<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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 March 31, 1999: 1,000
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<PAGE>
Part I - FINANCIAL INFORMATION
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)
<TABLE>
<CAPTION>
March 31, 1999 December 31,
(unaudited) 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 35,697 $ 41,595
Accounts receivable, net....................................... 4,823 4,301
Other current assets........................................... 16,055 14,242
------------- -------------
TOTAL CURRENT ASSETS........................................... 56,575 60,138
PROPERTY AND EQUIPMENT, net..................................... 302,892 301,252
DUE FROM AFFILIATE.............................................. 4,352 --
OTHER ASSETS.................................................... 8,495 5,644
------------- -------------
$ 372,314 $ 367,034
============= =============
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 6,214 $ 9,888
Accrued liabilities............................................ 28,080 25,338
Due to affiliate............................................... -- 1,353
Current portion of long-term debt.............................. 7,817 7,905
------------- -------------
TOTAL CURRENT LIABILITIES...................................... 42,111 44,484
LONG-TERM DEBT, less current portion............................ 233,981 199,954
DEFERRED INCOME TAXES........................................... -- 6,654
DEFERRED RENT................................................... 13,988 13,024
------------- -------------
TOTAL LIABILITIES.............................................. 290,080 264,116
------------- -------------
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 86,903
Retained earnings (deficit).................................... (4,670) 16,014
------------- -------------
TOTAL STOCKHOLDER'S EQUITY..................................... 82,234 102,918
------------- -------------
$ 372,314 $ 367,034
============= =============
</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 Ended March 31, 1999 and 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING REVENUES:
Casino................................................. $ 66,057 $ 59,179
Food and beverage...................................... 17,775 16,578
Hotel.................................................. 7,877 6,937
Other.................................................. 7,046 6,093
------------- -------------
GROSS OPERATING REVENUES............................. 98,755 88,787
Less: promotional allowances.......................... (8,689) (7,773)
------------- -------------
NET OPERATING REVENUES............................... 90,066 81,014
------------- -------------
OPERATING EXPENSES:
Casino................................................. 32,046 31,512
Food and beverage...................................... 11,776 11,734
Hotel.................................................. 3,041 2,712
Other.................................................. 5,969 4,827
General and administrative............................. 15,425 13,673
Deferred rent.......................................... 964 594
Depreciation and amortization.......................... 5,210 4,881
------------- -------------
TOTAL OPERATING EXPENSES................................ 74,431 69,933
------------- -------------
OPERATING INCOME..................................... 15,635 11,081
------------- -------------
OTHER INCOME (EXPENSES)
Interest expense, net.................................. (6,299) (6,663)
Gain on disposal of assets............................. -- 25
------------- -------------
TOTAL OTHER INCOME (EXPENSES)........................... (6,299) (6,638)
------------- -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM....... 9,336 4,443
------------- -------------
Income tax provision.................................... 3,013 1,625
------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEM.................... 6,323 2,818
------------- -------------
Extraordinary item - loss on early retirement of debt,
net of applicable income tax benefit ($14,543)......... (27,007) --
------------- -------------
NET INCOME (LOSS)....................................... $ (20,684) $ 2,818
============= =============
</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 Three Months Ended March 31, 1999 and 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ (20,684) $ 2,818
------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization............................................ 5,210 4,881
Provision for bad debts.................................................. 173 758
Gain on disposal of assets............................................... -- (25)
Deferred income taxes.................................................... (7,927) --
Deferred rent............................................................ 964 594
Loss on early retirement of debt......................................... 41,550 --
Other non-cash expenses.................................................. 124 554
Changes in assets and liabilities:
Net increase in accounts receivable and other assets................... (5,851) (1,480)
Net increase (decrease) in accounts payable and accrued liabilities.... (932) 5,561
------------ ------------
TOTAL ADJUSTMENTS.......................................................... 33,311 10,843
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 12,627 13,661
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................... (6,532) (4,794)
Proceeds from disposal of assets........................................... -- 25
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (6,532) (4,769)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net of issuance costs............ 168,521 --
Early retirement of debt................................................... (223,017) --
