<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, 1997
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)
<TABLE>
<S> <C>
NEVADA 88-0345706
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
4500 WEST TROPICANA AVE., LAS VEGAS, NEVADA 89103
(Address of principal executive offices) (Zip code)
</TABLE>
(702) 365-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
-
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of September 30, 1997: 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,
1997 1996
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 22,110 $ 53,369
Restricted cash equivalents, in escrow account..................... - 8,186
Accounts receivable, net........................................... 4,182 3,659
Other current assets............................................... 16,265 14,427
------------- -----------
TOTAL CURRENT ASSETS............................................... 42,557 79,641
PROPERTY AND EQUIPMENT, net........................................... 300,595 286,025
OTHER ASSETS.......................................................... 8,500 6,680
------------- -----------
$351,652 $372,346
============= ===========
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 5,891 $ 13,479
Accrued liabilities................................................ 31,497 23,864
Construction accounts payable...................................... 7,851 23,517
Current portion of long-term debt.................................. 8,031 6,781
------------- -----------
TOTAL CURRENT LIABILITIES.......................................... 53,270 67,641
------------- -----------
LONG-TERM DEBT, less current portion.................................. 192,334 195,764
------------- -----------
DEFERRED RENT......................................................... 4,360 2,577
------------- -----------
OTHER LIABILITIES..................................................... 5,981 5,686
------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common Stock, $1.00 par value, 25,000 shares authorized,
1,000 shares issued and outstanding................................ 1 1
Additional paid - in capital....................................... 95,858 95,858
Retained earnings (deficit)........................................ (152) 4,819
------------- -----------
TOTAL STOCKHOLDER'S EQUITY......................................... 95,707 100,678
------------- -----------
$351,652 $372,346
============= ===========
</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 OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino......................................... $50,655 $36,324 $154,235 $107,624
Food and beverage.............................. 15,233 9,248 45,416 28,637
Hotel.......................................... 6,475 3,577 20,811 10,594
Other.......................................... 4,937 2,597 14,112 7,511
----------- ---------- ---------- ----------
GROSS OPERATING REVENUES............... 77,300 51,746 234,574 154,366
Less: promotional allowances.............. (6,859) (4,088) (19,430) (12,508)
----------- ---------- ---------- ----------
NET OPERATING REVENUES................. 70,441 47,658 215,144 141,858
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Casino......................................... 27,878 18,661 83,052 52,503
Food and beverage.............................. 11,429 7,222 36,651 21,894
Hotel.......................................... 3,022 1,753 9,154 5,238
Other.......................................... 4,114 1,954 11,709 5,652
General and administrative..................... 14,164 10,486 45,624 29,198
Land lease..................................... 1,119 -- 3,358 --
Depreciation and amortization.................. 4,743 1,969 14,227 5,591
----------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES........................... 66,469 42,045 203,775 120,076
----------- ---------- ---------- ----------
OPERATING INCOME............................... 3,972 5,613 11,369 21,782
----------- ---------- ---------- ----------
OTHER INCOME (EXPENSES)
Interest expense................................. (6,577) (5,884) (19,607) (16,061)
Interest income.................................. -- 959 98 3,406
Interest capitalized............................. 543 2,670 543 4,901
Gain on disposal of assets....................... 52 -- 895 2
----------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSES)...................... (5,982) (2,255) (18,071) (7,752)
----------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT)................................ (2,010) 3,358 (6,702) 14,030
----------- ---------- ---------- ----------
INCOME TAX PROVISION (BENEFIT)..................... (681) 1,175 (1,731) 7,411
----------- ---------- ---------- ----------
NET INCOME (LOSS).................................. $(1,329) $ 2,183 $ (4,971) $ 6,619
=========== ========== ========== ==========
PRO FORMA DATA (reflecting change in tax status):
Provision (benefit) for income taxes........... (681) 1,175 (1,731) 4,911
----------- ---------- ---------- ----------
Net income (loss).............................. $(1,329) $ 2,183 $ (4,971) $ 9,119
=========== ========== =========== ==========
</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, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (4,971) $ 6,619
----------------- ------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization.................................... 14,227 5,575
