<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, 1998
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)
4500 WEST TROPICANA AVENUE, LAS VEGAS, NEVADA 89103
(Address of principal executive offices) (Zip Code)
(702) 365-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of September 30, 1998: 1,000
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COAST HOTELS AND CASINOS, INC.
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 (unaudited) 1997
-------------------- -------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 42,007 $ 29,426
Accounts receivable, net.................................... 4,599 5,616
Other current assets........................................ 17,239 19,952
-------------------- -------------------
TOTAL CURRENT ASSETS.................................... 63,845 54,994
PROPERTY AND EQUIPMENT, net.................................... 300,549 305,420
OTHER ASSETS................................................... 7,838 6,447
-------------------- -------------------
$372,232 $366,861
==================== ===================
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 5,711 $ 9,107
Accrued liabilities......................................... 34,889 27,651
Construction accounts payable............................... -- 2,491
Income taxes payable........................................ 1,564 --
Current portion of long-term debt........................... 7,934 8,076
-------------------- -------------------
TOTAL CURRENT LIABILITIES............................... 50,098 47,325
LONG-TERM DEBT, less current portion........................... 201,750 207,173
DEFERRED INCOME TAXES.......................................... 8,465 10,063
DEFERRED RENT.................................................. 12,020 4,954
-------------------- -------------------
TOTAL LIABILITIES....................................... 272,333 269,515
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 25,000 shares authorized,
1,000 shares issued and outstanding 1 1
Additional paid-in capital.................................. 86,903 95,858
Retained earnings........................................... 12,995 1,487
-------------------- -------------------
TOTAL STOCKHOLDER'S EQUITY.............................. 99,899 97,346
-------------------- -------------------
$372,232 $366,861
==================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino................................... $61,050 $50,655 $178,084 $154,235
Food and beverage........................ 16,426 15,233 49,187 45,416
Hotel.................................... 6,919 6,475 21,145 20,811
Other.................................... 6,579 4,937 18,658 14,112
-------------- -------------- -------------- --------------
GROSS OPERATING REVENUES.............. 90,974 77,300 267,074 234,574
Less: Promotional allowances............ (7,903) (6,859) (23,006) (19,430)
-------------- -------------- -------------- --------------
NET OPERATING REVENUES................ 83,071 70,441 244,068 215,144
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Casino................................... 31,967 28,239 93,851 84,419
Food and beverage........................ 11,794 11,616 35,356 37,836
Hotel.................................... 3,278 3,273 9,000 9,784
Other.................................... 6,080 4,418 16,023 13,599
General and administrative............... 16,060 13,586 43,634 42,127
Deferred rent............................ 1,004 594 2,193 1,783
Depreciation and amortization............ 5,193 4,743 15,398 14,227
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES....................... 75,376 66,469 215,455 203,775
-------------- -------------- -------------- --------------
OPERATING INCOME:........................ 7,695 3,972 28,613 11,369
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSES):
Interest expense......................... (6,895) (6,577) (20,529) (19,607)
Interest income.......................... 168 -- 460 98
Interest capitalized..................... -- 543 -- 543
Gain on disposal of assets............... 15 52 157 895
-------------- -------------- -------------- --------------
TOTAL OTHER INCOME (EXPENSES).................. (6,712) (5,982) (19,912) (18,071)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES.............. 983 (2,010) 8,701 (6,702)
-------------- -------------- -------------- --------------
INCOME TAX PROVISION (BENEFIT)................ 348 (681) 2,962 (1,731)
-------------- -------------- -------------- --------------
NET INCOME (LOSS).............................. $ 635 $(1,329) $ 5,739 $ (4,971)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
COAST HOTELS AND CASINOS, INC.