Principal payments on long-term debt....................................... (2,192) (2,044)
Proceeds from borrowings under bank line of credit......................... 47,000 --
Advances to affiliate...................................................... (2,305) (32)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES...................................... (11,993) (2,076)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ (5,898) 6,816
CASH AND CASH EQUIVALENTS, at beginning of period........................... 41,595 29,426
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period................................. $ 35,697 $ 36,242
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
COAST HOTELS AND CASINOS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
For the Year Ended December 31, 1998 and
For the Three Months Ended March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Retained
------------------------- Additional Earnings
Shares Amount Paid-In Capital (Deficit) Total
------- -------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997.... 1,000 $ 1 $ 95,858 $ 1,487 $ 97,346
Transfer of Coast West Inc. to
the Company by Coast
Resorts, Inc.................. (8,955) 5,769 (3,186)
Net income...................... 8,758 8,758
------- -------------- --------------- ---------------- ----------------
Balances at December 31, 1998.... 1,000 1 86,903 16,014 102,918
Net loss........................ (20,684) (20,684)
------- -------------- --------------- ---------------- ----------------
Balances at March 31, 1999....... 1,000 $ 1 $ 86,903 $ (4,670) $ 82,234
======= ============== =============== ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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. ("Coast Hotels" or the "Company") is a
Nevada corporation and a wholly owned subsidiary of Coast Resorts, Inc. ("Coast
Resorts"), which is also a Nevada corporation. We own and operate the following
Las Vegas hotel-casinos:
. The Orleans Hotel and Casino, located approximately one mile west of the
Las Vegas Strip on Tropicana Avenue.
. 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 Gold Coast and Barbary Coast hotel-casinos were, prior to January 1996,
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. On January 1, 1996, the partners of the two
partnerships completed a reorganization (the "Reorganization") with Coast
Resorts. Coast Resorts was formed in September 1995 to effect the
Reorganization. Coast Resorts, Gold Coast and Barbary Coast were all related
through common ownership and management control.
In the Reorganization, the partners of the Gold Coast partnership and the
Barbary Coast partnership transferred their respective partnership interests to
Coast Resorts 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 Coast Hotels 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 below, 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.
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. As of the date of the stock transfer, Coast West had a
cumulative retained deficit of $8,955,000 and the Company had recorded an
allowance for doubtful accounts of $5,769,000 in connection with advances
provided to Coast West for lease payments. 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 net liabilities of Coast West as a
decrease in additional paid-in capital. Effective on March 23, 1999, Coast West
was merged into the Company.
6
<PAGE>
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED 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, 1998. 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 - LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
(in thousands)
9.5% senior subordinated notes due April 2009......................... $ 175,000 $ --
$75.0 million, reducing revolving credit facility due 2004,
collateralized by substantially all of the assets of Coast Hotels 47,000 --
and Casinos, Inc.,...................................................
13% First Mortgage Notes due December 15, 2002, net of original issue
discount of $3,971,000 (1998)...................................... 1,960 171,029
10-7/8% First Mortgage Notes due November 1, 2001..................... -- 16,800
9.19% note payable, payable in 60 monthly installments of
approximately $750,000, including principal and interest,
collateralized by certain gaming and other equipment................. 13,114 14,987
8.6% note due August 11, 2007, payable in monthly installments of
$26,667 principal plus interest on remaining principal balance,
collateralized by 1980 Hawker aircraft............................... 2,693 2,773
Other notes payable................................................... 2,031 2,270
--------------- ---------------
241,798 207,859
Less: current portion................................................. 7,817 7,905
--------------- ---------------
$ 233,981 $ 199,954
=============== ===============
</TABLE>
7
<PAGE>
COAST HOTELS AND CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT (Continued)
In January 1996, we issued $175.0 million principal amount of the 13% first
mortgage notes. Additionally, in November 1997, we issued $16.8 million
principal amount of the 10-7/8% first mortgage notes. In March 1999, we issued
$175.0 million principal amount of 9.5% senior subordinated notes with interest
payable on April 1 and October 1 beginning October 1, 1999 and entered into a
$75.0 million senior secured revolving credit facility due 2004 to facilitate a
refinancing. The credit facility can be increased to $200 million with lender
approval. Borrowings under the credit facility bear interest, at the Company's
option, at a premium over the one-, two-, three- or six-month London Interbank
Offered Rate ("LIBOR"). As of March 31, 1999 the interest rate was 6.93%. The
Company incurs an annual commitment fee on the unused portion of the credit
facility.
