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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 #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 Identification No.)
incorporation or organization)
4500 WEST TROPICANA ROAD, LAS VEGAS, NEVADA 89103
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 365-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the Registrant's Common Stock outstanding as of
March 5, 1999 was 1,000 shares, none of which was held by non-affiliates of the
Registrant.
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COAST HOTELS AND CASINOS, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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PAGE
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PART I
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Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 13
Item 3. Legal Proceedings............................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........................... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 16
Item 6. Selected Financial Data....................................................... 16
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations. ................................................................. 18
Item 8. Financial Statements and Supplementary Data................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 24
Item 11. Executive Compensation........................................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 27
Item 13. Certain Relationships and Related Transactions................................ 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............. 29
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PART I
ITEM 1. BUSINESS.
THE COMPANY
We own and operate three Las Vegas hotel-casinos, The Orleans, the Gold
Coast and the Barbary Coast. Our primary target customers for The Orleans and
the Gold Coast are local Las Vegas residents. The Barbary Coast benefits from
foot traffic at its prime location on the Las Vegas Strip. Our growth strategy
includes expanding our existing facilities, as well as identifying and
developing new gaming opportunities, primarily in Las Vegas. We are currently
developing and intend to construct a fourth hotel-casino, the Suncoast, on a 50
acre site in west Las Vegas near Summerlin, a rapidly-growing master-planned
community. We also own an approximately 29 acre gaming site in North Las Vegas
that we may develop in the future.
We were formed in 1995 in connection with the reorganization of two
affiliated partnerships, the Gold Coast Hotel and Casino, a Nevada limited
partnership (the "Gold Coast Partnership"), and the Barbary Coast Hotel and
Casino, a Nevada general partnership (the "Barbary Coast Partnership" and,
together with the Gold Coast Partnership, the "Predecessor Partnerships"). The
Gold Coast Partnership, formed in 1986, and the Barbary Coast Partnership,
formed in 1978, previously owned and operated the Gold Coast and the Barbary
Coast, respectively, and the Gold Coast Partnership commenced the development of
The Orleans.
Our principal executive office is located at 4500 West Tropicana Road,
Las Vegas, Nevada 89103. The telephone number is (702) 365-7000.
THE REORGANIZATION
Effective January 1, 1996, the Predecessor Partnerships were
consolidated and reorganized (the "Reorganization") pursuant to an Agreement and
Plan of Reorganization, as supplemented and amended, entered into among each of
the Predecessor Partnerships, Gaughan-Herbst, Inc., the sole general partner of
the Gold Coast Partnership, and Coast Resorts. As a result of the
Reorganization, we own and operate the Gold Coast, the Barbary Coast and The
Orleans. In the Reorganization, (a) the partners of the Predecessor Partnerships
each transferred to Coast Resorts, Inc., our parent company ("Coast Resorts") by
assignment or through the merger of Gaughan-Herbst, Inc., 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 (the "Common Stock") and (b) we assumed, jointly and severally
with Coast Resorts, all of the liabilities of the Predecessor Partnerships other
than (i) the obligations under approximately $52.5 million principal amount of
notes payable to the shareholders of Coast Resorts that were exchanged for an
aggregate of 494,353 shares of Common Stock on January 16, 1996, and (ii) those
liabilities incident to Coast West Inc. ("Coast West"), which prior to July 1998
was a wholly-owned subsidiary of Coast Resorts. On July 21, 1998, Coast Resorts
contributed the common stock of Coast West to the Company. Coast West leases the
real property on which we intend to construct the Suncoast.
BUSINESS AND MARKETING STRATEGY
Our business and marketing strategy is to attract gaming customers to
our casinos by offering consistently high quality gaming, hotel, entertainment
and dining experiences at affordable prices. We emphasize attracting and
retaining repeat customers. Our primary target market for The Orleans and Gold
Coast consists of value-oriented local middle-market gaming patrons who gamble
frequently. We believe that our target customers return to our hotel-casinos
because of their convenient locations, friendly employees, higher slot machine
and video poker payout rates than are offered at casinos on the Las Vegas Strip
and high quality entertainment and amenities. Additionally, visitors to Las
Vegas find that our guest rooms are spacious, well-appointed and competitively
priced.
Our operating strategy with respect to gaming revenue focuses on slot
and video poker machines because these games accounted for approximately 70% of
our gaming revenues and approximately 48% of our total
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revenues in the year ended December 31, 1998. (It is customary in the gaming
industry to include video poker and other gaming machines when using the term
"slots" or "slot machines.") Our marketing efforts include many high profile
programs, including slot clubs and frequent prize drawings for slot players.
Other promotions include the original "Pick the Pros" $1,000,000 football
contest, check cashing promotions and direct mail campaigns.
We believe that the most important factors in successfully operating our
casinos are convenient locations with easy access, a friendly atmosphere, a
value-oriented approach and high quality entertainment and amenities. We believe
that our casinos strongly appeal to the Las Vegas residents who gamble.
Additionally, we offer Las Vegas visitors spacious, well-appointed and
competitively priced guest rooms.
o CONVENIENT, STRATEGIC LOCATIONS. We believe that our two locals-oriented
properties, The Orleans and the Gold Coast, offer our target customers
easily accessible, convenient locations for gaming and entertainment.
The Orleans and the Gold Coast are both located one to two miles west of
the Strip in high traffic areas close to fast-growing segments of the
western Las Vegas valley. The Suncoast will have a suburban location
conveniently located adjacent to the fast-growing Summerlin
master-planned community with strong demographics, approximately nine
miles from the Strip. The Orleans and Gold Coast are easily accessible
and offer ample parking, providing our customers with convenient
alternatives to the congestion on the Strip.
o FRIENDLY ATMOSPHERE. A key element of our strategy is to provide patrons
with friendly, personal service that is designed to foster customer
loyalty and generate repeat business. Locals appreciate a friendly,
casual gaming environment where employees make them feel at home.
o VALUE. We offer value to our gaming patrons by providing video poker and
slot machines with better odds than those traditionally found at Strip
casinos due to lower hold percentages on our slot machines. Locals'
perception of value is also influenced by such things as slot clubs that
reward frequent gamblers. The Orleans and Gold Coast slot clubs offer
customers an opportunity to earn cash and prizes based on their
winnings. Because locals and repeat visitors demand variety and quality
in their slot machine play, our casinos offer the latest slot and video
poker technology, including several games designed exclusively for us.
In addition, in order to appeal to our value-conscious customers, our
many restaurants and bars serve generous portions of quality food and
beverages at attractive prices.
o ENTERTAINMENT, MOVIE THEATERS AND AMENITIES. We believe we compete
effectively with other locals-oriented casinos by offering amenities and
entertainment that our customers demand and that accentuate the
perception of value for our customers. Our properties offer a number of
amenities that generate significant foot traffic through our casinos,
including movie theaters, bowling centers, quality restaurants and a
variety of musical entertainment.
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o Entertainment. The Orleans features headliner entertainers in its
850-seat theater, attracting both local customers and tourists alike.
Among the entertainers who have appeared are Willie Nelson, Ray Charles
and the Righteous Brothers. The entertainment lounges at our
hotel-casinos feature many popular lounge acts.
o Movie Theaters. The Gold Coast was the first hotel-casino in Las Vegas
to offer first-run movies in its twin theaters. The Orleans has twelve
"stadium-seating" movie theaters, which opened in December 1997. Our
theaters are operated through a long-term joint venture with Century
Theaters, one of Las Vegas' leading theater operators, allowing us to
offer a wide variety of first-run movies in our state-of-the-art
facilities.
o Restaurants. We believe that the value offered by the many restaurants
at our casino properties is a major factor in attracting local gaming
customers, as we believe dining is a primary motivation for casino
visits by many locals. All of the restaurants located in our casino
properties offer generous portions of quality food at reasonable prices.
In addition, the Barbary Coast features two award-winning gourmet
restaurants, Michael's and Drai's on the Strip.
o Other Amenities. In addition to the restaurants and theaters mentioned
above, we offer a variety of amenities directed to the locals market,
including our bowling centers at the Gold Coast and The Orleans, which
are among the most popular in Las Vegas. Other amenities include banquet
and meeting rooms, wedding chapels and child care facilities.
Tourist Customers. While a significant portion of our customers at The
Orleans and the Gold Coast are local residents, the same factors that appeal to
local residents also appeal to visitors to Las Vegas, including better odds than
those traditionally found at Strip casinos and lower minimum wager limits on our
table games than Strip casinos. Additionally, our casinos are strategically
situated to benefit from a growing visitor market, with the Gold Coast and The
Orleans each located within two miles of the Strip and the Barbary Coast located
at one of the busiest corners on the Strip. In addition to the growing local
resident market, Las Vegas is one of the fastest growing entertainment markets
in the United States.
THE ORLEANS
We designed The Orleans to differentiate it in the Las Vegas market by
combining an upscale, off-Strip experience in an exciting themed environment
reflecting the architectural heritage of the New Orleans French Quarter with a
wide variety of non-gaming amenities. The Orleans primarily targets middle to
upper-middle income gaming customers, both local residents and visitors to Las
Vegas. We believe that The Orleans is an attractive alternative for local
residents and Las Vegas visitors, offering a full-service hotel-casino and
entertainment experience complemented with a value-oriented pricing strategy.
The Orleans is strategically located on Tropicana Avenue, a short distance from
the Las Vegas Strip and McCarren International Airport. According to the Nevada
Department of Transportation 1997 Annual Traffic Report, approximately 68,000
vehicles travel by The Orleans each day. With easy access and ample parking, The
Orleans has quickly become a popular destination for locals.
The Orleans features an approximately 100,000 square foot casino, a
22-story tower with 840 hotel rooms, 12 "stadium seating" first-run movie
theaters, a 70-lane bowling center, approximately 40,000 square feet of banquet
and meeting facilities, including an approximately 17,000 square foot grand
ballroom, a wedding chapel, five full-service restaurants, specialty themed
bars, a barber shop, a child care facility, a video arcade, a beauty salon and
approximately 4,000 parking spaces. The casino includes approximately 2,241 slot
machines, 54 table games, a keno lounge, a poker parlor and race and sports
books. The Orleans also includes an 850-seat theater that features headliner
entertainment and other special events. Among the performers at The Orleans'
theater during the past year have been Willie Nelson, Ray Charles and the
Righteous Brothers. We believe that the high-quality entertainment at the
theater distinguishes us from most other locals casinos in Las Vegas and allows
us to attract more tourists who would otherwise gamble at Strip casinos.
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The Orleans features five restaurants including the Canal Street Grille,
serving steaks and seafood in a gourmet atmosphere, Vita's Ristorante, an
Italian restaurant, Don Miguel's, a Mexican restaurant, the Courtyard Cafe, a
coffee shop featuring New Orleans favorites as well as Chinese and American
fare, and the French Market Buffet, an all-you-can-eat buffet. Each of our
restaurants serves generous portions of quality food and beverages at
competitive prices. For customers desiring a quick meal or snack, we offer
Terrible Mike's, a hamburger and sandwich restaurant, Kate's Corner, an ice
cream parlor, and a snack bar in our bowling center. The Orleans employs a
number of marketing programs, including a slot club with over 200,000 members,
football contests and grand prize drawings.
We are currently in the process of expanding The Orleans by
approximately 65,000 square feet, including a new multi-station action buffet
restaurant, an Asian restaurant and additional casino gaming space with
approximately 200 more slot machines and 14 table games. We expect that this
expansion will be completed in the second quarter 1999. Our budget for this
expansion is approximately $13 million, which we are funding from cash on hand.
Through December 31, 1998 we had spent approximately $2.8 million on the
expansion.
In order to capitalize on our strong presence in the locals market, we
are considering further expansion of The Orleans by adding additional movie
theaters, a restaurant, a new hotel tower and a parking garage. No definitive
plans for such an expansion have been made, nor have we arranged for the
financing for such a project. Because the proposed expansion is subject to a
number of factors, including financing capacity and continued growth of revenues
at The Orleans, we cannot assure you that all or any aspects of this expansion
will be commenced or completed.
THE GOLD COAST
The Gold Coast, which opened in 1986, is located on West Flamingo Road
approximately one mile west of the Las Vegas Strip near Interstate 15, the major
highway linking Las Vegas and Southern California, offering easy access from all
four directions in the Las Vegas Valley. The Gold Coast is located in a
high-traffic area and, according to the Nevada Department of Transportation, an
average of approximately 78,000 vehicles travel by the Gold Coast each day. The
Gold Coast features an approximately 70,000 square foot casino, including
approximately 2,050 slot machines, 48 table games, a keno lounge, a 160-seat
race and sports book and a 700-seat bingo parlor. The Gold Coast also features
an 11-story tower with 712 hotel rooms and suites and a swimming pool with a
covered bar.
The Gold Coast features three full-service restaurants, a 380-seat
buffet restaurant, a fast-food restaurant, a snack bar and ice cream parlor.
Entertainment amenities include a 72-lane bowling center, two movie theaters,
approximately 10,000 square feet of banquet and meeting facilities, four bars,
two entertainment lounges and a showroom/dance hall featuring live musical
entertainment. Other amenities include a gift shop, a liquor store, a travel
agency, an American Express office, a Western Union office, a beauty salon, a
barber shop, a child care facility and over 3,000 parking spaces.
The Gold Coast primarily targets middle-market gaming customers,
catering to local residents as well as repeat visitors to Las Vegas who desire
an alternative to the hotel-casino properties located on the Strip. Our
operating strategy is to maximize customer visitation and thereby increase
casino revenues at the Gold Coast by offering value-conscious customers a
combination of friendly service, generous portions of quality food at
competitive prices and clean, comfortable and inexpensive hotel rooms. We
believe this value-oriented approach generates a high level of customer
satisfaction, fostering customer loyalty and repeat business. We have
periodically renovated and upgraded the Gold Coast in order to maintain its
appeal to our target customers.
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The Gold Coast has developed a number of innovative campaigns designed
to promote its business and attract local residents. The Gold Coast's slot club
has issued nearly 500,000 club cards to its members since inception and
currently has over 100,000 active members. We established the slot club in 1987
to encourage repeat business by rewarding frequent slot players with cash and
prizes. Our other Gold Coast marketing programs have included the original "Pick
the Pros" football contest, a $250,000 paycheck cashing contest and live
entertainment in the showroom/dance hall. In addition, the Gold Coast is a
sponsor of the annual National Finals Rodeo, which attracts thousands of
visitors to Las Vegas each December. The awards ceremonies for the Rodeo are
held nightly at the Gold Coast during the 10-day event.
THE BARBARY COAST
The Barbary Coast, which opened in 1979, is located at the intersection
of Flamingo Road and Las Vegas Boulevard. The Barbary Coast is located on one of
the busiest intersections on the Strip, along with Caesars Palace, Bally's Las
Vegas and Bellagio. Historically, the Barbary Coast has relied on foot traffic
on the Las Vegas Strip for a significant amount of its revenues. As a result,
the Barbary Coast's customer base is primarily visitors to the Las Vegas area.