Provision for bad debts.......................................... 1,700 1,595
Gain on disposal of assets....................................... (895) (2)
Deferred income taxes............................................ 9 2,500
Other non-cash expenses.......................................... 2,236 355
Changes in assets and liabilities:
Net increase in accounts receivable and other assets............. (4,535) (1,234)
Net increase in accounts payable and accrued liabilities......... 45 11,191
----------------- ------------------
TOTAL ADJUSTMENTS................................................ 14,597 19,980
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 9,626 26,599
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of construction accounts payable....... (43,888) (82,617)
Proceeds from disposal of assets................................. 1,143 21
Net reductions (additions) to restricted cash equivalents........ 8,186 (56,378)
----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES............................ (34,559) (138,974)
----------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of discounts and commissions............................... 3,200 164,098
Principal payments on long-term debt............................. (5,832) (1,505)
Proceeds from borrowings under bank line of credit............... -- 1,045
Principal payments on bank line of credit........................ -- (29,200)
Payments for debt issue costs.................................... -- (1,236)
Advances to affiliates........................................... (3,694) (4,015)
----------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (6,326) 129,187
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (31,259) 16,812
CASH AND CASH EQUIVALENTS, at beginning of year......................... 53,369 14,539
----------------- ------------------
CASH AND CASH EQUIVALENTS, at end of period............................. $ 22,110 $ 31,351
================= ==================
</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. ("The Company"), a Nevada corporation, is a
wholly owned subsidiary of Coast Resorts, Inc. ("Coast Resorts"), which is also
a Nevada corporation. The Company owns and operates the following Las Vegas
hotel-casinos:
. Gold Coast Hotel and Casino, approximately one mile west of the Las
Vegas Strip on Flamingo Road.
. Barbary Coast Hotel and Casino, located on the Las Vegas Strip.
. The Orleans Hotel and Casino, located approximately one mile west of
the Las Vegas Strip on Tropicana Avenue.
The Gold Coast and Barbary Coast hotel-casinos 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 general
partnership (collectively, the "Predecessor Partnerships"). On January 1, 1996,
the partners of the Predecessor Partnerships completed a reorganization (the
"Reorganization") with Coast Resorts. Coast Resorts was formed in September
1995 for the purpose of effecting such Reorganization of the Predecessor
Partnerships. Coast Resorts, Gold Coast and Barbary Coast 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 (see Note 4), which Coast Resorts contributed to Coast West,
Inc. ("Coast West"), another wholly owned subsidiary of Coast Resorts. 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.
5
<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 (CONTINUED)
Basis of Presentation
The accompanying financial statements are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The unaudited
financial statements should be read in conjunction with the audited financial
statements and footnotes for the year ended December 31, 1996. 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 - CONSTRUCTION COMMITMENTS
In the first quarter of 1997, the Company began construction of Phase Two
of The Orleans. The project, expected to cost $35 to $40 million, will include
twelve movie theaters, a child care facility, additional restaurants, gaming
facilities and space for live entertainment. Management anticipates that the
first part of the project, including the movie theaters and child care facility,
will open in December 1997. In addition, in October 1997 the Company completed
and opened a new restaurant at the Barbary Coast, estimated to cost $1.9
million. As of September 30, 1997, the Company had incurred $20.7 million and
$1.7 million, respectively, of costs related to the two construction projects.
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 for the
quarter ended March 31, 1996. In addition, upon termination of the partnership
tax status on January 1, 1996, all undistributed earnings of the Predecessor
Partnerships were reclassified to additional paid-in capital.
Subsequent to the Reorganization, the Company is included in the
consolidated federal income tax return filed by Coast Resorts. The Company's
tax is allocated based on the amount of tax it would incur if it filed a
separate return. Coast Resorts will pay the Company an amount equal to the tax
benefit arising from the utilization of net operating losses of the Company to
the extent that such losses result in a reduction in the amount of tax payable
by
6
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 3 - INCOME TAXES (CONTINUED)
Coast Resorts. For the three months and nine months ended September 30, 1997,
the income tax benefit differs from that computed at the federal statutory
corporate tax rate due to limitations on Coast Resorts' ability to utilize the
net operating losses generated by the Company and adjustment of prior year tax
liabilities.
