Las Vegas to be used for future expansion opportunities. The Coast West
Lease term runs through December 31, 2055, with three 10-year renewal options,
with monthly payments of $166,667 for the year ending December 31, 1995.
Thereafter the monthly rent increases by the amount of $5,000 in January of each
year. The Coast West 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 Coast West 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 Coast West Lease, the potential purchase
price commitment ranges from approximately $31.0 million to approximately $51.0
in the years 2014 through 2018. As of September 30, 1996, the Company had
advanced Coast West approximately $2.1 million related to the Coast West Lease
and other obligations. Coast West is a development stage enterprise and has no
source of income and is therefore solely dependent on the advances to be
provided by the Company. There can be no assurance that Coast West will develop
a gaming property at the Coast West site, or that it will be able to repay any
advances made by the Company. Accordingly, the Company has recorded an allowance
for doubtful accounts in an amount equal to advances provided.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in 1995 as a wholly owned subsidiary of Coast
Resorts to own and operate the Gold Coast Hotel and Casino (the "Gold Coast")
and the Barbary Coast Hotel and Casino (the "Barbary Coast"), which are two Las
Vegas hotel-casinos previously owned by two partnerships, Gold Coast Hotel and
Casino, a Nevada general partnership, and Barbary Coast Hotel and Casino, a
Nevada limited partnership, and to develop and construct The Orleans Hotel and
Casinos ("The Orleans"), a new gaming property being constructed in Las Vegas.
The Orleans is expected to open in December 1996. The Company's net revenues and
net income are derived primarily from gaming activities at the Gold Coast and
the Barbary Coast. The Company utilizes food and beverage, hotel operations and
various entertainment amenities to maximize customer visitation to its casinos,
thereby enhancing casino revenues. The Company expects to maintain a pricing
structure for non-gaming amenities at the Gold Coast and the Barbary Coast that
is competitive with comparable casinos in their respective markets. For the
three months ended September 30, 1996, casino revenues for the Gold Coast and
the Barbary Coast accounted for approximately 74.2% and 81.7%, respectively, of
total revenues, and for the nine months ended September 30, 1996, 74.3% and
80.3%, respectively, of total revenues.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial information regarding the results of operations of the Company:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
NET REVENUES:
Gold Coast........... $34,652 $32,036 $105,420 $ 95,814
Barbary Coast........ 13,006 11,589 36,438 32,144
------- ------- -------- --------
$47,658 $43,625 $141,858 $127,958
======= ======= ======== ========
OPERATING INCOME:
Gold Coast........... $ 6,271 $ 3,801 $ 22,588 $ 11,565
Barbary Coast........ 773 367 2,997 (828)
Corporate Expenses... (1,431) - (3,803) -
------- ------- -------- --------
$ 5,613 $ 4,168 $ 21,782 $ 10,737
======= ======= ======== ========
</TABLE>
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net revenues for the Company were $47.7 million in the quarter ended
September 30, 1996 compared to $43.6 million in the same quarter in 1995, an
increase of $4.1 million
9
<PAGE>
(9.2%), and were $141.9 million in the nine months ended September 30, 1996
compared to $128.0 million for the same period in 1995, an increase of $13.9
million (10.9%). (Percentages are actual and are not adjusted for rounding.) The
increased revenues were primarily due to stronger gaming revenues at the
Company's two hotel-casinos, as well as to increased hotel revenues. Operating
income was $5.6 million for the quarter ended September 30, 1996, compared to
$4.2 million in 1995, an increase of 34.7%, and $21.8 million for the nine month
period ended September 30, 1996, compared to $10.7 million in 1995, an increase
of 102.9%, primarily due to the increased revenues discussed above. Casino
expenses increased $1.1 million (6.3%) to $18.7 million in the third quarter of
1996, compared to $17.6 million in the third quarter of 1995, primarily due to
increased promotional expenses in the race book. For the nine months ended
September 30, 1996 casino expenses increased $1.3 million (2.6%) to $52.5
million compared to $51.2 million for the same period in 1995, primarily due to
the increased race book promotional expenses. General and administrative
expenses increased $1.1 million (11.5%) from third quarter 1995 to 1996, and
$3.3 million (12.7%) from the nine months ended September 30, 1995 compared to
the same period in 1996, primarily due to increased advertising and marketing
expenses, an increase in corporate salaries and the addition of an incentive
bonus program.
Net income was $2.2 million for the third quarter of 1996, compared to $2.8
million in 1995 and $6.6 million for the first nine months of 1996, compared to
$8.5 million in 1995. The decrease in the first nine months of 1996 was
primarily due to the provision for income tax, including a one-time charge of
$2.5 million in the first quarter of 1996 for temporary differences as a result
of a change in tax status from partnerships to a corporation on January 1, 1996
( See Note 3 of Notes to Condensed Consolidated Financial Statements), as well
as an increase in net interest attributable to $175.0 million principal amount
of first mortgage notes issued in January 1996 (the "First Mortgage Notes").
Gold Coast. Net revenues at the Gold Coast were $34.7 million for the
quarter ended September 30, 1996, an increase of $2.6 million (8.2%) over 1995
third quarter revenues of $32.0 million, and were $105.4 million for the nine
months ended September 30, 1996, an increase of $9.6 million (10.0%) over 1995
revenues of $95.8 million. Gaming revenues were $25.7 million for third quarter
1996, an increase of $2.7 million (11.8%) compared to $23.0 million in the same
period in 1995, and for the nine months ended September 30, 1996 were $78.4
million, an increase of $9.8 million (14.2%) compared to $68.6 million the same
period in 1995. The increase was primarily due to higher wagering volume which
management believes is a result of an upgrade of slot equipment completed in
December 1995. Hotel revenues for third quarter 1996 were $2.6 million, an
increase of 5.9% over third quarter 1995 hotel revenues of $2.4 million, and for
the nine months ended September 30, 1996 were $7.6 million, an increase of 5.7%
over the nine month 1995 hotel revenues of $7.2 million, due to higher occupancy
rates and higher room rates. Operating income was $6.3 million for the third
quarter of 1996 compared to $3.8 million in 1995, an increase of $2.5 million
(65.0%), and was $22.6 million for the first nine months of 1996 compared to
$11.6 million in 1995, an increase of $11.0 million (95.3%). Operating expenses
for third quarter 1996 increased slightly (.5%) compared to 1995, and for the
nine months ended September 30, 1996 decreased $1.4 million (1.7%). Food and
beverage expenses accounted for most of the reduction in the nine month period,
decreasing $1.9 million or 9.9% due to lower cost of sales in the restaurants
primarily as a result of fewer meals served.