In addition to its favorable location on the Strip, the Barbary Coast has also
benefited from its more intimate gaming atmosphere, allowing it to develop a
loyal base of table games and slot customers. Our marketing efforts toward table
games customers include complimentary rooms, food and beverage, as well as
programs such as blackjack tournaments and golf outings. Slot players may also
receive complimentary rooms, food and beverage, as well as cash and prizes as
members of our slot club. The slot players' "Fun Club" has over 100,000 members
who are rewarded for their frequent play.
The Barbary Coast features an approximately 30,000 square foot casino,
including approximately 600 slot machines, 50 table games, race and sports books
and other amenities. Our eight-story tower includes 197 spacious rooms and
suites. The Barbary Coast is furnished and decorated in an elegant
turn-of-the-century Victorian theme and includes three bars and three
restaurants: Michael's gourmet restaurant, Drai's on the Strip (leased to and
operated by a third party) and the Victorian Room. Drai's specializes in French
and California cuisine served in an elegant setting. The Victorian Room features
both American and Chinese cuisine served in an atmosphere of stained glass and
turn-of-the-century decor.
At the Barbary Coast, we have historically generated most of our gaming
revenue from the table games operations. In 1998, we reconfigured the gaming
floor of the Barbary Coast to enhance its appeal to gaming customers walking on
the Strip and to provide more focus on our slot operations. Approximately 100
machines were added and approximately 40% of the existing machines were replaced
by many of the newest innovations in slot technology. Additionally, as part of
the reconfiguration of the casino, we added live music in our new entertainment
lounge.
THE SUNCOAST
We are currently designing and developing the Suncoast to expand our
presence in the growing Las Vegas locals market. The Suncoast will serve one of
the fastest growing areas of the Las Vegas valley and will be located on
approximately 50 acres in Peccole Ranch, a master-planned community adjacent to
Summerlin.
Our new hotel-casino will be strategically located at the intersection
of Rampart Boulevard and Alta Drive, readily accessible from most major points
in the city, including downtown Las Vegas (approximately eight miles) and the
Strip (approximately nine miles). Accessibility will be further enhanced by the
expected connection of the Las Vegas beltway to Summerlin Parkway in 2000. The
site will be approximately 1/4 mile from the Resort at Summerlin, a new luxury
resort that is expected to open in the second quarter of 1999.
We are designing the Suncoast with a Mediterranean theme and it is
expected to include an approximately 78,000 square foot casino, 232 hotel rooms,
with an average size of approximately 550 square feet, approximately 15,000
square feet of banquet and meeting facilities, 16 "stadium seating" movie
theaters, four full-service
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restaurants and approximately 3,400 parking spaces. We expect the casino to
include approximately 2,000 slot machines, 34 table games, a keno lounge, a
poker parlor, race and sports books and a 60 lane bowling alley. The Suncoast is
master-planned to double the number of hotel rooms, when necessary, by adding an
additional wing.
We have an estimated construction and development budget of
approximately $150 million (including contingencies, but excluding pre-opening
expenditures, opening bankroll and capitalized interest costs). Construction is
expected to cost approximately $105.0 million, including contingencies, and
subject to obtaining financing, we expect construction to begin in mid-1999. The
budget also includes $40.0 million for equipment and $5.0 million for
architecture and design fees. We have assembled a construction team with
substantial experience in the development and construction of hotel-casinos in
Las Vegas and with whom we have worked successfully in the past, including
Tiberti Construction Company, Inc. and Yates-Silverman, Inc. Tiberti
Construction served as general contractor for the construction of The Orleans
and the Gold Coast.
GAMING SECURITY
Each of our casinos employs extensive supervision and accounting
procedures to control the handling of cash in their gaming operations. These
measures include security personnel, closed-circuit television observation of
critical areas of the casino, locked cash boxes, independent auditors and
observers, strict sign-in and sign-out procedures which ensure, to the extent
practicable, that gaming chips issued by, and returned to, the casino cashier's
cages are accurately accounted for, and procedures for the regular observation
of gaming employees. The accounting departments of each of our casinos, which
employ persons who have no involvement in the gaming operations, review on a
daily basis records compiled by gaming employees pertaining to cash flow and
credit extension. Moreover, regular periodic analysis of the results of our
gaming operations, including analyses of our compliance with the internal
control standards established by the Nevada State Gaming Control Board (the
"Nevada Board"), are performed by us and our independent auditors to detect
significant deviations from industry standards. Based on the results of these
analyses, management believes that its procedures are in compliance in all
material respects with the requirements established by the Nevada Gaming
Commission (the "Nevada Commission") and the Nevada Board.
POTENTIAL FUTURE DEVELOPMENTS
From time to time in our ordinary course of business we review proposals
for new developments, joint ventures and other strategic transactions. We cannot
assure you that any such new developments, ventures or transactions will be
pursued or, if pursued, will be successful.
NEIGHBORHOOD CASINO ACT
Nevada's Senate Bill 208, also known as SB 208 and the Neighborhood
Casino Act, was enacted in 1997 and affects the development of our Suncoast
location as well as other potential locations for casinos targeting Las Vegas
residents. The Neighborhood Casino Act, among other things, imposes more
stringent requirements for approval of new hotel-casinos in Clark County that
are not located in the vicinity of the Strip and downtown Las Vegas. Sites that
have been designated a gaming overlay or gaming enterprise district not later
than December 31, 1998 and that receive approval from the Nevada Gaming
Commission (the "Nevada Commission") for a nonrestricted gaming license no later
than December 31, 2002 will not be subject to the more stringent requirements of
the Neighborhood Casino Act.
The site on which the Suncoast will be constructed has been designated
as a gaming overlay or gaming enterprise district by the City of Las Vegas,
which is the zoning designation necessary to construct and operate a
hotel-casino. We must receive approval for a nonrestricted gaming license which
is generally not available until immediately prior to beginning gaming
operations, by December 21, 2002, or we will be required to successfully
petition the City of Las Vegas to designate the Suncoast site as a gaming
overlay or gaming enterprise district in order to obtain a nonrestricted gaming
license pursuant to the more stringent standards of SB 208. These and other
restrictions may limit our ability to develop and operate the Suncoast and any
future development projects in Clark County, including the land we own in North
Las Vegas.
COMPETITION
There is intense competition among companies in the gaming industry. The
Orleans and the Gold Coast compete (and, when completed, the Suncoast will
compete) primarily with Las Vegas hotel-casinos and non-hotel gaming facilities
which target local residents. Some of these competitors have recently completed
expansions or new projects. In addition, there are currently gaming facilities
that have been announced or are under construction in the immediate vicinity of
our casinos. A hotel-casino has been proposed for a location adjacent to the
Gold Coast. Additionally, adjacent to the Suncoast site, a luxury hotel-casino
and spa called The Resort at Summerlin is expected to open in the second quarter
of 1999 and is anticipated to include a 50,000 square foot gaming facility and
over 500 hotel rooms. Furthermore, there are several undeveloped properties in
the immediate vicinity of The Orleans, the Gold Coast and the location of the
Suncoast on which new gaming facilities could be built. The construction of new
properties and the expansion or enhancement of existing properties near our
casinos could have a negative impact on our business.
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In contrast to our other casinos, the Barbary Coast competes for customers
primarily with the hotel-casinos located on the Strip. Several large
hotel-casinos have either recently opened or are under construction on the
Strip, including Bellagio, Mandalay Bay, Paris, Aladdin and The Venetian. The
construction of new properties and the expansion or enhancement of existing
properties on the Strip by competitors could materially adversely affect the
Barbary Coast.
In addition, each of our properties compete (and, when completed, the
Suncoast will compete) to a lesser extent with all other casinos and hotels in
the Las Vegas area. In addition to those mentioned above, several new
hotel-casino projects and expansions have been announced or are under
construction in Las Vegas. These projects and expansions will add substantial
additional gaming capacity and approximately 12,000 rooms to the Las Vegas area
over the next two years. This additional gaming and room capacity may have a
negative impact on our business.
Furthermore, we compete with other legalized forms of gaming and gaming
operations in other parts of the state of Nevada and elsewhere. Certain states
have recently legalized, and several other states are currently considering
legalizing, casino gaming in designated areas. We also face competition from
casinos located on Native American reservations. We believe that the development
by Native Americans and others of casino properties similar to those in Las
Vegas in areas close to Nevada, particularly California and Arizona, could have
a material adverse effect on our business and results of operations.
Gaming competition from Native American ventures in California may
intensify due to Proposition 5, a California ballot initiative passed by voters
in California on November 3, 1998. Proposition 5 permits Native American tribes
that enter into agreements with the State of California to conduct gaming
activities including operating gaming devices (including slot machines), banked
card games, horse race wagering and lotteries. Proposition 5 is subject to a
legal challenge and its enforcement has been blocked pending a decision by the
California Supreme Court. We are not certain when, or if, Proposition 5 will
become effective or how it will affect us. However, because visitors from
California make up Nevada's largest visitor market, if Proposition 5 is
implemented, increased competition from Native American gaming may cause a
decline in our revenues and may have a negative impact on our business.
ENVIRONMENTAL MATTERS
We are subject to a wide variety of federal, state and local laws and
regulations relating to the use, storage, discharge, emission and disposal of
hazardous materials. While we believe that we are presently in material
compliance with all environmental laws, failure to comply with such laws could
result in the imposition of severe penalties or restrictions on operations by
government agencies or courts that could adversely affect operations. In 1995,
we completed Phase I environmental assessments at the properties owned or leased
by us. The reports did not identify any environmental conditions or
non-compliance, the remediation or correction of which are reasonably expected
to have a material adverse impact on our business or financial condition.
EMPLOYEES
At December 31, 1998, we had approximately 4,900 employees. We have not
experienced any significant work stoppages and believe our labor relations are
good. The Las Vegas job market for employees is very competitive. Except for
approximately 350 employees at the Barbary Coast who are covered by a collective
bargaining agreement, none of our other employees are covered by a collective
bargaining agreement.
NEVADA REGULATION AND LICENSING
The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act"), and (ii) various local regulations.
Our gaming operations are subject to the licensing and regulatory control of the
Nevada Commission, the Nevada Board and the Clark County Liquor and Gaming
Licensing Board (the "Clark County Board"). The Nevada Commission, the Nevada
Board and the Clark County Board are collectively referred to as the "Nevada
Gaming Authorities."
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The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which seek to, among
other things, (i) prevent unsavory or unsuitable persons from having any direct
or indirect involvement with gaming at any time or in any capacity, (ii)
establish and maintain responsible accounting practices and procedures, (iii)
maintain effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and requiring the
filing of periodic reports with the Nevada Gaming Authorities, (iv) prevent
cheating and fraudulent practices and (v) provide a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations
and procedures could have an adverse effect on the Company's gaming operations.
The Company, which operates the Gold Coast, the Barbary Coast and The
Orleans, is licensed by the Nevada Gaming Authorities and is a corporate
licensee (a "Corporate Licensee") under the terms of the Nevada Act. The gaming
licenses require the periodic payment of fees and taxes and are not
transferable. Coast Resorts is registered with the Nevada Commission as a
publicly traded corporation (a "Registered Corporation") and Coast Resorts has
been found suitable to own the stock of Coast Hotels. Coast Resorts, as a
Registered Corporation, and Coast Hotels, as a Corporate Licensee, are required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information that the Nevada Commission may
request. No person may become a stockholder of, or receive any percentage of the
profits from, Coast Hotels without first obtaining licenses and approvals from
the Nevada Gaming Authorities. The Company and Coast Resorts have obtained from
the Nevada Gaming Authorities the various registrations, approvals, permits and
licenses required in order to engage in gaming activities at its hotel-casinos.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Coast
Resorts in order to determine whether such individual is suitable or should be
licensed as a business associate of a Corporate Licensee or a Registered
Corporation. Officers, directors and certain key employees of the Company must
file applications with the Nevada Gaming Authorities and may be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of the Company who are actively and directly involved in
gaming activities of the Company may be required to be licensed or found
suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may
deny an application for licensing for any cause which they deem reasonable. A
finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all the costs of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities and, in addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee of the Company or Coast Resorts unsuitable for licensing or
unsuitable to continue having a relationship with the Company or Coast Resorts,
the Company and Coast Resorts would have to sever all relationships with such
person. In addition, the Nevada Commission may require the Company and Coast
Resorts to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and Coast Resorts are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Coast Resorts and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the Company's gaming properties
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the Company's gaming
properties) could be forfeited to the State of Nevada. Limitation, conditioning
or
10
<PAGE> 11
suspension of any gaming license or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
a Registered Corporation's voting securities determined if the Nevada Commission
has reason to believe that such ownership would otherwise be inconsistent with
the declared policies of the State of Nevada. The applicant must pay all costs
of investigation incurred by the Nevada Gaming Authorities in conducting any
such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within 30 days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15% of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor will not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of a Registered Corporation, any change in a Registered Corporation's corporate
charter, bylaws, management, policies or operations, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or
a license within 30 days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the owner, after request, fails to
identify the beneficial owner. Any stockholder found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the voting securities of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or Coast
Resorts, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities, including, if necessary, the
immediate purchase of such voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Corporate Licensee or a Registered Corporation to file
applications, be investigated and be found suitable to own the debt security. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Corporate Licensee or the
Registered Corporation can be sanctioned, including the loss of its licenses, if
without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction.
11
<PAGE> 12
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act.
Licensed Corporations and Registered Corporations such as the Company
and Coast Resorts may not make public offering of their securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to require or extend obligations incurred for such purposes. The
Nevada Commission has previously granted exemptions from this prior approval
process for certain public offerings by the Company and Coast Resorts. Approval
of a public offering, if given, will not constitute a finding, recommendation or
approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and Nevada
Commission with respect to a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as a part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by a Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation of the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease at the
discretion of the Nevada Commission.
12
<PAGE> 13
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
The Company may pursue development opportunities in other jurisdictions
and expects that if it does so it will be subject to similar rigorous regulatory
standards in each other jurisdiction in which it seeks to conduct gaming
operations. There can be no assurance that regulations adopted, permits required
or taxes imposed, by other jurisdictions will permit profitable operations by
the Company in those jurisdictions.
CERTAIN FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning
of the securities laws. All statements regarding our expected financial
position, business, strategies and financing plans under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" "Business" and elsewhere in this Form 10-K are forward-looking
statements. In addition, in those and other portions of this Form 10-K, the
words "anticipates," "believes," "estimates," "seeks," "expects," "plans,"
"intends" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, and have based these expectations on our beliefs as well as
assumptions we have made, such expectations may prove to be incorrect. Important
factors that could cause actual results to differ materially from such
expectations are disclosed in this Form 10-K, including, without limitation, the
following factors:
o increased competition, both in Nevada and other states;
o dependence on the Las Vegas area and Southern California for a majority
of our customers;
o uncertainties associated with obtaining financing on acceptable terms
for the construction of the Suncoast;
o substantial leverage and uncertainty that we will be able to service our
debt;
o uncertainties associated with the Suncoast and other construction
projects, including the related disruption of operations and the
availability of financing, if necessary; and
o changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by our cautionary statements. The forward-looking statements included are made
only as of the date of this Form 10-K. We do not intend, and undertake no
obligation, to update these forward-looking statements.