The pro forma provision for income taxes and the related pro forma net
income reflect adjustments to income taxes assuming that the recognition of net
deferred tax liabilities occurred prior to January 1, 1996.
NOTE 4-ADVANCES TO COAST WEST
The Company has agreed to provide advances to Coast West sufficient to make
payments on the Coast West Lease (described below) 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 in 1995,
$171,667 in 1996 and $176,667 in 1997. 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, 1997, the Company had advanced Coast West approximately $5.1
million related to the Coast West lease payments and certain development
expenses. Coast West is a development stage enterprise and has no source of
income and is therefore solely dependent on the advances 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 the advances.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial information regarding the results of operations of the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------------------
1997 1996 1997 1996
---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
GOLD COAST
Net operating revenues................. $29,994 $34,652 $ 93,950 $105,420
Operating income....................... $ 4,822 $ 6,271 $ 16,847 $ 22,588
EBITDA (1)............................. $ 6,029 $ 7,479 $ 20,455 $ 26,057
BARBARY COAST
Net operating revenues................. $10,884 $13,006 $ 33,509 $ 36,438
Operating income....................... $ 611 $ 773 $ 518 $ 2,997
EBITDA (1)............................. $ 1,008 $ 1,182 $ 1,721 $ 4,227
THE ORLEANS
Net operating revenues................. $29,563 - $ 87,686 -
Operating income....................... $ 245 - $ (972) -
EBITDA (1)............................. $ 3,628 - $ 9,182 -
EBITDAR (1)............................ $ 4,153 - $ 10,757 -
TOTAL (INCLUDING CORPORATE)
Net operating revenues................. $70,441 $47,658 $215,144 $141,858
Operating income....................... $ 3,972 $ 5,613 $ 11,369 $ 21,782
EBITDA (1)............................. $ 9,311 $ 7,582 $ 27,382 $ 27,373
EBITDAR (1)............................ $ 9,836 - $ 28,957 -
</TABLE>
(1) "EBITDA" is defined as operating income plus depreciation, amortization and
deferred (non-cash) rent. "EBITDAR" is defined as operating income plus
depreciation, amortization and rent expense (both cash and deferred).
EBITDA and EBITDAR should not be construed as alternatives to operating
income as an indicator of the company's operating performance, or as
alternatives to cash provided by operating activities as an indicator of
cash flows or a measure of liquidity. EBITDA and EBITDAR are presented
solely as supplemental disclosure because management believes that they are
widely used measures of financial performance in the gaming industry.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996 and Nine Months ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net revenues for the Company were $70.4 million in the quarter ended
September 30, 1997, an increase of $22.7 million (47.6%) over revenues of $47.7
million in the same quarter in 1996. For the nine months ended September 30,
1997, net revenues were $215.1 million, an increase of $73.2 million (51.6%)
over revenues of $141.9 million in the first nine months of 1996. The increases
were due to the opening of the Company's newest hotel-casino, The Orleans, in
December 1996.
Operating income decreased $1.6 million (28.6%) to $4.0 million in the
quarter ended September 30, 1997 compared to $5.6 million in the third quarter
of 1996. For the first nine months of 1997, operating income decreased $10.4
million (47.7%) to $11.4 million compared to $21.8 million in the same period in
1996. The decreases were primarily due to lower-than-expected revenues at the
Company's newest hotel-casino, The Orleans, as well as continued decreased
revenues at the Company's other two hotel-casinos, the Gold Coast and the
Barbary Coast (discussed below).
Net loss for the quarter ended September 30, 1997 was $1.3 million compared
to net income of $2.2 million in the quarter ended September 30, 1996. For the
first nine months of 1997 net loss was $5.0 million compared to net income of
$6.6 million in the first nine months of 1996. The decreases were due to
increased interest expense as well as the decreases in operating income at the
Gold Coast and Barbary Coast described below and the lower-than-expected
operating results at The Orleans.