Barbary Coast. Net revenues at the Barbary Coast were $13.0 million in the
quarter ended September 30, 1996, an increase of $1.4 million or 12.2% over
third quarter 1995 revenues of $11.6 million, and were $36.4 million during the
nine months ended September 30, 1996, an increase of $4.3 million or 13.4% over
1995 revenues of $32.1 million in the
10
<PAGE>
same period. Gaming revenues increased 11.5% to $10.6 million in the third
quarter of 1996 compared to $9.5 million in the same period in 1995, primarily
due to increased race book wagering. Gaming revenues increased 13.4% to $29.3
million in the first nine months of 1996 compared to $25.8 million in 1995,
primarily due to increases in the sports book and race book wagering volume.
Operating income was $773,000 for the third quarter of 1996 compared to $367,000
for the same quarter 1995, and was $3.0 million for the first nine months of
1996 compared to a loss of $828,000 in 1995, primarily due to the increased
revenues discussed above. Operating expenses were $12.2 million in the third
quarter of 1996 compared to $11.2 million in 1995, an increase of $1.0 million
or 9.0%, and were $33.4 million in the first nine months of 1996 compared to
$33.0 million in 1995, an increase of $469,000 (1.4%), primarily due to
increased promotional expenses associated with the increased wagering volume in
the race book.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have consisted of cash
provided by operating activities and, until termination of its revolving credit
facility in January 1996, bank financing. In connection with the reorganization
in which the Barbary Coast Hotel and Casino and the Gold Coast Hotel and Casino
were combined with Coast Resorts, Coast Resorts exchanged shares of common
stock, par value $.01 per share, of Coast Resorts for approximately $52.5
million principal amount of notes payable to certain shareholders of Coast
Resorts, resulting in a reduced debt service. See Note 1 to Notes to Condensed
Financial Statements.
On January 30, 1996, the Company issued $175.0 million principal amount of
First Mortgage Notes to finance, in part, the development, construction,
equipping and opening of The Orleans. The net proceeds from the issuance, after
deducting discounts and commissions, were approximately $164.1 million. Of that
amount, (i) approximately $114.8 million was deposited in a construction
disbursement account for use by the Company to finance in part The Orleans, (ii)
approximately $19.3 million was used by the Company to purchase U.S. Government
Obligations which were deposited into an interest escrow account to fund the
interest payable on the First Mortgage Notes through December 15, 1996 and (iii)
approximately $29.2 million was used by the Company to repay all outstanding
indebtedness under its revolving credit facility, which was terminated upon
repayment. The balance of approximately $800,000 was used to pay, in part, the
estimated offering expenses of $2.4 million.
The Company's consolidated cash requirements include principally the costs
related to the development, construction, equipping and opening of The Orleans,
debt service on the First Mortgage Notes subsequent to December 15, 1996 of
approximately $22.8 million annually, ongoing capital expenditures at the Gold
Coast and the Barbary Coast estimated to be approximately $4.0 million in the
aggregate in 1996, advances to Coast West (up to maximum of $8.0 million in the
aggregate) for rent on land held for possible future development and other
related costs estimated to be at least approximately $2.1 million annually, and
debt service unrelated to the First Mortgage Notes estimated to be approximately
$500,000 in 1996. Prior to the Reorganization, a primary use of cash also
included distributions to the partners of the Gold Coast Partnership and the
Barbary Coast Partnership, which were separate partnerships that did not pay
income taxes.
The Company expects to satisfy the costs of developing, constructing,
equipping and opening The Orleans (including an estimated $7.5 million in pre-
opening expenses and an estimated $6.1 million for the opening bankroll) with
the proceeds from the issuance of the
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First Mortgage Notes, approximately $30.0 million of equipment financing and
approximately $23.0 million of cash from operations at the Gold Coast and
Barbary Coast. Taking into account the use of cash from operations for the
construction of The Orleans, the Company expects that excess cash from Coast
Hotel's two existing properties will be sufficient to satisfy the Company's
consolidated cash requirements other than costs related to the development,
construction, equipping, and opening The Orleans. Subsequent to the commencement
of operations of The Orleans, the Company expects that cash generated from the
operations of the Company will be sufficient to satisfy consolidated cash
requirements, including debt service on the First Mortgage Notes subsequent to
December 15, 1996, although no assurance can be given to that effect.
FORWARD LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis which are not
historical fact are forward looking statements that are made pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The statements are subject to risks and uncertainties, including, but not
limited to increased competition, both in Nevada and other jurisdictions,
dependence on the Las Vegas area and the Southern California region for a
majority of the Company's customers and uncertainties associated with
construction and the commencement of operations of a new enterprise, which could
cause actual results to vary materially from those discussed herein.
12
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
None.
Item 2: Changes in Securities.
None.
Item 3: Defaults Upon Senior Securities.
None.
Item 4: Submission of Matters to a Vote of Security Holders.
None.
Item 5: Other Information.
None.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits.