With the proceeds from those notes and borrowings under the credit
facility, we repurchased substantially all of the outstanding 13% first mortgage
notes and all of the 10-7/8% first mortgage notes and amended the indenture
under which the 13% first mortgage notes were issued to eliminate substantially
all of its restrictive covenants. Approximately $2.0 million in principal
amount of the 13% first mortgage notes remain outstanding and are governed by
the terms of the amended indenture. In connection with the repurchase of the
13% notes and the 10-7/8% notes, we incurred repurchase premiums of $31.0
million and $2.1 million, respectively. The repurchase premiums and the write-
offs of unamortized debt issuance costs and original issue discount resulted in
an extraordinary loss of $27.0 million, net of applicable income tax benefit of
$14.5 million.
The availability under the $75.0 million credit facility will be reduced in
quarterly amounts beginning in the fiscal quarter ending June 30, 2001. The
initial advance of $47.0 million under the new credit facility was used in
connection with the repurchase of the 13% first mortgage notes and the 10-7/8%
first mortgage notes. Subsequent advances under the new credit facility may be
used for working capital, general corporate purposes, construction of our new
property (the Suncoast) and certain improvements to our existing properties.
8
<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
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Hotel-casino operations:
Net operating revenues........................... $ 90,066 $ 81,014
Operating expenses............................... 71,774 68,216
------------ ------------
Operating income from hotel-casino operations..... 18,292 12,798
Corporate expenses (1)............................ 2,657 1,717
------------ ------------
Total operating income............................ $ 15,635 $ 11,081
============ ============
EBITDA, hotel-casino operations (2)............... $ 23,739 $ 17,897
============ ============
EBITDA, total (including corporate) (2)........... $ 21,809 $ 16,556
============ ============
</TABLE>
(1) Corporate expenses include corporate general and administrative expenses,
depreciation and amortization and land lease expenses, both cash and
deferred, on the Suncoast land.
(2) "EBITDA" means earnings before interest, taxes, depreciation, amortization,
deferred (non-cash) rent expense and certain non-recurring items, including
pre-opening expenses. EBITDA should not be construed as an alternative to
operating income or net income (as determined in accordance with generally
accepted accounting principles) as an indicator of the Company's operating
performance, or as an alternative to cash flows generated by operating,
investing and financing activities (as determined in accordance with
generally accepted accounting principles) as an indicator of cash flows or
a measure of liquidity. EBITDA is presented solely as supplemental
disclosure because management believes that it is a widely used measure of
operating performance in the gaming industry. All companies do not
calculate EBITDA in the same manner. As a result, EBITDA as presented here
may not be comparable to a similarly titled measure presented by other
companies.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net revenues in the quarter ended March 31, 1999 were $90.1 million
compared to $81.0 million in the same quarter in 1998, an increase of $9.1
million (11.2%). Revenues were higher at all three of our hotel-casino
properties. First quarter operating income was $15.6 million compared to 1998
first quarter operating income of $11.1 million, an increase of $4.5 million
(40.5%).Operating margins (operating income as a percentage of revenues)
improved at all three of our hotel-casino properties. Due to a one-time charge
of $27.0 million (net of income tax benefit) as a result of the early retirement
of $189.9 million in first mortgage notes, there was a net loss of $20.7 million
in the first quarter of 1999 compared to net income of $2.8 million in the first
quarter of 1998.
Casino. Casino revenues in the quarter ended March 31, 1999 were $66.1
million, an increase of $6.9 million (11.6%) compared to the same quarter in
1998. The increase was primarily due to the continued improvement in slot
revenues at The Orleans, up 28.1% over the first quarter in 1998 as a result of
increased customer volume. Casino revenues also improved at the Gold Coast and
the Barbary Coast, increasing by 5.8% and 9.3%, respectively, due primarily to
increases in customer volume in both slots and table games areas.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
(Continued)
Casino expenses in the quarter ended March 31, 1999 increased by 1.7% over
the same quarter in 1998. This modest increase, coupled with the 11.6% increase
in casino revenues discussed above, resulted in a casino operating margin of
51.5% compared to 46.8% in the first quarter of 1998.