ITEM 2. PROPERTIES.
The Orleans occupies a portion of an approximately 80 acre site located
on West Tropicana Avenue, approximately one mile south of the Gold Coast. We
lease the real property under a ground lease entered into by the Company and the
Tiberti Company, a Nevada general partnership of which J. Tito Tiberti, a
director of the Company, is managing partner. See "Certain Transactions." The
lease had an effective commencement date of
13
<PAGE> 14
October 1, 1995, an initial term of 50 years, and includes an option,
exercisable by us, to extend the initial term for an additional 25 years. The
lease provides for monthly rental payments of $175,000 per month through
February 1999, $200,000 per month during the 36-month period thereafter,
$225,000 per month during the 48-month period thereafter and $250,000 per month
during the 60-month period thereafter. In March 2011, annual rental payments
will increase on a compounding basis at a rate of 3.0% per annum. In addition,
we have been granted an option to purchase the real property during the two-year
period commencing in February 2016. The lease provides that the purchase price
will be the fair market value of the real property at the time we exercise the
option, provided that the purchase price will not be less than 10 times, nor
more than 12 times, annual rent at such time.
We own the approximately 26 acres that the Gold Coast occupies on West
Flamingo Road. We also own an 8.33 acre site across the street from the Gold
Coast that contains an approximately 100,000 square foot warehouse. The
warehouse is used by the Gold Coast, the Barbary Coast and The Orleans primarily
as a storage facility.
The Barbary Coast occupies approximately 1.8 acres at the intersection
of Flamingo Road and the Strip and occupies real property that we lease pursuant
to a lease that expires on May 1, 2003. The lease provides for rental payments
of $175,000 per year. The lease contains two options, exercisable by us, to
extend the term of the lease for 30-years each (with the rent to be readjusted
as provided in the lease during those renewal periods). We have an option to
purchase the leased property at any time during the six month period prior to
the expiration of the lease, provided that certain conditions are met, at a
purchase price equal to the greater of $3.5 million or the then appraised value
of the real property. We also have a right of first refusal in the event the
landlord desires to sell the real property during the initial term of the lease.
We also lease approximately 2.5 additional acres of real property located
adjacent to the Barbary Coast. The lease expires on December 31, 2003. The lease
provides for rental payments of $125,000 per annum. We use the 2.5 acre property
as a parking lot for our employees and for valet parking. The landlord has the
right to terminate the lease upon six months prior notice to us if it requires
the use of the property for its own business purposes (which excludes leaving
the property vacant or leasing it to third parties prior to January 1, 2003).
We lease the approximately 50 acre Suncoast site located at the corner
of Rampart Boulevard and Alta Drive in the west Las Vegas valley pursuant to a
Ground Lease Agreement dated as of October 28, 1994. The initial term of the
lease expires on December 31, 2055. The lease contains three options,
exercisable by us, to extend term of the lease for 10 years each. The lease
provided for monthly rental payments of $166,667 for the year ended December 31,
1995. Thereafter, the monthly rent increases by the amount of $5,000 in January
of each year. The landlord has the option to require us to purchase the property
at the end of 2014, 2015, 2016, 2017 and 2018, at the fair market value of the
real property at the time the landlord exercises the option, provided that the
purchase price will not be less than 10 times nor more than 15 times the annual
rent at such time. Based on the terms of the lease, the potential purchase price
commitment ranges from approximately $31.0 million to approximately $51.0
million in the years 2014 through 2018. We have a right of first refusal in the
event the landlord desires to sell the property at any time during the lease
term.
We also own an approximately 29 acre parcel of undeveloped land located
at the corner of Rancho Drive and Carey Avenue in North Las Vegas, close to the
Fiesta Hotel and Casino and the Texas Station Hotel and Casino. Any future
developments on this site would be subject to, among other things, our ability
to obtain necessary financing and compliance with SB 208.
ITEM 3 LEGAL PROCEEDINGS
We are currently, and are from time to time, involved in litigation
arising in the ordinary course of our business. We are currently subject to two
lawsuits in which the plaintiffs have sought punitive damages. We intend to
continue to defend the lawsuits vigorously. We do not believe that such
litigation, including the foregoing proceedings, will, individually or in the
aggregate, have a material adverse effect on our financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
14
<PAGE> 15
No matters were submitted to our shareholders during the quarter ended
December 31, 1998.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
We are a wholly-owned subsidiary of Coast Resorts. None of our equity
securities are publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Form 10-K. The balance sheets and statements of income data as
of and for each of the five years in the period ended December 31, 1998 are
derived from the consolidated financial statements of the Company which have
been audited by PricewaterhouseCoopers LLP. The consolidated financial
statements of the Company as of December 31, 1997 and 1998 and for each of the
three years in the period ended December 31, 1998 are included in this report on
Form 10-K.
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995 1996(1) 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net revenues...................................... $172,573 $ 174,756 $ 195,987 $ 293,883 $ 332,363
Departmental operating expenses(2) ............... 118,697 118,534 121,628 197,200 209,104
General and administrative expenses .............. 29,271 30,405 37,992 54,351 55,879
Guaranteed payments to former partners(3) ........ 2,672 858 -- -- --
Pre-opening expenses ............................. -- -- 7,125 -- --
Land leases ...................................... -- -- -- 2,100 3,190
Deferred (non-cash) rent ......................... -- -- -- 2,378 3,198
Depreciation and amortization .................... 6,766 7,280 7,883 18,278 20,607
---------- ---------- ---------- ---------- ----------
Operating income ................................. 15,167 17,679 21,359 19,576 40,385
Interest expense, net ............................ (227) (3,545) (9,981) (25,228) (26,570)
Other income ..................................... 23 92 58 919 168
---------- --------- --------- --------- ---------
Net income (loss) before income taxes ............ 14,963 14,226 11,436 (4,733) 13,983
Provision (benefit) for income taxes ............. -- -- 6,617 (1,401) 5,225
---------- ---------- ---------- ---------- ----------
Net income (loss) ................................ $ 14,963 $ 14,226 $ 4,819 $ (3,332) $ 8,758
========= ========= ========= ========= =========
PRO FORMA INFORMATION TO REFLECT
CHANGE IN TAX STATUS(4):
Provision (benefit) for income taxes ............. 5,251 4,979 4,117 (1,401) 5,225
---------- ---------- ---------- ---------- ----------
Net income (loss) ................................ $ 9,712 $ 9,247 $ 7,319 $ (3,332) $ 8,758
========= ========= ========= ========= =========
OTHER DATA:
EBITDA(5) ........................................ $ 21,933 $ 24,959 $ 36,367 $ 40,232 $ 64,190
Cash provided by operating activities ............ $ 22,572 $ 22,841 $ 27,033 $ 16,046 $ 39,258
Cash used in investing activities ................ $ (5,509) $ (31,968) $(125,702) $ (56,666) $ (15,324)
Cash provided by (used in) financing activities... $ (14,883) $ 6,699 $ 145,685 $ 8,491 $ (11,765)
Capital expenditures ............................. $ 5,514 $ 32,187 $ 125,722 $ 57,736 $ 15,492
Distributions to partners(6) ..................... $ 25,823 $ 58,660 $ -- $ -- $ --
</TABLE>
- ------------
See Footnotes to Selected Financial Data.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA --(CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1994 1995 1996(1) 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .. $ 16,967 $ 14,539 $ 61,555 $ 29,426 $ 41,595
Total assets ............... 134,295 152,216 374,122 366,861 367,034
Total long-term debt(7) .... 11,776 83,357 195,764 207,173 199,954
Stockholder's equity ....... 87,781 43,334 100,678 97,346 102,918
</TABLE>
FOOTNOTES TO SELECTED FINANCIAL DATA
(1) The Orleans opened in December 1996
(2) Includes casino, food and beverage, hotel and other expenses.
(3) Prior to the Company's formation in 1995, the Gold Coast and the Barbary
Coast were operated by two affiliated partnerships which were
consolidated into the Company and Coast Resorts effective January 1,
1996. The partnership agreements for those partnerships required that
guaranteed payments be made to the partners.
(4) The Predecessor Partnerships were not subject to federal income taxes.
As a result of the Reorganization, the operations of the Gold Coast and
the Barbary Coast are being conducted by the Company, which has been
formed as a "C Corporation" and, therefore, is subject to federal income
taxes. A pro forma provision for federal income taxes has been made, and
pro forma net income has been calculated for all periods presented as if
the Predecessor Partnerships had been treated as a C corporation during
those periods.
(5) "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 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 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 the similarly titled measures presented by
other companies. The computation of EBITDA for each of the respective
periods shown is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996(1) 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes ..................... $ 14,963 $ 14,226 $ 11,436 $ (4,733) $ 13,983
Add back:
Interest expense, net ............................... 227 3,545 9,981 25,228 26,570
Depreciation and amortization ....................... 6,766 7,280 7,883 18,278 20,607
Pre-opening expenses ................................ -- -- 7,125 -- --
Non-recurring items (gain on equipment disposals).... (23) (92) (58) (919) (168)
Deferred (non-cash) rent expense ................... -- -- -- 2,378 3,198
-------- -------- -------- -------- --------
EBITDA................................................. $21,933 $ 24,959 $ 36,367 $ 40,232 $ 64,190
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA --(CONTINUED)
(6) Because the Gold Coast Partnership and the Barbary Coast Partnership
were partnerships during these periods, a substantial portion of their
net income was distributed to the partners. In 1994, the Barbary Coast
Partnership distributed $11.0 million of partners' capital in the form
of notes payable and, in 1995, the Gold Coast Partnership distributed
$50.0 million of partners' capital in the form of notes payable. Such
distributions represented previously taxed but undistributed earnings of
the Predecessor Partnerships.
(7) Excludes current maturities.
ITEM 7. 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 historical results of the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GOLD COAST
Net operating revenues ................ $ 140,548 $ 126,490 $ 128,509
Operating income ...................... 28,975 22,603 24,947
EBITDA(1) ............................. 33,609 27,403 29,916
Cash provided by operating activities.. 35,582 28,135 27,968
BARBARY COAST
Net operating revenues ................ $ 49,419 $ 44,610 $ 43,609
Operating income ...................... 4,155 1,034 1,977
EBITDA(1) ............................. 5,800 2,627 3,760
Cash provided by operating activities.. 5,954 2,438 2,362
THE ORLEANS
Net operating revenues ................ $ 6,020 $ 122,783 $ 160,245
Operating income (loss) ............... (5,859) 3,098 21,600
EBITDA(1) ............................. 1,669 15,946 36,324
Cash provided by (used in) operating
Activities .......................... (238) 9,142 37,912
TOTAL (INCLUDING CORPORATE)
Net operating revenues ................ $ 195,987 $ 293,883 $ 332,363
Operating income ...................... 21,359 19,576 40,385
EBITDA(1) ............................. 36,367 40,232 64,190
Cash provided by operating activities.. 27,033 16,046 39,258
</TABLE>
(1) "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 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 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 similarly titled measures presented by
other companies.
18
<PAGE> 19
FISCAL 1998 COMPARED TO 1997
Net revenues, operating income and net income all improved in the year
ended December 31, 1998, primarily due to improved revenues at The Orleans. Net
revenues in 1998 were $332.4 million compared to $293.9 million in the year
ended December 31, 1997, an increase of 13.1%. Operating income in the year
ended December 31, 1998 was $40.4 million compared to $19.6 million in the prior
year, an increase of 106.1% primarily due to the increased revenues. Operating
expenses increased $17.7 million, mainly as a result of higher casino expenses
due to increased business at our hotel-casinos. Additionally, land lease and
deferred (non-cash) rent expenses increased due to the Coast West lease
expenses, which became consolidated expenses of the Company in July 1998 as a
result of Coast West becoming a subsidiary. Despite an increase in interest
expense due to the issuance of the 10 7/8% first mortgage notes in November 1997
and an increase in the income tax expense, net income increased $12.1 million to
$8.8 million in 1998 compared to a net loss of $3.3 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, featuring headliner entertainment in its showroom and, in December
1997, the opening of 12 new movie theaters. For the year ended December 31,
1998, net revenues were $160.2 million compared to $122.8 million in 1997, an
increase of 30.5%. Casino revenues increased 34.3% for the year, primarily as a
result of increased slot machine play. Growth in customer volume led to an
increase in food and beverage revenues of 22.9%. Hotel revenues increased 4.6%
for the year due to increased occupancy and other revenues increased 63.2% in
1998, due primarily to higher showroom revenues. Operating expenses increased
15.8% in 1998, primarily due to increased casino promotional activities. Other
expenses were up 47.6% for the year due principally to the higher-priced
headliner entertainers in the showroom. Depreciation and amortization expense
increased by $1.9 million due to the opening in December 1997 of the movie
theaters, video arcade, child care facility and additional gaming space. Despite
the increase in operating expenses, operating income increased to $21.6 million
in 1998 compared to $3.1 million in 1997.
Gold Coast. For the year ended December 31, 1998, net revenues were
$128.5 million, an increase of $2.0 million, or 1.6% over 1997 revenues of
$126.5 million. Casino revenues accounted for most of the increase, up 4.8% over
1997 casino revenues, primarily due to increased slot machine play. Operating
income in the year ended December 31, 1998 was $24.9 million, an increase of
$2.3 million, or 10.4%, over 1997 operating income, as operating expenses were
relatively flat, increasing by 0.3% over the previous year.
Barbary Coast. Net revenues for the year ended December 31, 1998
decreased 2.2% to $43.6 million compared to $44.6 million in the year ended
December 31, 1997, primarily as a result of a decrease in table game wagering
volume, a lower table games win percentage, the removal of live keno and lower
wagering volume in the race book. Despite the lower revenues in 1998, operating
income increased to $2.0 million compared to $1.0 million in 1997, primarily due
to lower casino promotional expenses.
FISCAL 1997 COMPARED TO 1996
Net revenues were $293.9 million for the year ended December 31, 1997,
an increase of 50.0% over 1996 net revenues of $196.0 million. The increase was
due primarily to the opening of The Orleans on December 18, 1996. Operating
income declined $1.8 million (8.4%) to $19.6 million in 1997 compared to $21.4
million in 1996. The decline was primarily due to lower-than-expected revenues
in 1997 at the Company's newest property, The Orleans, as well as decreased
revenues at the Company's other two hotel-casinos, the Gold Coast and the
Barbary Coast (discussed below). The lower operating income as well as increased
interest expense contributed to a net loss of $3.3 million in 1997 compared to
net income of $4.8 million in 1996.
The Orleans. The year ended December 31, 1997 was the first full year of
operations for The Orleans, which opened on December 18, 1996. Net revenues for
the fourteen days in 1996 were $6.0 million. Operating income before pre-opening
expenses of $7.1 million was $1.3 million in 1996.