10.1 Master Security Agreement dated as of October 24, 1996, by
and between Coast Hotels and Casinos, Inc. and The CIT Group/Equipment
Financing, Inc.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the three months
ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14, 1996 COAST HOTELS AND CASINOS, INC., a
Nevada corporation
By: /s/ Gage Parrish
----------------------------------
Gage Parrish
Vice President and Chief Financial Officer
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EXHIBIT 10.1
MASTER SECURITY AGREEMENT
1. GRANT OF SECURITY INTEREST; DESCRIPTION OF COLLATERAL
The Debtor named below grants to Secured Party a security interest in the
property described in the Schedules of Indebtedness and Collateral now or
hereafter executed by or pursuant to the authority of the Debtor and accepted by
Secured Party in writing (individually, a "Schedule" and collectively, the
"Schedules"), along with a present and future attachments and accessories
thereto and replacements and proceeds thereof, including amounts payable under
any insurance policy, all hereinafter referred to collectively as "Collateral."
Each Schedule shall be serially numbered. Unless and only to the extent
otherwise expressly provided in a Schedule, no Schedule shall replace any
previous Schedule but shall be supplementary to all previous Schedules.
2. WHAT OBLIGATIONS THE COLLATERAL SECURES.
Each item of Collateral shall secure not only the specific amount which
Debtor promises to pay in each Schedule, but also all other present and future
indebtedness or obligations of Debtor to Secured Party of every kind and nature
arising under this Security Agreement (collectively, the "Obligations").
3. PROMISE TO PAY; TERMS AND PLACE OF PAYMENT.
Debtor promises to pay Secured Party the amounts set forth on each Schedule
at the rate and upon such terms as provided therein.
4. USE OF COLLATERAL.
Debtor warrants and agrees that the Collateral is to be used primarily for
business or commercial purposes (other than agricultural).
Debtor and Secured Party agree that regardless of the manner of affixation,
the Collateral shall remain personal property and not become part of the real
estate. Debtor agrees to keep the Collateral at the location set forth in the
applicable Schedule, and will notify Secured Party promptly in writing of any
change in the location of the Collateral within such State, but will not remove
the collateral from such State without the prior written consent of Secured
Party.
5. LATE CHARGES AND OTHER FEES.
Any payment not made when due shall, at the option of Secured Party, bear
late charges thereon calculated at the rate of 1 1/2% per month, but in no event
greater than the highest rate permitted by relevant law. Debtor shall be
responsible for and pay to Secured Party a returned check fee, not to exceed the
maximum permitted by law, which fee will be equal to the sum of (i) the actual
bank charges incurred by Secured Party plus (ii) all other actual costs and
expenses incurred by Secured Party. Returned check fees are payable upon demand
as Obligations secured by the Collateral under this Security Agreement.
6. DEBTOR'S WARRANTIES AND REPRESENTATIONS.
To induce Secured Party to enter into this Security Agreement and to make
the loans contemplated hereby, Debtor warrants and represents that:
(a) Debtor is justly indebted to Secured Party for the full amount of the
Obligations set forth on each Schedule;
<PAGE>
(b) except for the security interest granted hereby, the Collateral is
free from and will be kept free from all liens, claims, security
interests and encumbrances;
(c) Debtor is not aware of any financing statement covering the Collateral
or any proceeds thereof on file in favor of anyone other than Secured
Party, but if such other financing statement is on file, it will be
terminated or subordinated;
(d) all material information supplied and material statements made by
Debtor in any financial, credit or accounting statement or application
for credit prior to, contemporaneously with or subsequent to the
execution of this Security Agreement with respect to this transaction
are and shall be true, correct, valid and genuine;
(e) Debtor has full authority to enter into, deliver and perform this
Security Agreement and each of the other documents heretofore, now or
hereafter executed by Debtor in favor of or delivered to Secured Party
in respect to the transactions contemplated by this Security Agreement
(collectively, the "Loan Documents") to which it is a party, and in so
doing it is not violating its charter or by-laws, any law or
regulation or agreement with third parties, and it has taken all such
action as may be necessary or appropriate to make this Security
Agreement and the other Loan Documents binding upon it;
(f) the Collateral is new and in good operating condition and repair;
(g) Debtor is a corporation duly organized, validly existing and in good
standing under the laws of the State of Nevada. Debtor has duly
qualified and is authorized to do business and is in good standing as
a foreign corporation in all states and jurisdictions where the
character of its properties or the nature of its activities make such
qualification necessary;
(h) this Security Agreement is, and each of the other Loan Documents when
delivered will be, a legal, valid and binding obligation of Debtor
enforceable against it in accordance with their respective terms;
(i) Debtor has all governmental licenses, consents, approvals,
authorizations, permits, certificates, inspections, and franchises
necessary to conduct its business as heretofore or proposed to be
conducted by it and to own or lease and operate its properties as now
owned or leased by it;
(j) there are no actions, suits, proceedings or investigations pending, or
to the knowledge or Debtor, threatened, against or affecting Debtor or
any of its properties in any court or before any governmental
authority or arbitration board or tribunal, that if determined
adversely, would have a material adverse effect on its financial
condition, business, properties or operations, or its ability to
perform its obligations under this Security Agreement and all other
Loan Documents to which it is a party;
(k) Debtor has filed all federal, state and local tax returns and other
reports it is required by applicable law to file and has paid, or made
provision for the payment of, all taxes, assessments, levies, claims
or charges upon Debtor, its income or sales or any of its properties
that are due and payable;
(l) Debtor has duly complied with, and its properties and business
operations are in compliance in all respects with, the provisions of
all applicable laws;
(m) no Event of Default (as defined below) exists or will exist or result
from the execution and delivery of this Security Agreement or Debtor's
performance hereunder,
2
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(n) the balance sheets of Debtor as of March 31, 1996 and the related
statements of income, changes in stockholders' equity, and changes in
financial position for the period entered on such date, have been
prepared in accordance with generally accepted accounting principles
("GAAP") (except for changes in application in which Debtor's
independent certified public accountants concur), and present fairly
the financial position of Debtor at such dates and the results of
Debtor's operations for such periods. Since March 31, 1996 there has
been no material change in the condition, financial or otherwise, of
Debtor, except changes in the ordinary course of business, none of
which individually or in the aggregate has been materially adverse;
and
(o) there are no claims for brokerage commissions, finder's fees or
investment banking fees in connection with the transactions
contemplated by this Security Agreement.