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 5,739 $ (4,971)
---------------- ----------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization......................................... 15,398 14,227
Provision for bad debts............................................... 1,442 1,700
Gain on disposal of assets............................................ (157) (895)
Deferred income taxes................................................. (1,598) 1,819
Deferred rent......................................................... 2,193 1,783
Other non-cash expenses............................................... 484 453
Changes in assets and liabilities:
Net (increase) decrease in accounts receivable and other assets..... 2,717 (4,535)
Net increase in accounts payable and accrued liabilities............ 5,406 45
---------------- ----------------
TOTAL ADJUSTMENTS..................................................... 25,885 14,597
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 31,624 9,626
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (9,974) (43,888)
Proceeds from disposal of assets...................................... 157 1,143
Net reductions to restricted cash equivalents......................... -- 8,186
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES................................. (9,817) (34,559)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of discounts and commissions.................................... -- 3,200
Principal payments on long-term debt.................................. (5,942) (5,832)
Advances to affiliates................................................ (3,284) (3,694)
---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES................................. (9,226) (6,326)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 12,581 (31,259)
CASH AND CASH EQUIVALENTS, at beginning of year.............................. 29,426 53,369
---------------- ----------------
CASH AND CASH EQUIVALENTS, at end of period.................................. $42,007 $ 22,110
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED 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, prior to January 1996,
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 (as defined herein), which Coast Resorts contributed to its
wholly owned subsidiary, Coast West, Inc. ("Coast West"). However, as further
described in Note 2, on July 21, 1998, Coast Resorts contributed all of the
outstanding common stock of Coast West to the Company, making Coast West a
wholly owned subsidiary of the Company. The Coast West Lease is a long-term
lease on approximately 50 acres of land in Las Vegas on which the Company may
develop and operate a future hotel-casino. 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
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, 1997. 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.
5
<PAGE>
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION (CONTINUED)
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
NOTE 2- COAST WEST
The Company has agreed to provide advances to Coast West sufficient to make
payments on the Coast West Lease and other obligations, including project
development and site improvement. 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 lease includes a put option exercisable by
the landlord requiring the purchase of the land at fair market value at the end
of the 20th through 24th years of the lease, provided that the purchase price
shall not be less than ten times, nor more than fifteen times, the annual rent
at such time. Based on the terms of the lease, the potential purchase price
commitment ranges from approximately $31.0 million to approximately $51.0
million in the years 2014 through 2018.
In January 1996, the Company issued $175.0 million principal amount of 13%
first mortgage notes due 2002 ("13% First Mortgage Notes"). The indenture
governing the 13% First Mortgage Notes (the "Indenture") limited the amount
outstanding under advances to Coast West to $8.0 million unless Coast West
became a subsidiary of the Company. Based on the cash requirements of Coast West
for lease payments and anticipated development costs, it was likely that by
September 1998 Coast West would require cash from the Company that, when added
to the outstanding advances from the Company, would exceed $8.0 million. On July
21, 1998, Coast Resorts contributed the capital stock of Coast West to the
Company, as a result of which Coast West became a wholly owned subsidiary of the
Company. Coast West remains a guarantor of the 13% First Mortgage Notes.
Pursuant to the terms of the Indenture, the Company may make advances to its
wholly owned subsidiaries without limit.
As of the date of the stock transfer, Coast West had total assets of
$3,615,000, total liabilities of $12,570,000 (which includes $7,699,000 due to
the Company and $4,871,000 of deferred rent), and a cumulative retained deficit
of $8,955,000. Additionally, the Company had recorded an allowance for doubtful
accounts in connection with advances provided to Coast West for lease payments.
On the date of the stock transfer, the total allowance for bad debt expense
recorded by the Company in relation to those advances was $5,769,000. Upon the
transfer of Coast West stock, the Company wrote off this allowance for doubtful
accounts to retained earnings and recorded the assumption of the $8,955,000 of
net liabilities of Coast West as a decrease in additional paid-in capital.
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.