19
<PAGE> 20
For 1997, net revenues for The Orleans were $122.8 million. Net revenues
were $27.4 million for the quarter ended March 31, 1997, the first full quarter
of operations. Net revenues were $30.7 million in the second quarter, $29.6
million in the third quarter and $35.1 million in the quarter ended December 31,
1997. Operating income for 1997 was $3.1 million, including a first-quarter
operating loss of $2.5 million, operating income of $1.3 million in the second
quarter, operating income of $245,000 in the third quarter and operating income
of $4.1 million in the fourth quarter ended December 31, 1997. The increase in
revenues and operating income since the first quarter is due primarily to
increased casino activity, which management attributes to successful promotions
and an increasing target market familiarity with the property. Table games
customer wagering volume was 9.2% higher in the fourth quarter than in the first
quarter and slot machine customer wagering volume was 31.0% higher in the fourth
quarter than in the first.
In the first quarter of 1997, the Company began construction on a
series of improvements at The Orleans which included twelve movie theaters, a
child care facility, arcade and additional slot machines. The related
construction traffic reduced access to the property, adversely affecting
operating results at The Orleans. Management believes that, upon completion in
December 1997, the improvements and lack of disruption from construction
positively affected operating results in the fourth quarter.
Gold Coast. Net revenues for the year ended December 31, 1997 decreased
10.0% to $126.5 million compared to $140.5 million in 1996. Management
attributes the decrease primarily to competition from the opening of The Orleans
approximately one mile from the Gold Coast. Casino revenues declined 10.6% to
$93.1 million in 1997 compared to $104.2 million in 1996, due to lower customer
wagering volume. Food and beverage business decreased as a result of the reduced
customer traffic, causing revenues to decline 12.1% to $25.1 million in 1997
compared to $28.6 million in 1996. In 1997, an increased number of rooms in the
Las Vegas market led to a total room occupancy rate at the Gold Coast of 81.7%
compared to 92.3% in 1996, contributing to a $239,000 (2.3%) decline in hotel
revenues. Gold Coast operating expenses were $103.9 million in 1997, down $7.7
million (6.9%) from $111.6 million in 1996 primarily due to a $9.8 million
(16.5%) reduction in salaries and related costs as management reacted to the
reduced customer volume. Food and beverage expenses declined $3.2 million
(13.3%) and general and administrative expenses declined $3.0 million (11.6%).
Despite lower operating expenses, the reduced revenues contributed to a 22.0%
decrease in operating income to $22.6 million in 1997 compared to $29.0 million
in 1996.
Barbary Coast. Net revenues for the year ended December 31, 1997
decreased 9.7% to $44.6 million compared to $49.4 million in 1996. Casino
revenues declined 13.1% to $34.6 million in 1997 compared to $39.8 million in
1996, primarily as a result of decreased customer wagering volume and a lower
than expected win percentage on table games and decreased wagering volume in the
race book. Management attributes the decline to a reduction in foot traffic
since the January 1997 opening of New York-New York Hotel and Casino one mile
south of the Barbary Coast on the Las Vegas Strip as well as to increased
competition from other recently opened or expanded hotel-casinos (including The
Orleans). Food and beverage revenues increased $837,000 (8.6%) in 1997 primarily
as a result of higher drink prices in the bars. The increase in food and
beverage revenues was partially offset by an increase of $664,000 (11.3%) in
food and beverage expenses. Hotel room revenues declined $367,000 (9.1%) due
primarily to lower average room rates as management reacted to increasing
competition. Operating income at the Barbary Coast declined 75.1% to $1.0
million in 1997 compared to $4.2 million in 1996, primarily as a result of the
decreased revenues discussed above.
Depreciation and amortization expense increased by 132.0% in 1997
compared to 1996, principally due to the opening of The Orleans in December
1996. Net interest expense increased 152.8% in 1997 primarily due to decreases
in capitalized interest and interest income. Capitalized interest was $7.5
million in 1996 during the construction of The Orleans, but was only $1.0
million in 1997 during the construction of phase two of The Orleans.
Additionally, the proceeds from the sale of $175 million in 13% first mortgage
notes the Company earned interest income of $4.8 million in 1996, but were
substantially utilized by the end of 1996.
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<PAGE> 21
Gain on disposal of equipment was approximately $919,000 in 1997
compared to $58,000 in 1996, primarily due to a crash of the Company's
Beechcraft Super King Air aircraft which, after receipt of insurance proceeds,
resulted in a gain of $785,000.
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 increased to $39.3 million in 1998, an increase of $23.2 million over
1997, primarily due to the Company's increased profitability discussed above.
On January 30, 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 November 1, 2001 ("10 7/8% First Mortgage Notes"). The
indentures pursuant to which the 13% First Mortgage Notes and 10 7/8% First
Mortgage Notes were issued contain covenants that, among other things, limit the
ability of the Company to pay dividends or make advances to Coast Resorts, repay
existing indebtedness, incur additional indebtedness, or sell material assets as
defined in the indenture.
On February 19, 1999, the Company commenced a tender offer and consent
solicitation with respect to the 13% First Mortgage Notes. The tender offer,
which is subject to certain conditions, will expire on March 22, 1999, unless
extended. In the consent solicitation, we obtained consents to eliminate most
financial and restrictive covenants in the indenture and related security
agreement. The amendments will become operative if the tender offer is
consummated. The Company currently intends to issue senior subordinated notes
and enter into a credit facility with a $75.0 million availability to fund the
purchase of 13% First Mortgage Notes in the tender offer. The senior
subordinated notes are expected to be issued in an offering that will not be
registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an applicable exemption from
the registration requirements. No assurance can be given that we will issue the
senior subordinated notes, enter into a credit facility or complete the tender
offer to refinance the 13% First Mortgage Notes. If we complete the tender
offer, we also expect to repurchase the 10 7/8% First Mortgage Notes.
Our cash requirements, in addition to interest payments on outstanding
indebtedness, include annual principal payments of approximately $7.8 million on
equipment notes payable, land lease payments of approximately $4.3 million,
capital expenditures of approximately $10.2 million to complete an expansion of
The Orleans and ongoing maintenance capital expenditures and periodic
enhancements at our existing facilities. Our maintenance capital expenditures
for 1998 were approximately $13.0 million and we currently expect that we will
spend approximately $11.0 million for maintenance capital expenditures in 1999.
We believe that existing cash balances and operating cash flow will provide
sufficient resources to meet our debt obligations and foreseeable capital
expenditure requirements at our existing properties.
We are currently developing and intend to construct and open the
Suncoast. We do not yet have financing in place to fund the construction of the
Suncoast. Subject to obtaining adequate financing, we currently anticipate that
construction of the Suncoast will begin in mid-1999. If we enter into a new
credit facility, we expect it will contain 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 in this Annual Report on Form 10-K, the Company has
no agreements, arrangements or understandings with respect to financing the
future development of additional properties or capital improvements
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<PAGE> 22
to existing properties. Any future development or capital improvements would be
subject to, among other things, the Company's ability to obtain necessary
financing.
IMPACT OF INFLATION
Absent changes in competitive and economic conditions or in specific
prices affecting the industry, the Company does not expect that inflation will
have a significant impact on the Company's operations. Change in specific
prices, such as fuel and transportation prices, relative to the general rate of
inflation may have a material adverse effect on the hotel and casino industry.
REGULATION AND TAXES
The Company is subject to extensive regulation by the Nevada gaming
authorities. Changes in applicable laws or regulations could have a significant
impact on the Company's operations. In 1996, legislation was enacted which
established a federal commission to study the gaming industry.
The gaming industry represents a significant source of tax revenues,
particularly to the State of Nevada and its counties and municipalities. From
time to time, various state and federal legislators and officials have proposed
changes in tax law, or in the administration of such law, affecting the gaming
industry. Proposals in recent years that have not been enacted included a
federal gaming tax and increases in state or local taxes.
Management believes that the Company's recorded tax balances are
adequate. However, it is not possible to determine with certainty the likelihood
of possible changes in tax law or in the administration of such law. Such
changes, if adopted, could have a material adverse effect on the Company's
operating results.
During 1997, the Company recorded a tax benefit of $1.4 million in
relation to its loss before income taxes of $4.7 million. This benefit
represents an amount carried-back to prior taxable income.
IMPACT OF THE YEAR 2000 ISSUE
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.
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.
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<PAGE> 23
To assist them in their effort and to further help identify potential problems
areas, in October 1998 we retained the services of an advisor to review our Y2K
program.
As of December 31, 1998, 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 $300,000 of which has been spent as of December 31, 1998. All
costs related to software modifications, 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. As of December 31, 1998 we have begun developing
contingency plans for specific areas for 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of independent accountants, financial statements and
financial statement schedule listed in the accompanying index are filed as part
of this report. See "Index to Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 24
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT.
The following table sets forth the names and ages of the directors and
executive officers of the Company and their respective positions as of December
31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Michael J. Gaughan 55 Director, Chairman of the Board and Chief Executive
Officer
Harlan D. Braaten 48 Director, President and Chief Operating Officer
Jerry Herbst 60 Director, Vice President, Treasurer and Assistant
Secretary
J. Tito Tiberti 53 Director, Vice President and Secretary
Gage Parrish 45 Director, Vice President, Chief Financial Officer
and Assistant Secretary
Franklin Toti 60 Director, Vice President of Casino Operations
F. Michael Corrigan 62 Director
Charles Silverman 66 Director
Joseph Blasco 55 Director
</TABLE>
MICHAEL J. GAUGHAN. Mr. Gaughan has been a director of the Company
since its formation in September 1995 and is the Chairman of the Board and Chief
Executive Officer of the Company. His current term as a director expires in
2000. He is also a director and Chairman of the Board and Chief Executive
Officer of Coast Resorts, Inc. Mr. Gaughan was a general partner of the Barbary
Coast Partnership from its inception in 1979 until January 1, 1996, the
effective date of the reorganization in which the Barbary Coast Partnership and
the Gold Coast Partnership consolidated with Coast Resorts and the Company (the
"Reorganization"). Mr. Gaughan served as the managing general partner of the
Gold Coast Partnership from its inception in December 1986 until the effective
date of the Reorganization. Mr. Gaughan and Mr. Herbst were the sole
stockholders of Gaughan-Herbst, Inc., which was the sole corporate general
partner of the Gold Coast Partnership prior to the Reorganization. Mr. Gaughan
has been involved in the gaming industry since 1960 and has been licensed as a
casino operator since 1967.
HARLAN D. BRAATEN. Mr. Braaten joined the Company as the President,
Chief Financial Officer and a director in October 1995, and was appointed Chief
Operating Officer in February 1996. His current term as a director expires in
2000. Mr. Braaten is also the President and Chief Operating Officer of Coast
Resorts. Prior to joining the Company, Mr. Braaten was employed in various
capacities, including the general manager and, most recently, senior vice
president, treasurer and chief financial officer of Rio Hotel and Casino, Inc.
in Las Vegas. From March 1989 to February 1991, Mr. Braaten was vice president,
finance of MGM/Marina Hotel and Casino in Las Vegas, Nevada. Prior thereto, from
November 1983 to March 1989, Mr. Braaten was property controller for Harrah's in
Reno, Nevada. Mr. Braaten has over 20 years of experience in the Nevada gaming
industry.
JERRY HERBST. Mr. Herbst has been a director, Vice President, Treasurer
and Assistant Secretary of the Company since its formation in September 1995.
His current term as a director expires in 1999. Mr. Herbst has been the
president of Terrible Herbst Oil Company, an owner and operator of gas stations
and car washes, since 1959. Mr. Herbst and Mr. Gaughan were the sole
stockholders of Gaughan-Herbst, Inc., which was the sole
24
<PAGE> 25
corporate general partner of the Gold Coast Partnership prior to the formation
of the Company. Mr. Herbst has served as a member of the board of directors of
Bank of America--Nevada since 1977, of Nevada Power Company since 1990 and of
Edelbrook Corporation since 1994.
J. TITO TIBERTI. Mr. Tiberti has been a director, Vice President and
Secretary of the Company since its formation in September 1995. His current term
as a director expires in 1999. He is also a director and Vice President and
Secretary of Coast Resorts. Mr. Tiberti is the president, a director and a
stockholder of, and together with his immediate family, controls Tiberti
Construction, a construction company which served as the general contractor for
the construction of The Orleans and is also serving as general contractor for
the Suncoast. He has also served as managing general partner of The Tiberti
Company, a real estate rental and development company, since 1971. The Tiberti
Company is the lessor of the real property site for The Orleans. Mr. Tiberti has
been involved in the gaming industry for 19 years and was a general partner of
the Barbary Coast Partnership prior to the formation of the Company.
GAGE PARRISH. Mr. Parrish was named Vice President, Finance, Assistant
Secretary and a director of the Company and Coast Resorts in October 1995 and
was promoted to Chief Financial Officer in February 1996. His current term as a
director expires in 2000. Since 1986, he had been the Controller and Chief
Financial Officer of the Gold Coast Partnership prior to the formation of the
Company. From 1981 to 1986, Mr. Parrish served as Assistant Controller of the
Barbary Coast Partnership. Mr. Parrish is a certified public accountant and has
approximately 20 years of experience in the gaming industry.
FRANKLIN TOTI. Mr. Toti has been a director of the Company and Coast
Resorts since October 5, 1998. His current term expires in 1999. He has been
Vice President of Casino Operations for the Company since January 1, 1996. Mr.
Toti was a general partner and Casino Manager of the Barbary Coast Partnership
from its inception in 1979 until January 1, 1996, the effective date of the
reorganization. Mr. Toti has 38 years of experience in the gaming industry.
F. MICHAEL CORRIGAN. Mr. Corrigan was elected as a director of the
Company and Coast Resorts effective as of March 1, 1996. His current term as a
director expires in 2001. Since July 1989, Mr. Corrigan has served as the chief
executive officer of Corrigan Investments, Inc., which owns and manages real
estate in Nevada and Arizona. In addition, Mr. Corrigan is the Chief Executive
Officer of Corstan, Inc., a mortgage banking company, and was previously the
owner, President and Chief Operating Officer of Stanwell Mortgage, a Las Vegas
mortgage company.
CHARLES SILVERMAN. Mr. Silverman was elected as a director of the
Company and Coast Resorts effective as of March 1, 1996. His current term as a
director expires in 2001. Mr. Silverman is the President and sole stockholder of
Yates-Silverman, Inc., which specializes in developing theme-oriented interiors
and exteriors and is a leading designer of hotels and casinos. Completed
projects of Yates-Silverman, Inc. include New York-New York, Excalibur, Circus
Circus, Luxor, the Trump Taj Mahal, Trump Castle and Atlantic City Showboat.
Yates-Silverman, Inc. also served as the primary designer for The Orleans and is
serving in the same capacity for the Suncoast. Mr. Silverman has served as the
president of Yates-Silverman, Inc. since its inception in 1971.
JOSEPH BLASCO. Mr. Blasco was elected as a director of the Company and
Coast Resorts effective as of December 16, 1996. His current term as a director
expires in 2001. Since 1984, Mr. Blasco has been a partner in the real estate
development partnership which developed the Spanish Trail community in Las
Vegas, a project which includes over 1,200 homes, a 27-hole golf course and a
country club. Mr. Blasco is currently the managing General Partner of United
Realty Investments, a real estate development and management company in Las
Vegas. He is also general partner in two real estate development partnerships,
Summer Trail LLC and Trop-Edmond Ltd.