Debtor warrants to Secured Party that all representations and warranties of
Debtor contained in this Security Agreement and all other Loan Documents
shall be true at the time of Debtor's execution of this Security Agreement
and shall survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or
related thereto.
7. DEBTOR'S AGREEMENTS.
Debtor agrees:
(a) to defend at Debtor's own cost any action, proceeding, or claim
affecting the Collateral;
(b) to pay reasonable attorneys' fees and other expenses incurred by
Secured Party in enforcing its rights against Debtor under this
Security Agreement subsequent to an Event of Default hereunder or the
occurrence of an event which with the lapse of time or the giving of
notice or both would become an Event of Default;
(c) to pay promptly all taxes, assessments, license fees and other public
or private charges when levied or assessed against the Collateral or
this Security Agreement, and this obligation shall survive the
termination of this Security Agreement;
(d) that if a certificate of title be required or permitted by law, Debtor
shall obtain such certificate with respect to the Collateral, showing
the security interest of Secured Party thereon and in any event do
everything necessary or expedient to preserve or perfect the security
interest of Secured Party;
(e) that Debtor will not misuse, fail to keep in good repair, secrete or
without the prior written consent of Secured Party, sell, rent, lend,
encumber or transfer any of the Collateral notwithstanding Secured
Party's right to proceeds;
(f) that Secured Party may enter upon Debtor's premises or wherever the
Collateral may be located at any reasonable time to inspect the
Collateral and Debtor's books and records pertaining to the
Collateral, and Debtor shall assist Secured Party in making such
inspection;
(g) that the security interest granted by Debtor to Secured Party shall
continue effective irrespective of any retaking or redelivery of any
Collateral and irrespective of the payment of the Obligations
described in any Schedule so long as there are any Obligations of any
kind, including obligations under guaranties or assignments, owed by
Debtor to Secured Party, provided, however, upon any assignment of any
Schedule under this Security Agreement the Assignee shall thereafter
be deemed for the purpose of this Paragraph the Secured Party under
this Security Agreement with respect to such Schedule;
3
<PAGE>
(h) to preserve and maintain its separate corporate existence and all
rights, privileges, and franchises in connection therewith, and
maintain its qualification and good standing in all states in which
such qualification is necessary;
(i) to comply with all applicable laws and obtain and keep in force any
and all licenses, permits, franchises, or other governmental
authorizations necessary to the ownership of its properties or to the
conduct of its business;
(j) to notify Secured Party in writing: (i) promptly after Debtor's
learning thereof, of the commencement of any litigation or the
institution of any administrative proceeding which Debtor reasonably
believes, if determined adversely, may materially and adversely affect
Debtor's operations, financial condition, properties or business or
Secured Party's lien upon any of the Collateral; (ii) promptly after
Debtor's learning thereof, of any material default by Debtor under any
note, indenture, loan agreement, mortgage, lease, deed, guaranty or
other similar agreement relating to any indebtedness of Debtor
exceeding $1,000,000, (iii) promptly after the occurrence thereof, of
any Event of Default or any event or condition the occurrence of which
would, with the lapse of time or the giving of notice, or both, become
an Event of Default; and (iv) promptly after the rendition thereof, of
any judgment, order or decree rendered against Debtor in excess of
$1,000,000;
(k) to permit Secured Party to communicate directly with any of the
following persons and entities concerning Debtor, its business and the
Collateral (and Secured Party is irrevocably authorized to communicate
with each such persons) upon at least 24 hours' oral or written notice
to Debtor (unless an Event of Default exists, in which event no notice
shall be required): (a) any service bureau, warehousing service,
landlords or trade creditors; (b) any person employed by the Debtor
(but no prior notice shall be required for Secured Party to discuss
any matters pertaining to Debtor, its business or the Collateral with
any officer of Debtor or attorney for Debtor or any other person
designated by an officer of Debtor to deal on a day-to-day basis with
Secured Party); and (c) Debtor's present and future independent public
accountants; and each of the foregoing is authorized by Debtor to
communicate with Secured Party and to disclose to Secured Party any
and all matters relating to Debtor, its financial condition and
business prospects, and the Collateral;
(l) that Debtor will not enter into any transaction with any person or
entity which is a stockholder of Debtor or which directly or
indirectly controls, or is controlled by, or is under common control
with, Debtor or which beneficially owns or holds 5% or more of any
class of voting securities of Debtor, or 5% or more of the voting
securities or equity interest of which is beneficially owned or held
by Debtor, except in the ordinary course and pursuant to the
reasonable requirements of Debtor's business and upon fair and
reasonable terms, and, with respect to any such transaction which
affects the Collateral, upon fair and reasonable terms which are fully
disclosed to Secured Party;
(m) that Debtor will not transfer its principal place of business or chief
executive office to any location other than those at which the same is
presently kept or maintained, except upon at least sixty (60) days
prior written notice to Secured Party and after the delivery to
Secured Party of duly executed UCC-1 financing statements, if required
by Secured Party, in form satisfactory to Secured Party to perfect or
continue the perfection of Secured Party's lien and security interest
hereunder,
(n) to cause to be prepared and furnished to Secured Party the following
(all to be kept and prepared in accordance with GAAP applied on a
consistent basis, unless Debtor's certified public accountants concur
in any change therein and such change is disclosed to Secured Party
and is consistent with GAAP): (i) as soon as possible, but not later
than ninety (90) days after the close of each fiscal year of Debtor,
unqualified audited financial statements of Debtor as of the end of
4
<PAGE>
such year, certified by a firm of independent certified public
accountants of recognized national standing or otherwise acceptable to
Secured Party; and (ii) as soon as possible, but not later than forty-