Gold Coast. Net revenues for the Gold Coast Hotel and Casino declined in
----------
the three months and nine months ended September 30, 1997 compared to revenues
in the same periods in 1996. For the three months ended September 30, 1997, net
revenues were $30.0 million compared to $34.7 million in 1996, a decrease of
$4.7 million (13.5%). For the nine months ended September 30, 1997, net
revenues were $94.0 million compared to $105.4 million in 1996, a decrease of
$11.4 million (10.8%). Compared to 1996, third quarter casino revenues declined
$3.5 million (13.6%) and nine month casino revenues declined $9.4 million
(12.0%), primarily due to lower customer wagering volume. Food and beverage
business decreased as a result of reduced customer traffic, causing revenues to
decline $856,000 in the third quarter and $2.7 million in the first nine months
of 1997, down 12.4% and 12.5%, respectively, compared to the same two periods in
1996. Lower hotel room occupancy rates contributed to a $277,000 (10.8%)
decline in third quarter hotel revenues and a $125,000 (1.6%) decline in hotel
revenues for the nine months ended September 30, 1997. Management attributes
the overall revenue decline at the Gold Coast to the increased competition from
the openings of new casinos (including The Orleans) and expanded capacity in
others. Gold Coast operating expenses were $25.2 million in the third quarter
compared to $28.4 million in the third quarter of 1996, a reduction of 11.3%.
For the first nine months of 1997, operating expenses were $77.1 million, down
6.9% from 1996 expenses of $82.8 million. Due to the lower revenues, operating
income at the Gold Coast was $4.8 million in the third quarter of 1997 compared
to $6.3 million in the second quarter of 1996, down 23.8%. For the nine months
ended
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
September 30, 1997, Gold Coast operating income was $16.8 million compared to
$22.6 million in 1996, down 25.7%.
Barbary Coast. Net revenues for the Barbary Coast Hotel and Casino were
-------------
$10.9 million in the third quarter of 1997 compared to $13.0 million in the same
period in 1996, a decrease of 16.2%. For the first nine months of 1997, net
revenues were $33.5 million, an 8.0% decrease from revenues of $36.4 million in
the first nine months of 1996. The lower revenues were due to a decline in
casino revenues, down $2.1 million (19.8%) in the third quarter, primarily as a
result of lower pari-mutuel wagering in the race book. For the nine months
ended September 30, 1997, casino revenues declined $3.2 million (10.2%) compared
to 1996, primarily as a result of an 8.5% decrease in table games wagering
volume and a lower table games win percentage than in the previous year.
Operating expenses remained relatively constant for the two periods, but the
lower revenues caused operating income to decline to $611,000 in the third
quarter of 1997, compared to $773,000 in 1996. For the nine months ended
September 30, 1997, operating income was $518,000 compared to $3.0 million in
the first nine months of 1996.
The Orleans. The three months ended September 30, 1997 represented the
-----------
third full quarter of operations for The Orleans, which opened on December 18,
1996. Net operating revenues for the three months and nine months ended
September 30, 1997 were $29.6 million and $87.7 million, respectively.
Operating income was $245,000 in the third quarter of 1997 compared to operating
income of $1.3 million in the second quarter and an operating loss of $2.5
million in the first quarter. Compared to the second quarter of 1997, third
quarter table games handle (wagering volume) decreased 7.3%, but slot wagering
increased 6.8%. Third quarter hotel revenues declined 10.5% compared to the
second quarter, reflecting a lower occupancy rate and lower average daily room
rates. Restaurant customer volume increased 9.4% in the third quarter,
contributing to a 4.9% increase in food and beverage revenues over the second
quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have consisted of cash
provided by operating activities and, until termination of a bank credit
facility in January 1996, bank financing. On January 30, 1996, the Company
issued $175.0 million principal amount of 13% first mortgage notes due 2002
("First Mortgage Notes"). The net proceeds from the issuance, after deducting
discounts and commissions, were approximately $164.1 million. Of that amount,
approximately $29.2 million was used by the Company to repay all outstanding
indebtedness under the Company's revolving credit facility, which was
terminated, $19.3 million was deposited into an escrow account to fund the
Company's first two semi-annual interest payments on the First Mortgage Notes,
and approximately $114.8 million was applied to the cost of developing The
Orleans. The balance of approximately $800,000 was used to pay, in part, the
offering expenses of approximately $2.4 million. Additionally, approximately
$30 million of equipment for The Orleans was financed through a capital lease.