Directors of the Company who are also employees of the Company or Coast
Resorts receive no compensation for service on the Company's Board of Directors
or its committees. All other directors receive an annual director's fee of
$24,000, payable quarterly in arrears. Directors may also be reimbursed for
out-of-pocket expenses incurred in connection with attending Board of Director
or committee meetings.
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<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation earned by or paid by
the Company during 1996, 1997 and 1998 to each executive officer (the "Named
Executive Officers") whose compensation exceeded $100,000 in all capacities in
which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
---- -------- ------ ---------------
<S> <C> <C> <C> <C>
Michael J. Gaughan....................... 1998 $300,000 $ -- $ 5,000
Chairman of the Board and Chief 1997 300,000 -- 4,750
Executive Officer of the Company; 1996 300,000 195,000 4,750
Harlan D. Braaten........................ 1998 250,000 125,000 5,000
President and Chief Operating 1997 250,000 250,000(3) 4,750
Officer, the Company(2) 1996 250,000 162,500 --
Gage Parrish............................ 1998 200,000 -- 5,000
Vice President, Chief Financial Officer 1997 200,000 -- 4,750
and Assistant Secretary of the 1996 150,000 52,500 3,040
Company(4)
</TABLE>
- --------------
(1) The amounts reflect matching contributions paid to the Company's 401(k)
Profit Sharing Plan and Trust.
(2) Mr. Braaten joined the Company in October 1995 as President and Chief
Financial Officer of the Company and Coast Resorts. Mr. Braaten was
appointed as Chief Operating Officer of the Company and Coast Resorts
in February 1996.
(3) Pursuant to his previous employment agreement, Mr. Braaten received a
bonus of $250,000 because Coast Resorts had not made a public offering
of its common stock by December 31, 1997. Mr. Braaten entered into a
new employment agreement effective as of January 1, 1999.
(4) Mr. Parrish served as Vice President, Finance and Controller of the
Company and Coast Resorts from September 1995 to February 1996, when
Mr. Parrish was named Chief Financial Officer of the Company and Coast
Resorts.
EMPLOYMENT AGREEMENT
Effective as of January 1, 1999, the Company entered into an employment
agreement with Harlan Braaten, President and Chief Operating Officer. The
agreement has a term of three years and provides for Mr. Braaten to receive a
base salary of $250,000 for the first year and $300,000 for the second year. The
agreement may be terminated upon 30 days notice by Mr. Braaten and at any time
by the Company. In addition, in the event of a termination of Mr. Braaten's
employment other than for failure to comply with Nevada gaming regulations,
failure to perform his duties, medical incapacity or his arrest on a felony
offense, Mr. Braaten will be entitled to receive a severance payment in the
amount of $300,000 plus any pro rata bonus payment and unvested stock options to
which he is entitled. Pursuant to the arrangement, the Company granted Mr.
Braaten options to purchase 30,415 shares of Coast Resorts, Inc. for $100 per
share. The option vested as to one-third of the shares on the grant date,
January 1, 1999, and will vest with respect to half of the remaining shares, on
each of the first and second anniversaries of the grant date.
26
<PAGE> 27
BONUS PLAN
In 1996, the Company established a bonus plan designed to reward
executive officers and other key employees for their contributions to the
Company's business objectives and operating results. Bonuses may be awarded in
the discretion of the Board of Directors based upon achievement of financial
targets established by the Board of Directors on an annual basis, and generally
will be equal to a percentage of the recipient's base salary, depending on the
target achieved.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of our outstanding capital stock is owned by our parent company,
Coast Resorts, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We maintain numerous racetrack dissemination contracts with Las Vegas
Dissemination Company, Inc. ("LVD"). Michael J. Gaughan's son is the president
and sole stockholder of LVD. LVD provides certain dissemination and pari-mutuel
services to The Orleans, the Gold Coast and the Barbary Coast. LVD has been
granted a license by the Nevada Gaming Authorities to disseminate live racing
for those events and tracks for which it contracts and has been granted the
exclusive right to disseminate all pari-mutuel services and race wire services
in the State of Nevada. Under these dissemination contracts, we pay to LVD an
average of 3% of the wagers accepted for races held at the racetracks covered by
the respective contracts. We also pay to LVD a monthly fee for race wire
services. For the fiscal years ended December 31, 1996, 1997 and 1998, we
incurred expenses payable to LVD of approximately $889,000, $1.1 million and
$3.1 million, respectively. The terms on which such services are provided are
regulated by the Nevada Gaming Authorities.
Tiberti Construction served as the general contractor for the original
construction of the Gold Coast and for certain expansions thereof, and for the
original construction of the Barbary Coast and all expansions thereof. Tiberti
Construction was also the general contractor for the original construction of
The Orleans, and the 1997 and 1999 expansions. J. Tito Tiberti owns
approximately 6.4% of the outstanding common stock of Coast Resorts, and is a
director, Vice President and Secretary of the Company and Coast Resorts. Mr.
Tiberti is the president, a director and stockholder of, and together with his
immediate family members, controls Tiberti Construction. For the years ended
December 31, 1996, 1997 and 1998, we incurred expenses payable to Tiberti
Construction of approximately $80.3 million, $26.2 million and $3.7 million,
respectively.
We have entered into a ground lease with The Tiberti Company, a Nevada
general partnership, with respect to the real property on which The Orleans is
located. Mr. Tiberti, a director of the Company and a director and stockholder
of Coast Resorts, is the managing partner of The Tiberti Company. For the fiscal
years ended December 31, 1996, 1997 and 1998, we paid rental expenses to The
Tiberti Company of approximately $3.0 million, $2.1 million and $2.4 million,
respectively.
Michael J. Gaughan, Franklin Toti and Leo Lewis are the owners of LGT
Advertising, which serves as our advertising agency. LGT Advertising purchases
advertising for our casinos from third parties and passes any discounts directly
through to us. LGT Advertising receives no compensation or profit for such
activities, and invoices us for actual costs incurred. LGT Advertising uses our
facilities and employees in rendering its services, but does not pay any
compensation to us for such use. None of Messrs. Gaughan, Toti or Lewis receives
any compensation from LGT Advertising. Advertising expenses amounted to
approximately $3.8 million, $7.5 million and $6.0 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
We have purchased certain of our equipment and inventory for our
respective operations from RJS Inc., a Nevada corporation that is owned by
Michael J. Gaughan's father and Steven Delmont, our restaurant manager. RJS
invoices us for actual costs incurred. For the fiscal years ended December 31,
1996, 1997 and 1998, we incurred expenses payable to RJS of approximately $4.1
million, $1.4 million and $829,000, respectively.
27
<PAGE> 28
Michael J. Gaughan is the majority stockholder of Nevada Wallboards,
Inc., a Nevada corporation ("Nevada Wallboards"), which prints wallboards and
parlay cards for the use in our race and sports books. Mr. Gaughan receives no
compensation from Nevada Wallboards. We expect to continue to purchase
wallboards and parlay cards from Nevada Wallboards. For the fiscal years ended
December 31, 1996, 1997 and 1998, we incurred expenses payable to Nevada
Wallboards of approximately $145,000, $198,000 and $186,000, respectively.
Charles Silverman, a director of the Company and Coast Resorts, is the
president of Yates-Silverman, Inc., which served as the designer of The Orleans
and is serving as the designer for the Suncoast. For the fiscal years ended
December 31, 1996, 1997 and 1998, we incurred expenses payable to
Yates-Silverman of $508,000, $177,000 and $500,000, respectively.
The partnership that owned Barbary Coast prior to 1997 had from time to
time borrowed funds from Exber, Inc., a Nevada corporation ("Exber") which owns
the El Cortez Hotel & Casino. Exber is controlled by Jackie Gaughan, Michael J.
Gaughan's father. Jackie Gaughan, Jr., Michael J. Gaughan's brother, serves on
the Board of Directors of Exber. Irving Kenneth Epstein, a stockholder of Coast
Resorts and Vice President of the Company, is a stockholder of Exber. Michael J.
Gaughan has no ownership interest in Exber.
In February 1991, the Barbary Coast Partnership borrowed $7.5 million
from Exber, the proceeds of which were used to purchase slot machines and for
working capital purposes. The Barbary Coast Partnership repaid all outstanding
principal and interest on such indebtedness in January 1995. Also in January
1995, the Barbary Coast Partnership borrowed an additional $3.0 million from
Exber (the "1995 Exber Loan"). The proceeds from the 1995 Exber Loan were used
to purchase slot machines, to refinance approximately $465,000 outstanding under
the 1991 indebtedness and for working capital purposes. As of December 31, 1996,
nothing was owed to Exber, Inc. During the fiscal year ended December 31, 1996,
we paid to Exber total principal of $1.3 million and interest of $37,000.
In addition, Exber provided laundry services to the Gold Coast and the
Barbary Coast. We terminated our laundry services contract with Exber effective
October 31, 1996. During the fiscal year ended December 31, 1996, we incurred
total expenses payable to Exber of approximately $864,000.
In July 1995, the Barbary Coast Partnership borrowed an aggregate
amount of $1.5 million from Michael J. Gaughan which is evidenced by demand
promissory notes. The proceeds of the demand notes were used by the Barbary
Coast Partnership for working capital purposes. The demand notes accrued
interest at 6% per annum, commencing August 1, 1995, and were payable on demand.
In the Reorganization, Coast Resorts assumed the demand notes in exchange for
14,118 shares of Coast Resorts common stock.
From July 1991 through December 1996, we leased the main sign at the
Barbary Coast from Desert Ltd., a Nevada general partnership. Michael J.
Gaughan, J. Tito Tiberti and Franklin Toti own 50%, 25% and 25%, respectively,
of Desert Ltd. The lease provided for monthly rental payments of $13,700 through
July 1998. The lease also provided us with an option to purchase the sign at any
time prior to the end of the lease term or within thirty days thereafter for a
purchase price equal to its fair market value. We exercised the option to
purchase the sign in December 1996 for $233,000. For the year ended December 31,
1996, we made rental payments to Desert Ltd. of approximately $164,000.
The Company expects to promote The Orleans by advertising The Orleans
name on a NASCAR race car operated by Brendan Gaughan on the Winston West
Circuit. The Company expects to spend approximately $300,000 in connection with
this promotion. Brendan Gaughan is the son of Michael J. Gaughan.
The foregoing transactions are believed to have been on terms no less
favorable to us than could have been obtained from unaffiliated third parties
and were approved by a majority of our disinterested directors. Any future
transactions between us and our officers, directors, principal stockholders or
affiliates will be on terms no less favorable to us than may be obtained from
unaffiliated third parties, and will be approved by a majority of our
disinterested directors.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
1. Financial Statements Index F-1
See Index to Financial Statements on page F-1.
2. Financial Statement Schedule Index:
Schedule II - Valuation and Qualifying Accounts F-31
3. Exhibits
*2.1 Agreement and Plan of Reorganization dated as of September 29, 1995,
among Coast Resorts, Inc., the Gold Coast Hotel and Casino, a Nevada
limited partnership, the Barbary Coast Hotel and Casino, a Nevada
general partnership, and Gaughan-Herbst, Inc., a Nevada corporation
**2.2 Supplement to Agreement and Plan of Reorganization dated as of December
22, 1995, among Coast Resorts, Inc., the Gold Coast Hotel and Casino, a
Nevada limited partnership, the Barbary Coast Hotel and Casino, a
Nevada general partnership, and Gaughan-Herbst, Inc., a Nevada
corporation
*3.1 Articles of Incorporation of Coast Resorts, Inc.
*3.2 Bylaws of Coast Resorts, Inc.
***10.1 Indenture dated as of January 30, 1996, among Coast Hotels and Casinos,
Inc., the Guarantors, and American Bank National Association, as
Trustee.
***10.2 Registration Rights Agreement dated as of January 30, 1996 among Coast
Hotels and Casinos, Inc., the Guarantors, and Bear, Stearns & Co. Inc.
and BA Securities, Inc.
***10.3 Form of Note (included in Exhibit 4.1)
***10.4 Note Guarantee of Coast Resorts, Inc.
***10.5 Note Guarantee of Coast West, Inc.
***10.6 Deed of Trust, Assignment of Rents, Leases and Security Agreement dated
January 30, 1996 of Coast Hotels and Casinos, Inc.
***10.7 Leasehold Deed of Trust, Assignment of Rents, Leases and Security
Agreement dated January 30, 1996 of Coast West, Inc.
***10.8 Security Agreement dated January 30, 1996 (Coast Hotels and Casinos,
Inc.)
***10.9 Security Agreement dated January 30, 1996 (Coast West, Inc.)
***10.10 Stock Pledge and Security Agreement dated January 30, 1996 (Coast
Resorts, Inc.)
***10.11 Disbursement and Escrow Agreement dated January 30, 1996
***10.12 Pledge and Escrow Agreement dated January 30, 1996
***10.13 Collateral Assignment of Contracts dated January 30, 1996
***10.14 Escrow Agreement dated January 30, 1996
***10.15 Unsecured Environmental Indemnification Agreement (Coast Hotels and
Casinos, Inc.)
***10.16 Unsecured Environmental Indemnification Agreement (Coast West, Inc.)
***10.17 Tax Sharing Agreement dated as of January 30, 1996
***10.18 Agreement Between Owner and Contractor dated as of January 24, 1996,
between J.A. Tiberti Construction Co., Inc. and Coast Hotels and
Casinos, Inc.
*10.19 Ground Lease dated as of October 1, 1995, between The Tiberti Company,
a Nevada general partnership, and Coast Hotels and Casinos, Inc. (as
successor of Gold Coast Hotel and Casino, a Nevada limited partnership)
*10.20 Lease Agreement dated May 1, 1992, by and between Empey Enterprises, a
Nevada general partnership, as lessor, and the Barbary Coast Hotel &
Casino, a Nevada general partnership, as lessee
*10.21 Ground Lease Agreement dated October 28, 1994 by and among 21 Stars,
Ltd., a Nevada limited liability company, as landlord, Barbary Coast
Hotel & Casino, a Nevada general partnership, as tenant, Wanda Peccole,
as successor trustee of the Peccole 1982 Trust dated February 15, 1982
("Trust), and The William Peter and Wanda Ruth Peccole Family Limited
Partnership, a Nevada limited partnership ("Partnership"), and,
together with Trust, as owner, as amended
</TABLE>
30
<PAGE> 30
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
***10.22 Form of Subordination Agreement with former Gold Coast partners that
hold Subordinated Notes
*10.23 Lease dated as of November 1, 1982, by and between Nevada Power
Company, a Nevada Corporation as landlord, and Barbary Coast Hotel and
Casino, a Nevada general partnership
*10.24 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated February 13, 1991, by and between the Barbary Coast Hotel and
Casino, a Nevada general partnership, First American Title Company of
Nevada, and Exber, Inc., a Nevada corporation
+10.25 10 7/8% First Mortgage Note due 2001, dated November 21, 1997
+10.26 Indenture dated as of November 21, 1997 among Coast Hotels and Casinos,
Inc., the Guarantors, and Firstar Bank of Minnesota, N.A., as Trustee
+10.27 Note Guarantee of Coast Resorts, Inc.