five (45) days after the end of each of Debtor's fiscal quarter
hereafter, unaudited interim financial statements of Debtor as of the
end of such quarter and of the portion of Debtor's fiscal year then
elapsed, certified by the principal financial officer of Debtor as
prepared in accordance with GAAP and fairly presenting the financial
position and results of operations of Debtor for such quarter and
period. Concurrently with the delivery of the financial statements
described in clause (i) of this Paragraph, Debtor shall furnish to
Secured Party a copy of the accountants' letter to Debtor's
management, if any, that is prepared in connection with such financial
statements. Concurrently with the delivery of the financial
statements described in this Paragraph, Debtor shall cause to be
prepared and furnished to Secured Party a certificate from the chief
financial officer of Debtor certifying to Secured Party that to the
best of his knowledge, Debtor has kept, observed, performed and
fulfilled each and every covenant, obligation and agreement binding
upon Debtor in this Security Agreement and the other Loan Documents
and that no Event of Default has occurred, or, if such Event of
Default has occurred, specifying the nature hereof;
(o) that all the covenants and agreements made by Debtor, Coast Resorts,
Inc. and Coast West, Inc. in the $175,000,000 13% First Mortgage Notes
Indenture dated as of January 30, 1996 (the "Indenture") by and among
Debtor, Coast West, Inc., Coast Resorts, Inc., and American Bank
National Association as trustee, are incorporated herein and made part
hereof as such covenants and agreements were in effect on July 1, 1996
(without giving effect to any waiver or amendment of such covenants
and agreements after July 1, 1996 except as provided in the last
paragraph of this Section 7);
(p) within ten (10) business days of the date of this Security Agreement,
to execute and deliver to the Nevada Gaming Commission a report in
compliance with Regulation 8.130 of that Commission reporting the loan
made under this Security Agreement and the other Loan Documents, and
to give simultaneously a copy of the filed report to Secured Party;
(q) it will not declare or pay any dividend (other than a dividend payable
in stock of the Debtor) or authorize or make any other distribution on
any stock of the Debtor, whether now or hereafter outstanding which
would exceed (i) 50% of the Debtor's after tax net profit for the
preceding fiscal year or (ii) $3,000,000.00 annually, whichever is
less; and
(r) it will not consent or agree to the sale, lease, transfer, conveyance,
or other disposition (other than by way of merger or consolidation
with Coast Resorts, Inc.) of all or substantially all of the Debtor's
assets.
Debtor's obligation to comply with the covenants and agreements in the
Indenture as such covenants and agreements were in effect on July 1, 1996,
applies only to amendments which (i) impair Secured Party's rights in the
Collateral or (ii) materially impair Debtor's ability to pay the Obligations.
With respect to amendments not covered by clauses (i) and (ii), Secured Party
agrees that Debtor shall comply with the applicable covenant or agreement as
amended. With respect to amendments which (y) do impair Secured Party's rights
in the Collateral or (z) do materially impair Debtor's ability to pay the
Obligations, such amendments shall be accorded no effect for purposes hereof and
Debtor shall comply with the applicable covenant or agreement as if it had not
been amended.
The parties hereto agree that any and all amendments and other
modifications of whatever kind to Section 4.09 of the Indenture subsequent to
July 1, 1996 shall be deemed to (i) impair Secured Party's rights in the
collateral and (ii) materially impair Debtor's ability to pay the Obligations,
and shall be accorded no effect for the purposes hereof and Debtor shall comply
with Section 4.09 as if it had not been amended or modified.
5
<PAGE>
8. INSURANCE AND RISK OF LOSS.
All risk of loss, damage to or destruction of the Collateral shall at all
times be on Debtor. Debtor will procure forthwith and maintain at Debtor's
expense insurance against all risks of loss or physical damage to the Collateral
for the full insurable value thereof for the life of this Security Agreement
plus breach of warranty insurance and such other insurance thereon in amounts
and against such risks as Secured Party may specify, and shall promptly deliver
each policy to Secured Party with a standard long-form mortgagee endorsement
attached thereto showing loss payable to Secured Party; and providing Secured
Party with not less than 30 days written notice of cancellation; each such
policy shall be in form, terms and amount and with insurance carriers
satisfactory to Secured Party; Secured Party's acceptance of policies in lesser
amounts or risks shall not be a waiver of Debtor's foregoing obligations. As to
Secured Party's interest in such policy, no act or omission of Debtor or any of
its officers, agents, employees or representatives shall affect the obligations
of the insurer to pay the full amount of any loss. The insurance maintained by
Debtor should be primary without any right of contribution from insurance which
may be maintained by Secured Party. Debtor shall be liable for all deductible
portions of all required insurance.
Debtor hereby assigns to Secured Party any moneys which may become payable
under any such policy of insurance and irrevocably constitutes and appoints
Secured Party as Debtor's attorney in fact (a) to hold each original insurance
policy, (b) to make, settle and adjust claims under each policy of insurance,
(c) to make claims for any moneys which may become payable under such and other
insurance on the Collateral including returned or unearned premiums, and (d) to
endorse Debtor's on any check, draft or other instrument received in payment of
claims or returned or unearned premiums under each policy and to apply the funds
to the payment of the Obligations owing to Secured Party; provided, however,
Secured Party is under no obligation to do any of the foregoing.
Should Debtor fail to furnish such insurance policy to Secured Party, or to
maintain such policy in full force, or to pay any premium in whole or in part
relating thereto, then Secured Party, without waiving or releasing any default
or obligation by Debtor, may (but shall be under no obligation to) obtain and
maintain insurance and pay the premium therefor on behalf of Debtor and charge
the premium to Debtor's Obligations under this Security Agreement. The full
amount of any such premium paid by Secured Party shall be payable by Debtor upon
demand, and failure to pay same shall constitute an event of default under this
Security Agreement.