6
<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,
---------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
GOLD COAST
<S> <C> <C> <C> <C>
Net operating revenues............... $31,058 $29,994 $ 94,527 $ 93,950
Operating income..................... 5,106 4,822 18,131 16,847
EBITDA (1)........................... 6,358 6,029 21,863 20,455
BARBARY COAST
Net operating revenues............... $10,507 $10,884 $ 31,860 $ 33,509
Operating income (loss).............. (152) 611 541 518
EBITDA (1)........................... 298 1,008 1,855 1,721
THE ORLEANS
Net operating revenues............... $41,505 $29,563 $117,681 $ 87,686
Operating income (loss).............. 4,964 245 15,559 (972)
EBITDA (1)........................... 8,672 3,628 26,563 9,182
EBITDAR (1).......................... 9,197 4,153 28,138 10,757
TOTAL (INCLUDING CORPORATE)
Net operating revenues............... $83,071 $70,441 $244,068 $215,144
Operating income..................... 7,695 3,972 28,613 11,369
EBITDA (1)........................... 13,892 9,309 46,204 27,379
EBITDAR (1).......................... 14,962 9,836 48,324 28,957
</TABLE>
(1) "EBITDA" is defined as earnings before interest, taxes, depreciation,
amortization and deferred (non-cash) rent. "EBITDAR" is defined as earnings
before interest, taxes, 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997 and Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997
Net revenues, operating income and net income all improved in the quarter
ended and nine months ended September 30, 1998, primarily due to improved
revenues at the Company's newest hotel-casino, The Orleans. Net revenues in the
quarter ended September 30, 1998 were $83.1 million compared to $70.4 million in
the same quarter of 1997, an increase of 17.9%. For the nine months ended
September 30, 1998, net revenues were $244.1 million compared to $215.1 million
in the same period in 1997, an increase of 13.4%. Operating income in the third
quarter of 1998 was $7.7 million compared to $4.0 million in the third quarter
of 1997, an increase of 93.6%. For the nine months ended September 30, 1998,
operating income was $28.6 million, an increase of 151.6% over operating income
of $11.4 million in the same period in 1997. For the quarter and nine months
ended September 30, 1998, cash and deferred land lease expenses increased as a
result of the Company acquiring Coast West and its related deferred lease
expense by Coast Resorts contributing the Coast West stock to the Company on
July 21, 1998. Net income in the quarter ended September 30, 1998 was $635,000
compared to a net loss of $1.3 million in the third quarter of 1997. For the
nine months ended September 30, 1998, net income was $5.7 million compared to a
net loss of $5.0 million in 1997.
The Orleans. The Orleans opened in December 1996 and generated lower-than-
expected revenues in the first half of 1997. During the second half of 1997, the
property expanded its customer base through increased promotional activities,
the use of headliner entertainment in its showroom and, in December 1997, the
opening of twelve new movie theaters. Net revenues in the three months ended
September 30, 1998 were $41.5 million, an increase of 40.4% over revenues of
$29.6 million in the same quarter in 1997. For the nine month period ended
September 30, 1998, net revenues were $117.7 million, an increase of 34.2%
compared to the first nine months of 1997. Casino revenues were up in the third
quarter of 1998 (47.1%) and in the nine months ended September 30, 1998 (39.1%),
primarily as a result of increased slot machine activity. Increased customer
volume led to an increase in food and beverage revenues of 25.0% in the quarter
ended September 30, 1998 and an increase of 24.3% in the nine months ended
September 30, 1998. Hotel revenues increased slightly in the quarter and year-
to-date, primarily as a result of increased occupancy. Other revenues increased
in the third quarter and year-to-date due primarily to higher showroom revenue.
Operating expenses increased 24.6% in the third quarter of 1998, primarily due
to company-wide employee wage increases in July and increased casino promotional
activities. Additionally, the opening in December 1997 of twelve movie theaters
and additional gaming space, coupled with higher summer utility rates, caused an
increase in utilities expenses. Operating expenses in the nine months ended
September 30, 1998 increased 15.2% compared to the first three quarters in 1997,
primarily due to the increased casino promotions. Other expenses were up 26.3%
for the nine months due to the higher-priced headliner entertainers in the
showroom. Despite the increase in operating expenses, operating income increased
by $4.7 million in the quarter and by $16.5 million year-to-date.
Gold Coast. Net revenues in the three months ended September 30, 1998
increased $1.1 million (3.5%) to $31.1 million compared to $30.0 million in the
third quarter of 1997, primarily as a result of increased slot machine activity.