+10.28 Purchase Agreement dated November 21, 1997
+10.29 Security Agreement dated November 21, 1997 (Coast Hotels and Casinos,
Inc.)
+10.30 Deed of Trust, Assignment of Rents, Leases and Security Agreement dated
November 21, 1997
+10.31 Stock Pledge and Security Agreement dated November 21, 1997 (Coast
Resorts, Inc.)
+10.32 Pari Passu Intercreditor Agreement dated November 21, 1997
10.33 Master Security Agreement, dated as of October 24, 1996, by and between
Coast Hotels and Casinos, Inc. and the CIT Group/Equipment Financing,
Inc.
10.34 Amendment No. 1, dated December 27, 1996, to Master Security Agreement
dated as of October 24, 1996 by and between Coast Hotels and Casinos,
Inc. And the CIT Group/Equipment Financing Inc.
10.35 Agreement Between Owner and Contractor dated as of February 9, 1999,
between Coast Resorts, Inc., as owner, and J.A. Tiberti Construction
Co., Inc., as contractor
*16 Letter re Change in Certifying Accountant
*21 List of Subsidiaries of Coast Resorts, Inc.
</TABLE>
- --------------
* Previously filed as an exhibit to the Registrant's Form 10 General Form
For Registration of Securities, as amended, originally filed on October
3, 1995 (the "Registration Statement").
** Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement, filed on January 12, 1996.
*** Previously filed as an exhibit to Coast Resorts' Annual Report on Form
10-K for the year ended December 31, 1995.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
None.
31
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Las Vegas, State of Nevada, on March 5, 1999.
COAST HOTELS AND CASINOS, INC.
By: /s/ MICHAEL J. GAUGHAN
--------------------------------------
Michael J. Gaughan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ MICHAEL J. GAUGHAN Chairman of the Board of Directors and March 5, 1999
- ---------------------------------- Chief Executive Officer (Principal
Michael J. Gaughan Executive Officer) and Director
/s/ GAGE PARRISH Director and Chief Financial Officer March 5, 1999
vz---------------------------------- (Principal Financial and Accounting
Gage Parrish Officer)
/s/ HARLAN D. BRAATEN Director March 5, 1999
- ----------------------------------
Harlan D. Braaten
/s/ JERRY HERBST Director March 5, 1999
- ----------------------------------
Jerry Herbst
/s/ J. TITO TIBERTI Director March 5, 1999
- ----------------------------------
J. Tito Tiberti
Director March __, 1999
- ----------------------------------
Charles Silverman
Director March __, 1999
- ----------------------------------
Michael Corrigan
Director March __, 1999
- ----------------------------------
Joseph A. Blasco
Director and Vice President March __, 1999
- ---------------------------------- of Casino Operations
Franklin Toti
</TABLE>
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets of Coast Hotels and Casinos, Inc., and Subsidiary as
of December 31, 1997 and 1998 F-3
Statements of Operations of Coast Hotels and Casinos, Inc. and Subsidiary for
the years ended December 31, 1996, 1997 and 1998 F-4
Statements of Stockholder's Equity of Coast Hotels and Casinos, Inc. and
Subsidiary for the years ended December 31, 1996, 1997 and 1998 F-5
Statements of Cash Flows of Coast Hotels and Casinos, Inc. and Subsidiary for
the years ended December 31, 1996, 1997 and 1998 F-6
Notes to Financial Statements F-7
COAST RESORTS, INC. (PARENT COMPANY ONLY)
Report of Independent Accountants F-24
Balance Sheets of Coast Resorts, Inc. (parent company only) as of December 31,
1997 and 1998 F-25
Statements of Operations of Coast Resorts, Inc. (parent company only) for the
years ended December 31, 1996, 1997 and 1998 F-26
Statements of Stockholders' Equity of Coast Resorts, Inc. (parent company only)
for the years ended December 31, 1996, 1997 and 1998 F-27
Statements of Cash Flows of Coast Resorts, Inc. (parent company only) for the
years ended December 31, 1996, 1997 and 1998 F-28
Notes to Financial Statements F-29
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder of
Coast Hotels and Casinos, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholder's equity and cash flows
present fairly, in all material respects, the financial position of Coast Hotels
and Casinos, Inc. (a wholly owned subsidiary of Coast Resorts, Inc.) and
Subsidiary at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 5, 1999, except for Note 15
as to which the date is March 4, 1999
F-2
<PAGE> 34
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 29,426 $ 41,595
Accounts receivable, less allowance for doubtful
accounts $194 (1997) and $594 (1998) ....................................... 5,616 4,301
Inventories ........................................................................ 5,085 4,912
Due from affiliates ................................................................ 1,675 --
Refundable income taxes ............................................................ 1,772 --
Prepaid expenses and other ......................................................... 11,420 9,330
-------- --------
TOTAL CURRENT ASSETS ............................................................. 54,994 60,138
PROPERTY AND EQUIPMENT, net ......................................................... 305,420 301,252
OTHER ASSETS ........................................................................ 6,447 5,644
-------- --------
$366,861 $367,034
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................... $ 9,107 $ 9,888
Accrued liabilities ................................................................ 27,651 25,338
Due to affiliate ................................................................... -- 1,353
Construction accounts payable ...................................................... 2,491 --
Current portion of long-term debt .................................................. 8,076 7,905
-------- --------
TOTAL CURRENT LIABILITIES ........................................................ 47,325 44,484
LONG-TERM DEBT, less current portion ................................................. 207,173 199,954
DEFERRED INCOME TAXES ................................................................ 10,063 6,654
DEFERRED RENT ........................................................................ 4,954 13,024
-------- --------
TOTAL LIABILITIES ................................................................ 269,515 264,116
-------- --------
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 ......................................................... 95,858 86,903
Retained earnings .................................................................. 1,487 16,014
-------- --------
TOTAL STOCKHOLDER'S EQUITY ....................................................... 97,346 102,918
-------- --------
$366,861 $367,034
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 35
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Casino .................................................................. $ 148,509 $ 211,026 $ 242,992
Food and beverage ....................................................... 39,517 61,724 66,503
Hotel ................................................................... 14,700 28,095 28,443
Other ................................................................... 10,635 19,994 26,421
--------- --------- ---------
GROSS OPERATING REVENUES ............................................. 213,361 320,839 364,359
Less: promotional allowances ............................................ (17,374) (26,956) (31,996)
--------- --------- ---------
NET OPERATING REVENUES ............................................... 195,987 293,883 332,363
--------- --------- ---------
OPERATING EXPENSES:
Casino .................................................................. 74,169 114,932 127,512
Food and beverage ....................................................... 31,680 50,129 47,278
Hotel ................................................................... 7,428 12,623 11,856
Other ................................................................... 8,351 19,516 22,458
General and administrative .............................................. 37,992 54,351 55,879
Pre-opening expenses .................................................... 7,125 -- --
Land lease .............................................................. -- 2,100 3,190
Deferred (non-cash) rent ................................................ -- 2,378 3,198
Depreciation and amortization ........................................... 7,883 18,278 20,607
--------- --------- ---------
TOTAL OPERATING EXPENSES ............................................. 174,628 274,307 291,978
--------- --------- ---------
OPERATING INCOME ..................................................... 21,359 19,576 40,385
--------- --------- ---------
OTHER INCOME (EXPENSES):
Interest expense:
Related parties ...................................................... (160) (148) --
Other ................................................................ (22,076) (26,194) (27,323)
Interest income ......................................................... 4,791 98 695
Interest capitalized .................................................... 7,464 1,016 58
Gain on disposal of equipment ........................................... 58 919 168
--------- --------- ---------
TOTAL OTHER INCOME (EXPENSES) ........................................ (9,923) (24,309) (26,402)
--------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES ........................................ 11,436 (4,733) 13,983
PROVISION (BENEFIT) FOR INCOME TAXES ......................................... 6,617 (1,401) 5,225
--------- --------- ---------
NET INCOME (LOSS) ............................................................ $ 4,819 $ (3,332) $ 8,758
========= ========= =========
UNAUDITED PRO FORMA DATA (reflecting reorganization and change in tax status):
Provision (benefit) for income taxes .................................... 4,117
---------
Net income (loss) ....................................................... $ 7,319
=========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 36
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
---------------------- ADDITIONAL GAINS RETAINED
SHARES AMOUNT PAID-IN CAPITAL (LOSSES) EARNINGS TOTAL
-------- -------- --------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ............ 1,000 $ 1 $ 38,239 $ -- $ 5,094 $ 43,334
Exchange by Coast Resorts, Inc. of
notes payable for common stock ....... 52,525 52,525
Reclassification of undistributed
earnings to additional paid-in capital
upon termination of partnership
status ............................... 5,094 (5,094) --
Net income ............................. 4,819 4,819
-------- --- -------- ---- -------- --------
Balances at December 31, 1996 ............ 1,000 1 95,858 -- 4,819 100,678
Net loss ............................... (3,332) (3,332)
-------- --- -------- ---- -------- --------
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
======== === ======== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 37
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 4,819 $ (3,332) $ 8,758
--------- --------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization ........................... 7,883 18,278 20,607
Provision for bad debts ................................. 2,153 1,935 1,490
Gain on disposal of equipment ........................... (58) (919) (168)
Deferred rent ........................................... -- 2,378 3,198
Deferred income taxes ................................... 4,162 789 876
Amortization of original issue discount ................. 497 616 706
(Increase) decrease in operating assets:
Accounts receivable ..................................... (1,608) (1,773) 915
Refundable income taxes ........................... (645) (1,127) 1,772
Inventories ....................................... (2,286) 1,279 173
Prepaid expenses and other assets ................. (1,395) (1,493) 2,463
Increase (decrease) in operating liabilities:
Accounts payable .................................. 4,307 (2,727) 781
Accrued liabilities ............................... 9,204 2,142 (2,313)
--------- --------- ---------
TOTAL ADJUSTMENTS ................................. 22,214 19,378 30,500
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 27,033 16,046 39,258
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of amounts in accounts payable ...... (125,722) (57,736) (15,492)
Proceeds from sale of equipment ............................... 20 1,070 168
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............. (125,702) (56,666) (15,324)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under bank lines of credit ........... 1,045 -- --
Principal payments on bank lines of credit .................... (29,200) -- --
Proceeds from issuance of long-term debt, net of discounts and
commissions ............................................... 179,570 19,569 --
Principal payments on long-term debt .......................... (1,826) (7,913) (8,097)
Advances to affiliates ........................................ (2,568) (3,165) (3,668)
Payments for debt issue costs ................................. (1,336) -- --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES ........................................ 145,685 8,491 (11,765)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 47,016 (32,129) 12,169
CASH AND CASH EQUIVALENTS, at beginning of year .................... 14,539 61,555 29,426
--------- --------- ---------
CASH AND CASH EQUIVALENTS, at end of year .......................... $ 61,555 $ 29,426 $ 41,595
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 38
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BACKGROUND INFORMATION AND BASIS OF PRESENTATION
Background Information
Coast Hotels and Casinos, Inc. (the "Company ") is a Nevada corporation
and a wholly owned subsidiary of Coast Resorts, Inc. ( "Coast Resorts "), which
is also a Nevada corporation. The Company was formed in September 1995 and owns
and operates the following hotel-casinos in Las Vegas, Nevada:
- Gold Coast Hotel and Casino, which is located approximately one
mile west of the Las Vegas Strip on Flamingo Road.
- Barbary Coast Hotel and Casino, which is located on the Las
Vegas Strip.
- The Orleans Hotel and Casino, which is located approximately one
mile west of the Las Vegas Strip on Tropicana Avenue. The
Orleans opened for business on December 18, 1996.
Prior to the Reorganization described below, the Gold Coast Hotel and
Casino and the Barbary Coast Hotel and Casino had previously been operated
independently by Gold Coast Hotel and Casino, a Nevada limited partnership
organized in 1986 ("Gold Coast"), and Barbary Coast Hotel and Casino, a Nevada
partnership organized in 1979 ("Barbary Coast").
On January 1, 1996, the partners of Gold Coast and Barbary Coast (the
"Predecessor Partnerships") completed a reorganization (the "Reorganization")
with Coast Resorts. Coast Resorts was formed in September 1995 for the purpose
of effecting the 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, by assignment or through the merger of
Gaughan-Herbst, Inc., a Nevada corporation, the sole general partner of the Gold
Coast, 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. The partners of the Gold Coast (or their
principals) received in the aggregate 65% of such shares of common stock of
Coast Resorts, and the partners of the Barbary Coast received in the aggregate
35% of such shares. The shares of common stock were issued to the respective
partners (or their principals) of each such Predecessor Partnership based upon
such partners' pro rata interests in such Predecessor Partnership.
Concurrently with the exchange of the partners' interests in the
Predecessor Partnerships and the merger of Gaughan-Herbst, Inc. into Coast
Resorts, Coast Resorts became the sole partner of each of the Predecessor
Partnerships, and each Predecessor Partnership dissolved and terminated.
Immediately upon the dissolution and termination, all of the assets and
liabilities of the Predecessor Partnerships became the assets and liabilities of
Coast Resorts. Coast Resorts immediately contributed to the Company all of the
assets of the Predecessor Partnerships other than those relating to a certain
ground lease (the "Coast West Lease"), which Coast Resorts contributed to Coast
West Inc., another wholly-owned subsidiary of Coast Resorts ("Coast West"). In
addition, the Company assumed, jointly and severally with Coast Resorts, all of
the liabilities of the Predecessor Partnerships other than (i) obligations under
a portion of subordinated notes payable to former partners and $1,500,000
principal amount of demand notes payable to a related party which were retained
by Coast Resorts and were exchanged for shares of Coast Resorts Common Stock (as
defined below), and (ii) those liabilities incident to the Coast West Lease, and
Coast West assumed, jointly and severally with Coast Resorts, all of the
liabilities of the Predecessor Partnerships incident to the Coast West Lease.
F-7
<PAGE> 39
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BACKGROUND INFORMATION AND BASIS OF PRESENTATION--(CONTINUED)
Background Information--(Continued)
Coast Resorts retained the liability for an aggregate principal amount
of $51,025,000 in notes payable to former partners and retained the liability
for $1,500,000 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 common stock, par value $.01 per share, of Coast Resorts (the
"Coast Resorts Common Stock"), based upon management's estimate of the fair
market value of such common stock.
As a result of the Reorganization, the former partners of the
Predecessor Partnerships (or their principals) immediately following the
Reorganization owned all of the issued and outstanding shares of common stock of
Coast Resorts, Coast Resorts owned all of the issued and outstanding common
stock of the Company and Coast West, and the Company and Coast West owned and
had assumed in the aggregate all of the assets and liabilities of the
Predecessor Partnerships (other than the Exchange Liabilities that were
exchanged for Coast Resorts Common Stock).