9. EVENTS OF DEFAULT; ACCELERATION.
A very important element of this Security Agreement is that Debtor make all
its payments promptly as agreed upon. It is essential that the Collateral
remain in good condition and adequate security for the Obligations. Each of the
following is an Event of Default under this Security Agreement which will allow
Secured Party to take such action under this Paragraph and under Paragraph 10 as
it deems necessary:
(a) Debtor shall fail to pay any installment of principal or interest
owing with respect to a Schedule within fifteen (15) days after the
due date thereof;
(b) Debtor shaft fail to pay any of the Obligations not evidenced by a
Schedule on the due date thereof (whether due at stated maturity, on
demand, upon acceleration or otherwise) and such failure shall not be
cured within fifteen (I 5) days after the date on which Secured Party
gives to Debtor written notice of Debtor's failure to make such
payment on or before the due date thereof;
(c) Debtor breaches any warranty or provision hereof, or of any other Loan
Document, any note or of any other instrument or agreement delivered
by Debtor to Secured Party in connection with this or any other
transaction;
(d) Coast Resorts, Inc. shall fail to comply with the terms of the non-
spinoff letter dated October 24, 1996.
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(e) it is determined that Debtor has given Secured Party materially
misleading information regarding its financial condition;
(f) there shall occur any loss, theft, damage or destruction of Collateral
not fully covered by insurance (as required by this Security Agreement
and subject to such deductibles as Secured Party shall have agreed to
in writing), or the making of any levy, seizure, or attachment thereof
or thereon;
(g) Debtor shall (i) admit in writing its inability to pay its debts
generally as they become due, (ii) make an assignment for the benefit
of its creditors, or (iii) commence a proceeding for the appointment
of a receiver, trustee, liquidator or conservator of itself or of the
whole or any substantial part of its property, or (iv) a compliant or
petition or answer seeking reorganization or arrangement or any
similar relief under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state
is filed by or against the Debtor and, if filed against the Debtor,
continues unstayed and in effect for a period of 60 days, or (v) a
court of competent jurisdiction, trustee or conservator shall
otherwise assume custody or control of the Debtor or of the whole or
any substantial part of its assets;
(h) Debtor fails to maintain any and all licenses, permits, approvals or
authorizations of any kind necessary under Nevada statutes or required
by the Nevada Gaming Commission to engage in the business of operating
a Casino. For the purposes hereof "Casino" shall mean a gaming
establishment and other property or assets ancillary thereto or used
in connection therewith, including restaurants, hotels, theaters, non-
gaming retail businesses, and golf courses and other recreation and
entertainment facilities;
(i) [intentionally left blank]
(j) there shall occur any default or event of default on the part of
Debtor under any agreement, document or instrument to which Debtor is
a party or by which Debtor or any of its property is bound, creating
or relating to any indebtedness;
(k) there shall occur any material adverse change in the financial
condition or business prospects of Debtor;
(l) Debtor, Coast Resorts, Inc., or Coast West, Inc. shall breach any of
the covenants set forth in the Indenture in effect on July 1, 1996
(without giving effect to any waiver or amendment of any such covenant
on or after July 1, 1996 except as provided in the last paragraph of
Section 7 and without regarding whether the payment or maturity of the
indebtedness incurred under the Indenture is accelerated in
consequence of such breach);
(m) there shall occur any default or event of default on the part of Coast
Resorts, Inc. under any agreement, document or instrument (other than
the Indenture and related documents) to which it is a party or by
which it or any of its property is bound, provided Coast Resorts, Inc.
obligations owing upon such default under or related to such
agreement, document or instrument exceeds $5,000,000 or its foreign
currency equivalent; and
(n) there shall occur any Event of Default on the part of Coast Resorts,
Inc., under the Stock Pledge and Security Agreement (the "Pledge
Agreement") dated as of January 30, 1996, (as Event of Default is
defined in such Pledge Agreement) in favor of American Bank National
Association as trustee ("Trustee"), and as a result thereof, such
Trustee exercises any rights or remedies with regard to Shareholder's
Stock (as such term is defined in the Pledge Agreement).
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If an Event of Default shall occur, the Obligations described in each
Schedule and all other Obligations then owing by Debtor to Secured Party under
this or any other present or future agreement shall, if Secured Party shall so
elect, become immediately due and payable. After acceleration:
(a) the unpaid principal balance of the Obligations described in any
Schedule in which interest has been precomputed shall bear interest at
the rate of 18% per annum (or, if less, the maximum rate permitted by
law) until paid in full; and
(b) the unpaid principal balance of the Obligations described in any
Schedule in which interest has not been precomputed shall bear
interest at the same rate as before acceleration until paid in full.
In no event shall the Debtor upon demand by Secured Party for payment of
the Obligations, by acceleration of the maturity thereof or otherwise, be
obligated to pay any interest in excess of the amount permitted by law. Any
acceleration of the Obligations, if elected by Secured Party, shall be subject
to all applicable laws, including laws relating to rebates and refunds of
unearned charges.
Secured Party agrees that notwithstanding anything herein to the contrary,
it shall not exercise its remedies pursuant to Section 10 with respect to Events
of Default under clauses (c) through (1), with the exception of clauses (g) and
clause (c) as applied to Section 7(a), unless (i) Secured Party first notifies
Debtor that such Event of Default has occurred and (ii) permits Debtor fifteen
(15) days to cure such Event of Default. With respect to clause (g), Secured
Party is not required to give notice prior to declaring an Event of Default, and
the cure periods applicable thereto are set forth therein. With respect to
clause (g) and clause (c) as applied to Section 7(a), an Event of Default shall
not be deemed to have occurred until Debtor shall have failed to cure the
default under the Indenture within a reasonable period. If such default is not
curable within a reasonable time period, Debtor shall provide Secured Party with
such additional documents, security or assurances as Secured Party shall
reasonably request.