Food and Beverage. Food and beverage revenues were $17.8 million in the
first quarter of 1999 compared to $16.6 million in 1998, an increase of 7.2%.
Each of our hotel-casino properties showed increases that were consistent with
overall increases in customer volume.
Food and beverage expenses were $11.8 million in the first quarter of 1999
compared to $11.7 million in the first quarter of 1998, an increase of 0.4%.
The food and beverage operating margin improved to 33.7% from 29.2% in the prior
year, primarily as a result of a continued focus on food cost control.
Hotel. Hotel room revenues were $7.9 million in the three months ended
March 31, 1999, an increase of 13.6% over 1998 revenues of $6.9 million. Each
of our three hotel properties experienced increases in room occupancy
percentages as well as average daily room rates. For the first quarter, our
combined room occupancy was 95.7% compared to 88.7% in the first quarter of
1998. The average daily room rate increased to $53 from $51 in 1998.
Other. Other revenues were $7.0 million for the three months ended March
31, 1999, an increase of 15.6% over 1998 other revenues of $6.1 million. The
increase was primarily due to improved showroom and special events revenues at
The Orleans. Costs related to those increased revenues caused a 23.7% increase
in other expenses to $6.0 million in 1999, compared to $4.8 million in 1998.
General and Administrative. General and administrative expenses were $15.4
million in the first quarter of 1999, an increase of 12.8% over 1998 expenses of
$13.7 million. The increase was primarily due to wage and benefit increases at
our three hotel-casinos and higher property taxes.
Deferred Rent. Deferred rent increased from $594,000 in 1998 to $964,000
in 1999 as a result of Coast Hotels assuming the Coast West lease from Coast
Resorts in July 1998.
Depreciation and Amortization. Depreciation and amortization expense was
$5.2 million in the first quarter of 1999 compared to $4.9 million in 1998. The
increase was due primarily to the addition of new equipment at each of our
hotel-casino properties.
Liquidity and Capital Resources
Our principal sources of liquidity have consisted of cash provided by
operating activities and debt financing. Cash provided by operating activities
was $12.6 million in the three months ended March 31, 1999, compared to $13.7
million in the same period in 1998.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
Our cash requirements for 1999, in addition to interest payments on
outstanding indebtedness, include principal payments of approximately $7.8
million on equipment notes payable, land lease payments of approximately $4.4
million, capital expenditures of approximately $10.2 million in connection with
an expansion of The Orleans and ongoing maintenance capital expenditures of
approximately $11.0 million. For 1998, maintenance capital expenditures were
approximately $13.0 million. We believe that existing cash balances, operating
cash flow and borrowings from our new $75.0 million credit facility will provide
sufficient resources to meet our debt and lease payment obligations and
foreseeable capital expenditure requirements at our existing properties.
In January 1996, we issued $175.0 million principal amount of the 13% first
mortgage notes. Additionally, in November 1997, we issued $16.8 million
principal amount of the 10-7/8% first mortgage notes. In March 1999, we issued
$175.0 million principal amount of 9.5% senior subordinated notes with interest
payable on April 1 and October 1 beginning October 1, 1999 and entered into a
$75.0 million senior secured revolving credit facility due 2004 to facilitate a
refinancing. The credit facility can be increased to $200 million with lender
approval. Borrowings under the credit facility bear interest, at the Company's
option, at a premium over the one-, two-, three- or six-month London Interbank
Offered Rate ("LIBOR"). As of March 31, 1999 the interest rate was 6.93%. The
company incurs an annual commitment fee on the unused portion of the credit
facility.
With the proceeds from those notes and borrowings under the credit
facility, we repurchased substantially all of the outstanding 13% first mortgage
notes and all of the 10-7/8% first mortgage notes and amended the indenture
under which the 13% first mortgage notes were issued to eliminate substantially
all of its restrictive covenants. Approximately $2.0 million in principal
amount of the 13% first mortgage notes remain outstanding and are governed by
the terms of the amended indenture. In connection with the repurchase of the
13% notes and the 10-7/8% notes, we incurred repurchase premiums of $31.0
million and $2.1 million, respectively. The repurchase premiums and the write-
offs of unamortized debt issuance costs and original issue discount resulted in
an extraordinary loss of $27.0 million, net of applicable income tax benefit of
$14.5 million.