As further described in Note 9, on July 21, 1998, Coast Resorts
contributed the common stock of Coast West to the Company, as a result of which
Coast West became a wholly owned subsidiary of the Company.
Basis of Presentation
Gold Coast and Barbary Coast historically operated under a high degree
of common control. The former Managing General Partner of Gold Coast was also
the Managing General Partner of Barbary Coast. Due to the common control of Gold
Coast and Barbary Coast and the continuation of ownership by the former
partners, the Reorganization was accounted for as a reorganization of entities
under common control. Accordingly, the financial statements of the Company
reflect the Reorganization in a manner similar to a pooling of interests.
The consolidated financial statements include the accounts of the
Company and, from July 21, 1998 through December 31, 1998, its subsidiary Coast
West. All intercompany balances and transactions have been eliminated.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories, which consist primarily of food and beverage, liquor store,
and gift shop merchandise, are valued at the lower of cost or market value
(which is determined using the first-in, first-out and the average cost methods)
except for the base stocks of bar glassware and restaurant china which are
stated at original cost with subsequent replacements charged to expense.
Original Issue Discount and Debt Issue Costs
Original issue discount is amortized over the life of the related
indebtedness using the effective interest method. Costs associated with the
issuance of debt are deferred and amortized over the life of the related
indebtedness also using the effective interest method.
F-8
<PAGE> 40
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property, Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the accounts
and the resulting gain or loss is included in income. Depreciation is computed
by the straight-line method over the estimated useful lives of property and
equipment, which range from 5 to 15 years for equipment and up to 40 years for
buildings and improvements.
During construction, the Company capitalizes interest and other direct
and indirect development costs. Interest is capitalized monthly by applying the
effective interest rate on certain borrowings to the average balance of
expenditures. The interest that was capitalized was $7,464,000 (1996),
$1,016,000 (1997) and $58,000 (1998).
Pre-opening and Related Promotional Expense
Costs associated with the opening of new hotel-casinos or major
additions to an existing hotel-casino, including personnel, training, certain
marketing and other costs, are capitalized and charged to expense over
management's estimate of the period of economic benefit associated with such
costs. Management believes that such period, with respect to major
hotel-casinos, is within one fiscal quarter of the date of opening. Effective
January 1, 1999, pre-opening costs are expensed as incurred. There were no
capitalized pre-opening costs at December 31, 1997 or 1998.
Valuation of Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances warrant such a review. The carrying value of a long-lived or
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the cost
to dispose.
Advertising Costs
Costs for advertising are expensed as incurred, except costs for
direct-response advertising, which are capitalized and amortized over the period
of the related program. Direct-response advertising costs consist primarily of
mailing costs associated with direct mail programs. Capitalized advertising
costs were immaterial at December 31, 1997 and 1998. Advertising expense was
approximately $3.8 million, $7.5 million, and $6.0 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
Casino Revenue
In accordance with common industry practice, the Company recognizes as
casino revenue the net win from gaming activities, which is the difference
between amounts wagered and amounts paid to winning patrons.
Deferred Revenue
Wagers received on all sporting events are recorded as a liability until
the final outcome of the event when the payoffs, if any, can be determined.
Progressive Jackpot Payouts
The Company has a number of progressive slot machines, progressive poker
games and a progressive keno game. As coins are played on the progressive slot
machines, the amount available to win increases, to be paid out when the
appropriate jackpot is hit. The keno game and poker game payouts also increase
with the amount of play, to be paid out when hit. In accordance with common
industry practice, the Company has recorded the progressive jackpot as a
liability with a corresponding charge against casino revenue.
F-9
<PAGE> 41
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Promotional Allowances
The retail value of hotel accommodations and food and beverage items
provided to customers without charge is included in gross revenues and then
deducted as promotional allowances, to arrive at net revenues. The estimated
cost of providing these complimentary services is as follows for the years ended
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Hotel .............................. $ 1,804 $ 2,023 $ 2,497
Food and beverage .................. 14,725 23,187 25,552
------- ------- -------
Total cost of promotional allowances $16,529 $25,210 $28,049
======= ======= =======
</TABLE>
The cost of promotional allowances has been allocated to expense as
follows for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Casino.......... $15,361 $22,280 $25,290
Other.......... 1,168 2,930 2,759
------- ------- -------
$16,529 $25,210 $28,049
======= ======= =======
</TABLE>
Slot Club Promotion
The Company has established promotional clubs to encourage repeat
business from frequent and active slot machine customers. Members in the clubs
earn points based on slot activity accumulated in the members' account. Points
can be redeemed for certain consumer products (typically household appliances),
travel, food and beverage or cash. The Company accrues for slot club points
expected to be redeemed in the future based on the average cost of items
expected to be redeemed.
Income Taxes
Prior to the Reorganization, the Company operated as individual
partnerships which did not pay federal income taxes. The partners of Gold Coast
and Barbary Coast were taxed on their proportionate share of each of their
respective partnership's taxable income or loss.
Subsequent to the Reorganization, the Company is included in the
consolidated federal income tax return filed by Coast Resorts. The Company's tax
allocation is 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
Coast Resorts.
F-10
<PAGE> 42
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income taxes--(Continued)
In connection with the Reorganization, effective January 1, 1996, the
Company adopted Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and
liabilities are recognized for the expected future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The adoption of SFAS 109 on January 1, 1996
resulted in the recognition in the 1996 financial statements of net deferred tax
liabilities and a corresponding charge to earnings through the income tax
provision of approximately $2,500,000. 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity at acquisition of three months or less to be cash equivalents. Cash in
excess of daily requirements is typically invested in U.S. Government-backed
repurchase agreements with maturities of 30 days or less. Such investments are
generally made with major financial institutions having a high credit rating. At
times, the Company's cash deposited in financial institutions may be in excess
of federally insured limits. These instruments are stated at cost, which
approximates fair value because of their short maturity.
Short-term Investments
Short-term investments purchased with an original maturity of over three
months but less than one year are stated at cost, which approximates fair value
because of their short maturity. There were no short-term investments at
December 31, 1997 or 1998.
Concentration of Credit Risk
The Company extends credit to patrons after background checks and
investigations of creditworthiness and does not require collateral. The Company
has a concentration of credit risk in Southern Nevada. The Company records
provisions for potential credit losses and such losses have been within
management's expectations. Management believes that as of December 31, 1998, no
significant concentration of credit risk exists for which an allowance has not
already been determined and recorded.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-11
<PAGE> 43
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Stock Options
The Financial Accounting Standards Board has issued Statement No. 123,
"Accounting for Stock-Based compensation" ("SFAS" No. 123"). This Statement
defines a fair value based method of accounting for an employee stock option in
which companies account for stock options by recognizing, as compensation
expense in the statement of operations, the fair value of stock options granted
over the vesting period of the option. The statement also permits companies to
continue accounting for stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company
has elected to account for stock options under APB No. 25 and will disclose the
pro forma impact on net income and earning per share as if the Company had used
the fair value method recommended by SFAS No. 123.
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation.
NOTE 3--PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following as of
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Building .................... $ 232,661 $ 233,570
Furniture and fixtures ...... 139,022 146,175
--------- ---------
371,683 379,745
Less accumulated depreciation (81,733) (100,369)
--------- ---------
289,950 279,376
Land ........................ 15,232 15,232
Construction in progress .... 238 6,644
--------- ---------
Net property and equipment .. $ 305,420 $ 301,252
========= =========
</TABLE>
NOTE 4--LEASES
The Barbary Coast building is located on land which is leased. The lease
term runs through May 2003 with a purchase option and two 30 year renewal
options. In addition, the parking lot adjacent to the building is being leased
under a 10 year lease which runs through December 2003. Annual rental payments
under these leases total $300,000.
F-12
<PAGE> 44
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--LEASES--(CONTINUED)
During December 1995, the Company entered into a ground lease for the
land underlying the Orleans. The land is owned by The Tiberti Company, a Nevada
general partnership, of which a stockholder of Coast Resorts is the managing
partner. The stockholder is also the president and a director and stockholder of
the general contractor for the construction of the Orleans, as more fully
described in Note 10. The lease provides for an initial term of fifty years with
a twenty-five year renewal option and includes a purchase option, exercisable by
the Company, at fair market value during the twentieth and twenty-first years of
the lease. Lease payments range from $175,000 to $250,000 per month during the
first sixteen years of the lease increasing by 3% per annum thereafter. The
total amount of the base rent payments on the Orleans lease is being charged to
expense on the straight-line method over the term of the lease. The Company has
recorded deferred rent to reflect the excess of rent expense over cash payments
since the inception of the lease.
The Coast West lease was entered into in September 1995 for a parcel of
land located in the western area of Las Vegas to be used for future development
opportunities. The Coast West Lease term runs through December 31, 2055, with
three 10-year renewal options. Monthly payments started at $166,667 for the year
ended December 31, 1995. Thereafter, the monthly rent increases by the amount of
$5,000 in January of each year. The lease includes a put option exercisable by
the landlord requiring the purchase of the land at fair market value at the end
of the 20th through 24th years of the lease, provided that the purchase price
shall not be less than ten times, nor more than fifteen times, the annual rent
at such time. Based on the terms of the lease, the potential purchase price
commitment ranges from approximately $31,000,000 to approximately $51,000,000 in
the years 2014 through 2018. The total amount of the base rent payments on the
Coast West Lease are being charged to expense on the straight-line method over
the term of the lease. The Company has recorded deferred rent to reflect the
excess of rent expense over cash payments since the inception of the lease.
Future Minimum Lease Payments
The following is an annual schedule of future minimum cash lease
payments required under operating leases that have initial or remaining
noncancelable terms in excess of one year as of December 31, 1998:
OPERATING LEASES
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, PAYMENTS
- ------------------------ --------------
(IN THOUSANDS)
<S> <C>
1999 .................................. $ 4,890
2000 .................................. 5,000
2001 .................................. 5,060
2002 .................................. 5,370
2003 .................................. 5,480
Later years ........................... 420,657
--------
Total minimum lease payments........... $446,457
========
</TABLE>
F-13
<PAGE> 45
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--LEASES--(CONTINUED)
Rent Expense
Rent expense for the years ended December 31, 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Occupancy rentals....... $4,777 $4,777 $6,688
------ ------ ------
Other equipment......... 414 900 115
------ ------ ------
$5,191 $5,677 $6,803
====== ====== ======
</TABLE>
NOTE 5--ACCRUED LIABILITIES
Major classes of accrued liabilities consist of the following as of
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Slot club liability ...................... $ 6,475 $ 7,548
Compensation and benefits ................ 8,177 7,318
Progressive jackpot payouts .............. 4,101 4,511
Customer deposits and unpaid winners...... 5,069 3,003
Deferred sports book revenue ............. 871 914
Taxes .................................... 1,046 575
Accrued interest expense ................. 1,354 1,207
Other .................................... 558 262
------- -------
$27,651 $25,338
======= =======
</TABLE>
F-14
<PAGE> 46
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following as of December 31, 1997 and 1998: DECEMBER 31,
-------------------------------------
1997 1998
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Related parties:
7.5% notes, payable in monthly installments of interest only, with all principal
and any unpaid interest due December 31, 2001. The notes are uncollateralized
and are payable to the former partners of Barbary Coast and Gold Coast.
Approximately $51,025,000 of the notes were exchanged for Coast Resorts Common
Stock on January 16, 1996 as more fully described in Note 1.............................. $ 1,975 $ 1,975
Non-related parties:
13% First Mortgage Notes due December 15, 2002, with interest payable
semiannually on June 15 and December 15, net of original issue discount of
$4,677,000 in 1997 and $3,971,000 in 1998................................................ 170,323 171,029
10 7/8% First Mortgage Notes due November 1, 2001, with interest payable
quarterly on March 15, June 15, September 15 and December 15............................. 16,800 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.......................................................................... 22,481 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.......................................................................... 3,067 2,773
Other notes payable ..................................................................... 603 295
------------ -----------
215,249 207,859
Less: current portion.................................................................... 8,076 7,905
------------ -----------
$ 207,173 $ 199,954
============ ===========
</TABLE>
On January 30, 1996, the Company completed a private placement of $175
million principal amount of 13% First Mortgage Notes Due December 15, 2002 (the
"13% First Mortgage Notes"). Interest on the 13% First Mortgage Notes is payable
semi-annually commencing June 15, 1996. The 13% First Mortgage Notes are
unconditionally guaranteed by Coast Resorts, Coast West and certain future
subsidiaries of the Company. Net proceeds from the offering (after deducting
original issue discount and commissions) were approximately $164.1 million. Of
that amount, (i) approximately $114.8 million was deposited in a construction
disbursement account restricted for use by the Company to finance in part the
cost of developing, constructing, equipping and opening The Orleans, (ii)
approximately $19.3 million was used by the Company to purchase U.S. Government
Obligations which were deposited into an interest escrow account restricted to
fund the interest payable on the 13% First Mortgage Notes through December 15,
1996 and (iii) approximately $29.2 million was used by the Company to repay all
outstanding indebtedness under the Company's credit facility, which was
terminated. The balance of approximately $800,000 was used to pay, in part, the
estimated offering expenses of $2.4 million.
F-15
<PAGE> 47
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT--(CONTINUED)
The 13% First Mortgage Notes are redeemable at the option of the Company
at 106.50% and 103.25% of the principal amount thereof during the twelve month
periods beginning December 15, 2000 and 2001, respectively. In addition, on or
before December 15, 1998, the Company was entitled to redeem up to $57.25
million aggregate principal amount of 13% First Mortgage Notes at 110% of the
principal amount thereof with the net proceeds of a public offering of Coast
Resorts Common Stock subject to certain limitations as outlined in the indenture
governing the 13% First Mortgage Notes (the "Indenture").
Pursuant to the terms of the Indenture, in December 1996 the Company
incurred approximately $30 million of equipment financing for The Orleans. In
August 1997, the Company incurred an additional $3.2 million in equipment
financing. At December 31, 1997 and 1998, outstanding equipment financing
totaled approximately $25.5 million and $17.8 million, respectively.
The Indenture contains covenants that, among other things, limit the
ability of the Company to pay dividends or make advances to Coast Resorts, repay
existing indebtedness, incur additional indebtedness, or sell material assets,
as defined in the Indenture. Additionally, pursuant to the Indenture, if on July
20, 1998 (the twentieth day of the month following the first month in which The
Orleans has been operating for 18 months), the Fixed Charge Coverage Ratio (as
defined in the Indenture) of the Company for the most recently ended four full
fiscal quarters was less than 1.5 to 1, the Company would have been required to
consummate an asset sale of the Barbary Coast within one year. The proceeds from
such asset sale would be required to be used by the Company to repurchase Notes
at a price equal to 101% of the principal amount of such Notes. As of June 30,
1998, the measurement date, the Fixed Charge Coverage Ratio was in excess of 1.5
to 1.