10. SECURED PARTY'S REMEDIES AFTER DEFAULT; CONSENT TO ENTER PREMISES.
Upon the occurrence of an Event of Default (and the failure of Debtor to
remedy such Event of Default during the time period, if any, provided Debtor to
remedy such Event of Default) and at any time thereafter, Secured Party shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code and any other applicable laws, including the right to any deficiency
remaining after disposition of the Collateral for which Debtor hereby agrees to
remain fully liable. Debtor agrees that Secured Party, by itself or its agent,
may without notice to any person and without judicial process of any kind, enter
into any premises or upon any land owned, leased or otherwise under the real or
apparent control of Debtor or any agent of Debtor where the Collateral may be or
where Secured Party believes the Collateral may be, and disassemble, render
unusable and/or repossess all or any item of the Collateral, disconnecting and
separating all Collateral from any other property and using all force necessary.
Debtor expressly waives all further rights to possession of the Collateral after
default and all claims for injuries suffered through or loss caused by such
entering and/or repossession. Secured Party may require Debtor to assemble the
Collateral and return it to Secured Party at a place to be designated by Secured
Party which is reasonably convenient to both parties.
Secured Party may sell or lease the Collateral at a time and location of
its choosing provided that the Secured Party acts in good faith and in a
commercially reasonable manner. Secured Party will give Debtor reasonable
notice of the time and place of any public sale of the Collateral or of the time
after which any private sale or any other intended disposition of the Collateral
is to be made. Unless otherwise provided by law, the requirement of reasonable
notice shall be met if such notice is mailed, postage prepaid, to the address of
Debtor shown herein at least ten days before the time of the sale or
disposition. Expenses of retaking, holding, preparing for sale, selling and the
like shall include reasonable attorneys' fees and other legal expenses. Debtor
understands that Secured Party's rights are cumulative and not alternative.
Secured Party is hereby granted a license or other right to use, without
charge, Debtor's labels, patents, copyrights, rights of use of any name, trade
secrets, tradenames, trademarks and advertising matter, or any
8
<PAGE>
property of similar nature, as it pertains to the Collateral, in advertising for
sale and selling any Collateral and Debtor's rights under all licenses and all
franchise agreements shall inure to Secured Party's benefit. The proceeds
realized from the sale of any Collateral may be applied, after allowing two (2)
business days for collection, first to the reasonable costs, expenses and
attorneys' fees and expenses incurred by Secured Party for collection and for
acquisition, completion, protection, removal, storage, sale and delivery of the
Collateral; secondly, to interest due upon any of the Obligations; and thirdly,
to the principal of the Obligations. If any deficiency shall arise, Debtor and
Guarantor shall remain liable to Secured Party therefor.
11. WAIVER OF DEFAULTS; AGREEMENT INCLUSIVE.
Secured Party may in its sole discretion waive an Event of Default, or
cure, at Debtor's expense, an Event of Default. Any such waiver in a particular
instance or of a particular Event of Default shall not be a waiver of any other
Event of Defaults or the same kind of default at another time. No modification
or change in this Security Agreement or any related note, instrument or
agreement shall bind Secured Party unless in writing signed by Secured Party.
No oral agreement shall be binding.
12. FINANCING STATEMENTS; CERTAIN EXPENSES.
If permitted by law, Debtor authorizes Secured Party to file a financing
statement with respect to the Collateral signed only by Secured Party, and to
file a carbon, photocopy or other reproduction of this Security Agreement or of
a financing statement. At the request of Secured Party, Debtor will execute any
financing statements, agreements or documents, in form satisfactory to Secured
Party which Secured Party may deem necessary or advisable to establish and
maintain a perfected security interest in the Collateral.
13. WAIVER OF DEFENSES ACKNOWLEDGMENT.
If Secured Party assigns a Schedule under this Security Agreement to a
third party ('Assignee'), then after such assignment:
(a) Debtor will make all payments due under such Schedule directly to such
Assignee at such place as Assignee may from time to time designate in
writing;
(b) Debtor agrees that it will settle all claims, defenses, setoffs and
counterclaims it may have against Secured Party directly with Secured
Party and will not set up any such claim, defense, setoff or
counterclaim against Assignee, Secured Party hereby agreeing to remain
responsible therefor;
(c) Secured Party shall not be Assignee's agent for any purpose and shall
have no authority to change or modify such Schedule or any related
document or instrument; and
(d) Assignee shall have all of the rights and remedies of Secured Party
hereunder with respect to such assigned Schedule but none of Secured
Party's obligations.
14. MISCELLANEOUS.
Debtor waives all exemptions. Secured Party may correct patent errors
herein and fill in such blanks as serial numbers, date of first payment and the
like. Any provisions hereof contra! to, prohibited by or invalid under
applicable laws or regulations shall be inapplicable and deemed omitted
herefrom, but shall not invalidate the remaining provisions hereof.
Debtor and Secured Party each hereby waive any right to a trial by jury in
any action or proceeding with respect to, in connection with, or arising out of
this Security Agreement, or any note or document delivered pursuant to this
Security Agreement. Except as otherwise provided herein or by applicable law,
the Debtor shall have no right to prepay the indebtedness described in any
Schedule. Debtor acknowledges receipt of a true copy and waives acceptance
hereof.
9
<PAGE>
If Debtor is a corporation, this Security Agreement is executed pursuant to
authority of its Board of Directors. Except where the context otherwise
requires, 'Debtor' and 'Secured Party' include the heirs, executors or
administrators, successors or assigns of those parties; nothing herein shall
authorize Debtor to assign this Security Agreement or its rights in and to the
Collateral. If more than one Debtor executes this Security Agreement, their
obligations under this Security Agreement shall be joint and several.