The Company is permitted by the indenture pursuant to which the First
Mortgage Notes were issued, to
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
borrow up to an additional $20 million for working capital purposes, and is in
discussions with respect to working capital financing. In August 1997, the
Company incurred $3.2 million in equipment financing, resulting in an aggregate
of $27.6 million of equipment financing outstanding at September 30, 1997.
The Company's consolidated cash requirements, in addition to debt service
on the First Mortgage Notes and equipment capital leases, include land lease
payments for its properties, ongoing maintenance capital expenditures at its
existing facilities and periodic enhancements to those facilities. The
Company's capital expenditures (exclusive of those associated with the
development and construction of The Orleans) for 1996 were approximately $6.2
million, most of which related to normal maintenance capital expenditures.
Management expects that maintenance capital expenditures for 1997 will be
approximately $6.0 million.
In the first quarter of 1997, the Company began construction of Phase Two
of The Orleans. The project, expected to cost $35 to $40 million, will include
twelve movie theaters, a child care facility, additional restaurants, gaming
facilities and space for live entertainment. Management anticipates that the
first part of the project, including the movie theaters and child care facility,
will open in December 1997. Through September 30, 1997, the Company had
incurred $20.7 million of costs related to the project. In October 1997, the
Company completed and opened a new restaurant at the Barbary Coast which has an
estimated total cost of $1.9 million. Both the Orleans and Barbary Coast
projects have been financed with existing cash reserves and cash from
operations.
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, uncertainties associated with construction
projects, including the related disruption of operations and the availability of
financing, if necessary, which could cause actual results to vary materially
from those discussed herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
11
<PAGE>
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.
10.25 Employment Agreement dated January 1, 1997 between
Coast Hotels and Casinos, Inc. and Harlan Braaten.
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, 1997.
12
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
Date: November 14, 1997 COAST HOTELS AND CASINOS, INC., a Nevada corporation
By: /s/ Gage Parrish
----------------
Gage Parrish
Vice President and Chief Financial Officer
</TABLE>
13
<PAGE>
Coast Hotels and Casinos, Inc.
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement" is entered into on January 1, 1997
by and between Coast Hotels & Casinos, Inc. A Nevada Corporation ("Employer")
and Harlan Braaten ("Employee").
1. SCOPE OF DUTIES. Employer hereby employs Employee as its President and
Chief Operating Officer to perform such executive duties as are commonly
attendant upon these offices and such further normal executive duties as
may be specified from time to time by the Board of Directors through their
designated representative. In construing the provisions of this Agreement,
"Employer" shall also include Coast Resorts, Inc. and Coast West, Inc. and
any subsequently formed corporations affiliated with Employer wherein
Employee is chosen to be President and Chief Operating Officer by the Board
of Directors.
2. TERM OF AGREEMENT. The term of this agreement shall commence on October
31, 1995 and terminate December 31, 1998. Employee has represented to
Employer that he is not currently under contract to any entity other than
Coast Hotels & Casinos, Inc.