For the nine months ended September 30, 1998 net revenues were relatively flat
compared to the same period in 1997, increasing 0.6% to $94.5 million compared
to $94.0 million in 1997. A 3.7% increase in casino revenues was partially
offset by slight decreases in food, beverage and hotel revenues. Operating
income in the third quarter of 1998 was $5.1 million, an increase of 5.9% over
third quarter 1997 operating income of $4.8 million. The increased revenues were
partially offset by increased casino promotional expenses as well as company-
wide employee wage increases in July 1998. Operating income in the first nine
months of 1998 was $18.1 million, an increase of 7.6% over operating income of
$16.8 million in the first nine months of 1997. Reduced staffing and lower
food and beverage cost of sales contributed to lower operating expenses in the
nine months.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Barbary Coast. Net revenues in the three months ended September 30, 1998
decreased 3.5% to $10.5 million compared to $10.9 million in the three months
ended September 30, 1997, primarily as a result of a decrease in table games win
percentages, the removal of live keno and lower wagering volume in the race
book. For the nine months ended September 30, 1998, net revenues were $31.9
million, down $1.6 million (4.9%) compared to the same period in 1997 primarily
due to a lower-than-expected table games win percentage. For the third quarter,
the Barbary Coast had an operating loss of $152,000 compared to operating income
of $611,000 in the third quarter of 1997. For the nine months ended September
30, 1998, operating income was $541,000 compared to $518,000 in the same period
in 1997. Operating expenses increased $387,000 (3.8%) in the third quarter of
1998 compared to the same period in 1997, primarily due to increased promotional
expenses in the slot machine area. For the nine months ended September 30, 1998,
operating expenses decreased $1.7 million (5.1%), primarily due to lower race
book expenses attributable to a reduction in business in that area.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have consisted of cash
provided by operating activities and debt financing. Cash provided by operating
activities was $31.6 million in the first nine months of 1998, an increase of
$22.0 million over the same period in 1997, primarily due to the Company's
increased profitability discussed above.
In January 1996, the Company issued $175.0 million principal amount of 13%
first mortgage notes due 2002 ("13% First Mortgage Notes"). Additionally, in
November 1997, the Company issued $16.8 million principal amount of 10 7/8%
first mortgage notes due 2001 ("10 7/8% First Mortgage Notes"). The indentures
pursuant to which the 13% First Mortgage Notes and the 10 7/8% First Mortgage
Notes were issued ("the Indentures") contain covenants that, among other things,
limit the ability of the Company to pay dividends or make advances to Coast
Resorts, repay subordinated indebtedness, incur additional indebtedness, or sell
material assets as defined in the Indentures.
The Company's cash requirements, in addition to interest which is
anticipated to be approximately $27.0 million in 1998, include annual principal
payments of approximately $7.5 million on the equipment notes payable, land
lease payments of approximately $4.3 million, ongoing maintenance capital
expenditures at its existing facilities and periodic enhancements to those
facilities. The Company's maintenance capital expenditures for 1997 were
approximately $9.2 million. Management expects that maintenance capital
expenditures for 1998 will be approximately $10.5 million. Management believes
that existing cash balances and operating cash flow will provide the Company
with sufficient resources to meet its existing debt and lease payment
obligations and foreseeable capital expenditure requirements at the Company's
existing properties.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company agreed to provide advances to Coast West sufficient to make
payments on the Coast West Lease and other obligations, including project
development and site improvement. Pursuant to the Indenture under which the 13%
First Mortgage Notes were issued, the advances to Coast West could not exceed
$8.0 million in aggregate principal amount at any time outstanding unless Coast
West became a subsidiary of the Company. Based on the cash requirements of Coast
West for lease payments and anticipated development costs, it was likely that by
September 1998 Coast West would require cash from the Company that, when added
to the outstanding advances from the Company, would exceed $8.0 million. On July
21, 1998, Coast Resorts contributed the capital stock of Coast West to the
Company, as a result of which Coast West became a wholly owned subsidiary of the
Company. Coast West remains a guarantor of the 13% First Mortgage Notes.
Pursuant to the terms of the Indenture, the Company may make advances to its
wholly owned subsidiaries without limit.
The Company has no agreements, arrangements or understandings with respect
to financing the development of future properties. Any future development would
be subject to, among other things, the Company's ability to obtain necessary
financing.