If at any time this transaction would be usurious under applicable law,
then regardless of any provision contained in this Security Agreement or in any
other agreement made in connection with this transaction, it is agreed that:
(a) The total of all consideration which constitutes interest under
applicable law that is contracted for, charged or received upon this
Security Agreement or any such other agreement shall under no
circumstances exceed the maximum rate of interest authorized by
applicable law and any excess shall be credited to the Debtor; and
(b) If Secured Party elects to accelerate the maturity of, or if Secured
Party permits Debtor to prepay the Obligations described in Paragraph
3, any amounts which because of such action would constitute interest
may never include more than the maximum rate of interest authorized by
applicable law and any excess interest, if any, provided for in this
Security Agreement or otherwise, shall be credited to Debtor
automatically as of the date of acceleration or prepayment.
Debtor hereby agrees to indemnify Secured Party and hold Secured Party
harmless from and against any liability, loss, damage, suit, action or
proceeding ever suffered or incurred by Secured Party as the result of Debtor's
failure to observe, perform or discharge Debtor's duties hereunder.
Additionally, if any taxes (excluding taxes imposed upon or measured by the net
income of Secured Party, but including, without limitation, any intangibles
taxes, stamp taxes, recording taxes, documentary taxes or franchise taxes) shall
be payable by Secured Party or Debtor on account of the execution or delivery of
this Security Agreement, or the execution, delivery, issuance or recording of
any of the other Loan Documents, or the creation of any of the Obligations
hereunder, by reason of any existing or hereafter enacted federal or state
statute, Debtor will pay all such taxes, including, but not limited to, any
interest and penalties thereon, and will indemnify and hold Secured Party
harmless from and against liability in connection therewith. The obligations of
Debtor under this Paragraph shall survive the payment in full of the Obligations
and the termination of this Security Agreement.
This Security Agreement may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
All notices, requests and demands to or upon a party hereto shall be in
writing and shall be sent by certified or registered mail, return receipt
requested, personal delivery against receipt or by telecopier or other facsimile
transmission and, unless otherwise expressly provided herein, shall be deemed to
have been validly served, given or delivered when delivered against receipt or
three (3) business days after deposit in the U.S. mail, postage prepaid, or in
the case of facsimile transmission, when received at the office of the noticed
party, addressed as follows:
(A) If to Secured Party: The CIT Group/Equipment
Financing, Inc.
900 Ashwood Parkway
Suite 600
Atlanta, Georgia 30338
Attention: VP Credit
---------
Telecopier No.: (404) 551-7865
--------------
10
<PAGE>
(B) If to Debtor: Coast Hotels and Casinos, Inc.
4500 W. Tropicana Avenue
Las Vegas, Nevada 89103
Attention: Harlan Braaten, President
Telecopier: (702) 351-3515
with copies to Coast Resorts, Inc.
4000 W. Flamingo Road
Las Vegas, Nevada 89103
Attention: Barry Lieberman
Telecopier: (702) 351-3515
or to such other address as each party any designate for itself by like notice
given in accordance with this Paragraph (and Debtor shall be authorized to
designate another address for Coast Resorts, Inc.). Any written notice that is
not sent in conformity with the provisions hereof shall nevertheless be
effective on the date that such notice is actually received by the noticed
party.
This Security Agreement and the other Loan Documents, together with all
other instruments, agreements and certificates executed by the parties in
connection therewith or with reference thereto, embody the entire understanding
and agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
inducements, whether express or implied, oral or written.
This Security Agreement has been delivered at, and shall be effective when
accepted by Secured Party in Atlanta, Georgia. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of Nevada.
Debtor waives (i) presentment, demand and protest and notice of
presentment, protest, default, non payment, maturity, release, compromise,
settlement, extension or renewal of any or all guaranties at any time held by
Secured Party on which Debtor may in any way be liable and hereby ratifies and
confirms whatever Secured Party may do in this regard; (ii) any right Debtor may
have upon payment in full of the Obligations to require Secured Party to
terminate its security interest in the Collateral or in any other property of
Debtor until termination of this Security Agreement in accordance with its terms
and the execution by Debtor, and by any person whose loans to Debtor are used in
whole or in party to satisfy the Obligations, of any agreement indemnifying
Secured Party from any loss or damage Secured Party may incur as the result of
dishonored checks or other items of payment received by Secured Party from
Debtor; and (iii) notice of acceptance hereof.
15. SPECIAL PROVISIONS.
Prepayment of the obligations under any Schedule shall he permitted as set
forth in such Schedule.
Dated as of October 24, 1996
11
<PAGE>
Secured Party: Debtor:
THE CIT GROUP/EQUIPMENT FINANCING, INC. COAST HOTELS AND CASINOS, INC.
By:/s/ J.E. Palmer By: /s/Harlan Braaten
- ------------------------------- -------------------------------
Title: Senior Credit Operations Title: President and Chief
Manager Operating Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 42,515
<SECURITIES> 0
<RECEIVABLES> 2,377
<ALLOWANCES> 0
<INVENTORY> 3,792
<CURRENT-ASSETS> 56,258
<PP&E> 271,418
<DEPRECIATION> 67,154
<TOTAL-ASSETS> 314,308
<CURRENT-LIABILITIES> 35,153
<BONDS> 171,965
0
0
<COMMON> 1
<OTHER-SE> 102,477
<TOTAL-LIABILITY-AND-EQUITY> 314,308
<SALES> 0
<TOTAL-REVENUES> 141,858
<CGS> 0
<TOTAL-COSTS> 85,287
<OTHER-EXPENSES> 34,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,061
<INCOME-PRETAX> 14,030
<INCOME-TAX> 7,411
<INCOME-CONTINUING> 6,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,619
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0
</TABLE>