3. EMPLOYEE'S COMPENSATION PACKAGE. Employee shall receive:
a. An initial annual salary of $250,000;
b. Reimbursement for all reasonable business and travel expenses
incurred by Employee in performing his duties hereunder, payable
in accordance with Employer's customary practices;
1
<PAGE>
c. A bonus of at least fifty (50%) of his annual salary if specified
annual goals as set forth in Exhibit A attached hereto are met for
each year of the term of this contract. a new Exhibit A will be
prepared for each year this contract is in effect, listing the
specified annual goals for the pertinent year. Both Employer and
Employee will sign the Exhibit A at the earliest convenient time;
d. Health insurance for Employee and his spouse and dependent children
residing with him under the most favorable medical and dental plan
offered by Employer, including a plan offered exclusively for
executives if such plan exists;
e. Four weeks vacation per year;
f. Insurance coverage (including disability and life) provided to
executive employees of Employer;
g. Pension plan coverage provided to executive Employees of Employer;
and
h. All other perquisites currently available to executive employees
of Employer;
4. STOCK OPTIONS. Employer will provide to Employee, stock options with the
strike price being equal to the completed offering price of any initial
public offering ("IPO") for Coasts Resorts, Inc.,. When the IPO is
complete, Employee will have an option to purchase shares amounting to two
(2%) of the outstanding shares of Coast Resorts, Inc. The option will be
fully vested as to one-third of the shares at the completion of the IPO and
will vest in an additional one-third of the shares on the first anniversary
of the completion of the IPO and on the final one-third of the shares on
the second anniversary of the completion of the IPO, provided that Employee
is still employed by Employer.
2
<PAGE>
Notwithstanding the foregoing, it is the understanding of both Employer and
Employee that the options will be granted pursuant to an IRS qualified
stock option and that Employer and Employee will cooperate fully in
insuring that the options are issued in connection with a qualified stock
option plan. Should Coast Resorts, Inc. fail to complete an IPO by December
31, 1997, Employee will be paid a one time bonus of $250,000.
5. GAMING LICENSURE. Employee acknowledges and agrees that the laws of Nevada
require that Employee may be investigated for suitability and licensing.
Employee shall fully cooperate with the appropriate governmental
authorities in order that he may obtain all certificates, permits and
licenses required in connection with his employment hereunder. Employee
further acknowledges and agrees that in the event he fails to so cooperate
or he fails to obtain, within the time specified by the Nevada Gaming
Commission and all other governmental agencies having jurisdiction, or
thereafter maintain, in good standing and in full force and effect, during
the term hereof, all required certificates, permits and licenses in
connection with his employment hereunder, employer may terminate this
agreement, in which event Employer shall have no further liability or
obligation whatsoever to Employee hereunder, notwithstanding anything to
the contrary contained therein.
6. NO COMPETITION AGREEMENT. In consideration hereof and in consideration of
the grant of options contained herein, Employee covenants and agrees that
during the term of this agreement, he shall not, directly or indirectly,
engage in, participate in or otherwise be connected in any way (other than
through a passive ownership role) with any firm, person, corporation, or
other entity that is engaged in for profit business. in addition to all
other rights provided to Employer hereunder, if Employee breaches any of
his obligations contained in this paragraph or fails to comply with the
terms of paragraph 5 herein, Employer shall have the right to terminate
this agreement but any such termination shall not be deemed an election of
remedies and Employer expressly reserves all other legal and equitable
remedies. Employee further agrees that he shall not at any time during the
term of this Agreement or thereafter without Employer's written consent,
disclose to other persons or business entities any trade secrets or other
confidential information and all information concerning Employer's
customers constitute Employer's exclusive property, that all of the
restrictions on his activities contained in this Agreement are required for
Employer's reasonable protection and that in the event of any breach of the
agreement by him, Employer will be entitled if it so elects, to institute
and prosecute proceedings at law or in equity to obtain damages with
respect to such breach, to enforce the specific performance of this
agreement or to enjoin Employee
3
<PAGE>
from engaging in any activity in violation
hereof.
7. TERMINATION OF AGREEMENT. This Agreement may be terminated by Employer at
anytime during the term hereof for good cause. Upon any such termination,
Employer shall have no further liability or obligation whatsoever to
Employee hereunder except as expressly set forth in this Agreement. Good
cause shall be defined as:
a. Employee's death or disability, which is hereby defined to mean his
incapacity for medical reasons certified to by a licensed physician
which precludes the substantial performance of his duties hereunder
for a substantially consecutive period of six (6) months;
b. Employee's insubordination which is of such degree and kind as to
make a continuing relationship between Employee and the Chairman of
the Board of Directors impossible as determined in good faith by the
Board of Directors;
c. Employee's arrest on a felony offense, provided that probable cause
existed for such arrest.
d. Employee's misconduct, insubordination, inattention to Employer's
business, failure to substantially perform his duties or other
material breach of this Agreement, which is not remedied by Employee
to the good faith satisfaction of Employer within fifteen days
following his receipt of written notice thereof.