The availability under the $75.0 million credit facility will be reduced in
quarterly amounts beginning in the fiscal quarter ending June 30, 2001. The
initial advance of $47.0 million under the new credit facility was used in
connection with the repurchase of the 13% first mortgage notes and the 10-7/8%
first mortgage notes. Subsequent advances under the new credit facility may be
used for working capital, general corporate purposes, construction of our new
property (the Suncoast) and certain improvements to our existing properties
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
We are currently developing and intend to construct and open the Suncoast
Hotel and Casino. We do not yet have adequate financing in place to fund the
complete construction of the Suncoast. Subject to obtaining adequate financing,
we currently anticipate that construction of the Suncoast will begin in mid-
1999. Our new credit facility contains a provision that would allow us to
increase, with lender approval, the available borrowing capacity under the
facility to up to $200.0 million. We intend to use this increased capacity to
finance construction costs. The availability of the additional $125.0 million
will be reduced in quarterly amounts beginning the fiscal quarter ending June
30, 2001. The increase in the facility remains subject to a number of
contingencies, including lender approval and the negotiation of additional terms
relating to the construction. We cannot assure you that we will be able to
obtain the increase in the new credit facility or that it will be available on
acceptable terms.
Except as described above, we have no agreements, arrangements or
understandings with respect to financing the future development of additional
properties or capital improvements to existing properties. Any future
development or capital improvements would be subject to, among other things, our
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.
We utilize computer systems in virtually all areas of our hotel-casino
operations. Should we or certain of our vendors not be "Y2K compliant" the
operations of our hotel-casinos could be disrupted for an indeterminate period
of time, potentially having a material adverse impact on our results of
operations. Possible consequences of our not being Y2K compliant include, but
are not limited to, problems with the compiling of financial information in our
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.
We could also be exposed to Y2K problems should certain of our suppliers
have disruptions to their operations due to Y2K problems. We do not consider
these problems to be as significant as those with our own systems because in
most instances we could find alternate vendors for our 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, our operations
could be adversely affected.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Year 2000 (Continued)
We recognize the need to ensure our operations will not be adversely
affected by Y2K and have taken steps to update our systems, where necessary,
including replacing or updating software and equipment. Since 1997, our
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 we retained the services
of an advisor to review our Y2K program.
As of March 31, 1999, we have identified and updated or are in the process
of updating those systems and programs that we deem most critical to the day-to-
day operations of our hotel-casinos. We currently use Year 2000 compliant
software for our accounting, human resources, payroll, inventory and purchasing
systems. Based on representations from our vendors, we anticipate that our other
essential computer systems, including our 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. We estimate that the total cost to
identify and correct potential Y2K problems will be approximately $1.6 million,
approximately $400,000 of which had been spent as of March 31, 1999. All costs
related to software modification, as well as all costs associated with our Y2K
project, are being expensed as incurred and are included in the cost estimate
referred to above. We are currently developing contingency plans for specific
areas of our operations. Such plans include the training of employees in the
implementation of manual procedures for gaming operations, the selection of
alternative vendors and the testing of back-up electrical power generators. We
will continue to assess Y2K risk and develop contingency plans.
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 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.
13
<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.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
15
<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.
On March 2, 1999, the Company filed a Form 8-K under Item 5, Other
Events, with respect to the Company's intent to issue approximately $175 million
aggregate principal amount of senior subordinated notes.
On March 16, 1999, the Company filed a Form 8-K under Item 5, Other
Events, with respect to the Company's tender offer for its 13% First Mortgage
Notes and related consent solicitation, change in consideration offered in the
tender offer and expiration of the consent solicitation.
On March 29, 1999, the Company filed a Form 8-K under Item 5, Other
Events, with respect to the Company's acceptance for payment of tendered
securities upon the expiration of the Company's tender offer for its 13% First
Mortgage Notes, the consummation of the Company's private placement of $175
million 9-1/2% Senior Subordinated Notes and the Company entering into a $75
million senior secured credit facility.
16
<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: May 14, 1999 COAST HOTELS AND CASINOS, INC., a Nevada
corporation
By: /s/ Gage Parrish
-------------------------------
Gage Parrish
Vice President and Chief Financial Officer
17
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