YEAR 2000
Many currently installed computer systems and other equipment with embedded
computer chips cannot recognize dates after December 31, 1999. Beginning in the
year 2000, companies with such systems, software or equipment may experience
difficulties due to their reliance on them. This situation involving the year
2000 is commonly referred to as the "Y2K" problem.
The Company utilizes computer systems in virtually all areas of its hotel-
casino operations. Should the Company or certain of its vendors not be "Y2K
compliant," the operations of its hotel-casinos could be disrupted for an
indeterminate period of time, potentially having a material adverse impact on
its results of operations. Possible consequences of the Company not being Y2K
compliant include, but are not limited to, problems with the compiling of
financial information in the Company's back-office accounting, purchasing,
inventory and payroll systems. Additionally, disruptions could occur to hotel
reservations operations, hotel check-in/check-out procedures, point-of-sale
transactions in food, beverage and retail areas, race and sports book wagering
and the updating and accumulation of slot machine player marketing information.
Additionally, embedded microchips in certain systems such as elevators,
escalators and the heating, ventilation and air conditioning could lead to
interruptions in service. All of these problems could inconvenience hotel and
casino customers, resulting in a loss of business.
The Company could also be exposed to Y2K problems should certain of its
suppliers have disruptions to their operations due to Year 2000 problems. The
Company does not consider these problems to be as significant as those with its
own systems because in most instances it could find alternate vendors for its
supplies, but Y2K problems for certain suppliers, such as utility providers,
could result in disruptions to hotel-casino operations for an indeterminate
period of time. Additionally, should providers of financial services such as
ATM's, credit card processing and credit card cash advance experience Y2K
problems, the Company's operations could be adversely affected.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
The Company recognizes the need to ensure its operations will not be
adversely affected by Y2K and has taken steps to update its systems, where
necessary, including replacing or updating software and equipment. Since 1997,
the Company's Management Information Systems department has attempted to
identify all areas where Y2K could pose a problem. To assist them in their
effort and to further help identify potential problem areas, in October 1998 the
Company retained the services of an advisor to review the Company's Y2K
program.
As of November 1, 1998, the Company has identified and updated or is in the
process of updating those systems and programs that it deems most critical to
the day-to-day operations of its hotel-casinos. The Company currently uses Year
2000 compliant J.D. Edwards software for its accounting, human resources,
payroll, inventory and purchasing systems. Based on representations from its
vendors, the Company anticipates that its other essential computer systems,
including its hotel front desk and reservations, retail point of sale, bowling
center, race and sports wagering and casino player tracking and marketing
systems, will be Y2K compliant by July 1999, although no assurances can be made
to that effect. It is estimated that the total cost to identify and correct
potential Y2K problems will be approximately $2.0 million, approximately
$200,000 of which has been spent to date. All costs related to software
modification, as well as all costs associated with the Company's Y2K project,
are being expensed as incurred and are included in the cost estimate referred to
above. Although the Company has not developed a Y2K contingency plan to date, it
will continue to assess Y2K risk to determine if such a plan is necessary.
ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. SFAS 130 requires a separate statement
to report components of comprehensive income for each period presented. The
provisions of SFAS 130 are effective for fiscal years beginning after December
15, 1997. Management believes that the Company currently does not have items
that would require presentation in a separate statement of comprehensive income.
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. SFAS 131 will not have a material
effect on the Company's financial statements as the required information is
either currently being presented by the Company or it is not applicable to the
Company.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that the Company expense its pre-opening and
related promotional expense as incurred rather than capitalize it and amortize
it over the estimated period of economic benefit of such costs as has been the
Company's policy in the past. Effective January 1, 1998, the Company adopted SOP
98-5. The adoption had no impact on the financial position, results of
operations or cash flows of the Company as all start-up costs previously
capitalized had been expensed in prior periods.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 the Y2K
problem and 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.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
13
<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.
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, 1998.
14
<PAGE>
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 16, 1998 COAST HOTELS AND CASINOS, INC., a Nevada
corporation
By: /s/ Gage Parrish
--------------------------------
Gage Parrish
Vice President and Chief Financial Officer
15
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