8. SEVERANCE PAY. If Employee is terminated for any reason other than set
forth in paragraph 5 or 7 (c), in lieu of any amounts provided for in this
contract (other than amounts provided for in paragraph 9), Employee shall
be entitled to $250,000 or his annual salary on the date of termination,
whichever is greater and any prorata earned bonus. Employee's contract
will continue from year to year after initial term unless given 90 days'
notice before december 31st of current year in which Employee will be
entitled to his severance package.
4
<PAGE>
9. CHANGE OF CONTROL. Employer acknowledges that Michael Gaughan and Jerry
Herbst together currently own in excess of 40% of Coast Resorts, Inc. stock.
If Messrs. Gaughan and Herbst divest themselves of the Coast Resorts, Inc.
stock (other than through gifts or testamentary transfers) so that they no
longer own five percent (5%) of the outstanding stock of Coast Resorts, Inc.,
Employee shall be entitled to a lump sum payment of $250,000 from Employer
(in addition to any amounts payable under paragraph 8) if Employee is
terminated within six (6) months after the divestment of the stock of coast
resorts, inc. by Messrs. Gaughan and Herbst.
10. SEVERABILITY. If any provision hereof is unenforceable, illegal or invalid
for any reason whatsoever, such fact shall not affect the remaining
provisions hereof. If any of the provisions hereof which impose
restrictions on Employee are, with respect to such restrictions, determined
by a final judgment by any court of competent jurisdiction to be
unenforceable or invalid, such provision should be severed and the
remainder of the provisions enforced.
11. NO WAIVER. No failure or delay on the part of the Employer or Employee in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof nor shall any single or partial exercise of any such right, power
or remedy preclude any other right, power or remedy hereunder. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
12. ENTIRE AGREEMENT. This instrument contains the entire agreement between
Employer and Employee. It may not be changed orally but only by an
Agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought. No
amendment, modification, termination or waiver of any provision of this
Agreement nor consent to any departure by the Employee therefrom shall in
any event be effective unless the same shall be in writing and signed by a
duly authorized officer of Employer or Employee, as the case may be. Any
such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
13. CHOICE OF LAW. This Agreement shall be controlled, construed and enforced
in accordance with the laws of Nevada.
5
<PAGE>
14. NOTICES. All notices, demands, and other communications required or
permitted hereunder shall be given by hand delivery (with a receipt
acknowledging hand delivery), overnight delivery service or by certified
mail return receipt requested, and by facsimile. Notice will be deemed to
have been duly given on the day of hand delivery and one day after having
been sent by overnight delivery or by certified mail return receipt
requested and by facsimile.
All notices and other communications shall be delivered or sent to:
Employer
--------
Coast Hotels & Casinos, Inc.
4500 West Flamingo Road
Las Vegas, Nevada 89103
Facsimile: 365-7566
Employee
--------
Harlan Braaten
8641 Highacre Drive
Las Vegas, Nevada 89128
Facsimile:254-7460
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Registrant's
unaudited condensed balance sheet as of September 30, 1997 and the related
unaudited condensed statements of operations and cash flows for the nine months
ended September 30, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,110
<SECURITIES> 0
<RECEIVABLES> 4,711
<ALLOWANCES> 529
<INVENTORY> 5,291
<CURRENT-ASSETS> 42,557
<PP&E> 380,491
<DEPRECIATION> 79,896
<TOTAL-ASSETS> 351,652
<CURRENT-LIABILITIES> 53,270
<BONDS> 192,334
0
0
<COMMON> 1
<OTHER-SE> 95,706
<TOTAL-LIABILITY-AND-EQUITY> 351,652
<SALES> 0
<TOTAL-REVENUES> 215,144
<CGS> 0
<TOTAL-COSTS> 203,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,064
<INCOME-PRETAX> (6,702)
<INCOME-TAX> (1,731)
<INCOME-CONTINUING> (4,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,971)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