The Company is permitted by the Indenture governing the 13% First
Mortgage Notes to borrow up to an additional $20 million for working capital
purposes. In November 1997, the Company issued $16.8 million principal amount of
10 7/8% first mortgage notes due November 1, 2001 ("10 7/8% First Mortgage
Notes"). The 10 7/8% First Mortgage Notes are collateralized on a pari passu
basis with the 13% First Mortgage Notes. Interest on the 10 7/8% First Mortgage
Notes is payable quarterly on March 15, June 15, September 15 and December 15.
The 10 7/8% First Mortgage Notes are unconditionally guaranteed by Coast Resorts
and certain future subsidiaries of Coast Hotels. Net proceeds from the offering
(after deducting commissions) were approximately $16.5 million and were used for
working capital purposes.
The 10 7/8% First Mortgage Notes are redeemable at any time prior to
November 1, 2001 at a redemption price equal to the principal amount thereof,
plus any accrued and unpaid interest plus an "Applicable Premium" as defined in
the indenture governing the 10 7/8% First Mortgage Notes. That indenture
contains covenants that, among other things, limit the ability of the Company to
pay dividends to Coast Resorts, repay existing indebtedness, incur additional
indebtedness or sell material assets.
F-16
<PAGE> 48
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT--(CONTINUED)
Maturities on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MATURITIES
--------------
(IN THOUSANDS)
<S> <C>
1999 ..................... $ 7,905
2000 ..................... 7,918
2001 ..................... 19,150
2002 ..................... 175,323
2003 ..................... 323
Thereafter................ 1,211
--------
$211,830
========
</TABLE>
NOTE 7--INCOME TAXES AND PRO FORMA DATA
As discussed in Note 1, prior to the Reorganization, the Company
operated as individual partnerships which did not pay federal income taxes.
Effective January 1, 1996, the Company adopted SFAS 109. The adoption of SFAS
109 resulted in the recognition in the 1996 financial statements of net deferred
tax liabilities and a corresponding charge to earnings through the income tax
provision of approximately $2,500,000. Had the Companies been taxed as C
Corporations since formation, the income tax provision and net income for the
year ended December 31, 1996 would have been $4,117,000 and $7,319,000,
respectively.
The components of the income tax provision (benefit) for the years ended
December 31, 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997 1998
------- ------- -------
Federal: (IN THOUSANDS)
<S> <C> <C> <C>
Current $ 2,454 $(2,189) $ 4,349
Deferred 4,163 788 876
------- ------- -------
$ 6,617 $(1,401) $ 5,225
======= ======= =======
</TABLE>
F-17
<PAGE> 49
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES AND PRO FORMA DATA--(CONTINUED)
The income tax provision (benefit) for the years ended December 31,
1996, 1997 and 1998 differs from that computed at the federal statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997 1998
---- ----- ----
<S> <C> <C> <C>
Federal statutory rate ........ 34.0% (34.0)% 35.0%
Establishment of deferred taxes 21.0% -- --
Other ......................... 2.0% 4.4 % 2.4%
---- ----- ----
Effective tax rate ....... 57.0% (29.6)% 37.4%
==== ===== ====
</TABLE>
The tax effects of significant temporary differences representing net
deferred tax assets and liabilities at December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Current:
Accrued vacation ................. $ 565 $ 810
Allowance for doubtful accounts .. 2,893 286
Accrued slot club points ......... 902 444
Progressive liabilities .......... 1,025 1,103
Accrued medical and other benefits 131 202
Tax credits ...................... 1,299 --
NOL carryforward ................. 273 --
Other ............................ 42 --
-------- --------
Total current ............... 7,130 2,845
-------- --------
Non-current:
FICA, alternative minimum tax
and other tax credits ........ -- 2,195
Deferred rent .................... 1,734 4,688
-------- --------
Total non-current ............ 1,734 6,883
-------- --------
Total deferred tax assets .............. 8,864 9,728
-------- --------
Deferred tax liabilities:
Non-current:
Property, plant and equipment .... (11,797) (13,537)
-------- --------
Total deferred tax liabilities (11,797) (13,537)
-------- --------
Net deferred tax liability ............. $ (2,933) $ (3,809)
======== ========
</TABLE>
F-18
<PAGE> 50
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the Company's financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies. The carrying amounts of
cash and cash equivalents, accounts receivable, and accounts payable approximate
fair values due to the short-term maturities of these instruments. The carrying
amounts and estimated fair values of the Company's other financial instruments
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
(in thousands)
<S> <C> <C>
Liabilities:
Current portion of long-term debt $ 7,905 $ 7,905
======== ========
13% First Mortgage Notes $171,029 $196,000
======== ========
10 7/8% First Mortgage Notes $ 16,800 $ 19,328
======== ========
Other long-term debt $ 12,125 $ 10,789
======== ========
</TABLE>
The methods and assumptions are summarized as follows:
For current portion of long-term debt, the carrying amount approximates
fair value due to the short-term nature of such debt. The fair value of the 13%
First Mortgage Notes was determined based upon market quotes. The fair value of
the 10 7/8% First Mortgage Notes was determined using the make-whole premium as
defined in the associated indenture. For all other long-term debt, the fair
value is estimated using a discounted cash flow analysis, based on the
incremental borrowing rates currently available to the Company for debt with
similar terms and maturity.
F-19
<PAGE> 51
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--COAST WEST, INC.
The Company had 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 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 an accumulated deficit of
$8,955,000. 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.
NOTE 10--RELATED PARTY TRANSACTIONS
The Company's advertising services are provided by LGT Advertising, a
company owned by several stockholders of Coast Resorts. LGT purchases
advertising for the company from third parties and passes along any discounts
they receive. LGT and its owners receive no compensation or profit for these
services, as the Company is invoiced for actual costs incurred. Advertising
expense amounted to approximately $3.8 million, $7.5 million and $6.0 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company received laundry services from Exber, Inc. (dba El Cortez
Hotel & Casino). A major stockholder-officer of Exber, Inc. is the father of a
major stockholder of Coast Resorts and a director and officer of the Company.
Laundry expense payable to Exber, Inc. was approximately $864,000 for the year
ended December 31, 1996. The Company discontinued its laundry service from
Exber, Inc. in October 1996.
The Company purchases certain of its equipment and inventory for its
operations from RJS, a company owned by the father of a major stockholder and
director of Coast Resorts and a director and officer of the Company and the
Company's restaurant manager. RJS invoices the Company based on actual costs
incurred. For the fiscal years ended December 31, 1996, 1997 and 1998, the
Company incurred expenses payable to RJS of approximately $4.1 million, $1.4
million and $829,000, respectively.
The Company purchases wallboards and parlay cards for its race and
sports books from Nevada Wallboards, Inc. A major stockholder and director of
Coast Resorts and a director and officer of the Company is the majority
stockholder of Nevada Wallboards, Inc. For the fiscal years ended December 31,
1996, 1997 and 1998, the Company incurred expenses payable to Nevada Wallboards
of approximately $145,000, $198,000 and $186,000, respectively.
F-20
<PAGE> 52
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--RELATED PARTY TRANSACTIONS--(CONTINUED)
A director of the Company is the president and sole stockholder of
Yates-Silverman, Inc. which was retained by the Company as the designer of The
Orleans and the Coast West project. For the fiscal years ended December 31,
1996, 1997 and 1998, the Company incurred expenses payable to Yates-Silverman of
approximately $508,000, $177,000 and $500,000, respectively.
The Company maintains numerous racetrack dissemination contracts with
Las Vegas Dissemination, Inc. ("LVD"). The son of a major stockholder and
director of Coast Resorts and a director and officer of the company is the
president and sole shareholder of LVD. LVD has been granted a license by the
Nevada gaming authorities to disseminate live racing for those events and tracks
for which it contracts and has been granted the exclusive right to disseminate
all pari-mutuel services and race wire services in the State of Nevada. Under
these dissemination contracts, the Company pays to LVD an amount based on the
wagers accepted for races held at the racetracks covered by the respective
contracts. The Company also pays to LVD a monthly fee for race wire services.
For the fiscal years ended December 31, 1996, 1997 and 1998, the Company
incurred expenses payable to LVD of approximately $889,000, $1.1 million and
$3.1 million, respectively.
J.A. Tiberti Construction Company ("Tiberti Construction") has served as
the general contractor for the original construction of the Gold Coast and for
certain expansions thereof, for the original construction of the Barbary Coast
and all expansions thereof and for the original construction and Phase II
expansion of The Orleans. The president of Tiberti Construction is a stockholder
and director of Coast Resorts and a director of the Company. For the years ended
December 31, 1996, 1997 and 1998, the Company paid approximately $80.3 million,
$26.2 million and $3.7 million, respectively, to Tiberti Construction in
connection with such construction services.
As more fully described in Note 4, the Company is a party to a ground
lease with The Tiberti Company with respect to the land underlying The Orleans.
The president of The Tiberti Company is a director and stockholder of Coast
Resorts. Amounts paid to the Tiberti Company with respect to the lease were $3.0
million, $2.1 million and $2.4 million for the years ended December 31, 1996,
1997 and 1998, respectively.
NOTE 11-- BENEFIT PLANS
401(k) Plans
The Company offers separate defined contribution 401(k) plans for
eligible employees. During 1996, previously separate plans of the Gold Coast and
the Barbary Coast were consolidated into one plan. All employees of the Gold
Coast and The Orleans, and all employees of the Barbary Coast not covered by a
collective bargaining agreement, are eligible to participate. The employees may
elect to defer up to 15% of their yearly compensation, subject to statutory
limits. The Company makes matching contributions of 50% of the first 6% of the
employees' contribution. Contribution expense was $1,176,000, $842,000 and
$1,252,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Defined Benefit Plan
Certain employees at the Barbary Coast are covered by a union-sponsored,
collectively bargained, multi-employer, defined benefit pension plan. The
Barbary Coast contributed $274,000, $313,000 and $308,000 during the years ended
December 31, 1996, 1997 and 1998, respectively, to the plan. These contributions
are determined in accordance with the provisions of negotiated labor contracts
and generally are based on the number of hours worked.
F-21
<PAGE> 53
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-- BENEFIT PLANS--(CONTINUED)
Stock Compensation Plan
In December 1996, the Board of Directors of Coast Resorts adopted the
1996 Stock Incentive Plan (the "Plan") which authorizes the issuance of (i)
shares of Coast Resorts Common Stock or any other class of security of Coast
Resorts which is convertible into shares of Coast Resorts Common Stock or (ii) a
right or interest with an exercise or conversion privilege at a price related to
Coast Resorts Common Stock or with a value derived from the value of such common
stock. Awards under the Plan are not restricted to any specified form or
structure and may include, without limitation, sales or bonuses of stock,
restricted stock, stock options, reload stock options, stock purchase warrants,
other rights to acquire stock, securities convertible into or redeemable for
stock, stock appreciation rights, limited stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. Officers,
key employees, directors (whether employee directors or non-employee directors)
and consultants of Coast Resorts and its subsidiaries are eligible to
participate in the Plan.
Under the terms of the Plan, the aggregate number of shares issued and
issuable pursuant to all awards (including all incentive stock options) granted
under the Plan shall not exceed 220,000 at any time. In addition, the aggregate
number of shares subject to awards granted during any calendar year to any one
eligible person (including the number of shares involved in awards having a
value derived from the value of shares) shall not exceed 40,000.
No awards shall be made under the Plan after the tenth anniversary of
the adoption of the Plan. Although shares may be issued after the tenth
anniversary of the adoption of the Plan pursuant to awards made prior to such
date, no shares shall be issued under the Plan after the twentieth anniversary
of adoption of the Plan. As of December 31, 1998, no awards have been made under
the Plan.
NOTE 12--SUPPLEMENTAL CASH FLOWS INFORMATION
For the years ended December 31, 1996, 1997 and 1998 supplemental
cash flows information amounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid ................................................................................ $21,607 $25,488 $ 26,764
======= ======= ========
Income taxes paid ............................................................................ $ 3,100 $ -- $ 2,300
======= ======= ========
Supplemental schedule of non-cash investing and financing activities:
Property and equipment acquisitions included in
accounts payable or financed through notes payable ................................. $38,918 $ 2,491 $ --
======= ======= ========
Conversion of notes payable to Coast Resorts Common Stock .................................... $52,525 $ -- $ --
======= ======= ========
Transfer of net liabilities of Coast West to the Company by Coast Resorts
($8,955) less write-off of related allowance for advances to Coast West ($5,769)....... $ -- $ -- $ 3,186
======= ======= ========
</TABLE>
F-22
<PAGE> 54
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--REGULATION OF GAMING OPERATIONS
The gaming operations of the Company are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the Nevada Commission), the
Nevada State Gaming Control Board (the Nevada Control Board) and the Clark
County Liquor and Gaming Board (the Clark County Board) (collectively, the
"Nevada Gaming Authorities"). These agencies issue gaming licenses based upon,
among other considerations, evidence that the character and reputation of
principal owners, officers, directors, and certain other key employees are
consistent with regulatory goals. The necessary licenses have been secured by
the Company. The licenses are not transferable and must be renewed periodically
upon the payment of appropriate taxes and license fees. The Nevada Gaming
Authorities have broad discretion with regard to the renewal of the licenses
which may at any time revoke, suspend, condition, limit or restrict a license
for any cause deemed reasonable by the issuing agency. Officers, directors, and
key employees of the Company must be approved by the Nevada Control Board and
licensed by the Nevada Commission and Clark County Board.
NOTE 14--COMMITMENTS AND CONTINGENCIES
Coast Hotels is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
financial position, results of operations or cash flows of Coast Hotels.
NOTE 15--SUBSEQUENT EVENTS
First Mortgage Notes Repurchase
On February 19, 1999, Coast Hotels commenced an offer to purchase and
consent solicitation with respect to the 13% First Mortgage Notes. Coast Hotels
expects to fund the tender offer with the proceeds from a new note offering and
a bank credit facility which are anticipated to be completed by Coast Hotels
during 1999. In connection with these transactions, Coast Hotels also expects to
repurchase the 10 7/8% First Mortgage Notes. Upon completion of the repurchase
transactions, Coast Hotels anticipates that it will record an extraordinary
loss, net of tax benefit, of approximately $27.1 million which is comprised of
an estimated $33.0 million repurchase premium, the write-off of unamortized debt
issue costs of $4.8 million and the write-off of $4.0 million of original issue
discount associated with the 13% First Mortgage Notes, and a related tax benefit
at a rate of 35%.
There can be no assurance that Coast Hotels will complete the
aforementioned repurchase and debt offering transactions.
Stock Option Plan
Effective January 1, 1999, Coast Resorts issued options to purchase
30,415 shares of its common stock to its chief operating officer, who is also
the operating officer of the Company. The options vest in 1/3 increments on
January 1, 1999, January 1, 2000 and January 1, 2001. The exercise price on the
options is at $100 per share, which is equivalent to the estimated fair value of
Coast Resorts' common stock at the grant date, as estimated by Coast Resorts
from recent sales of common stock between shareholders.
F-23
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
Coast Resorts, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Coast Resorts, Inc. (parent company only) as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Company has no material business activity other than that conducted through
its wholly owned subsidiary, Coast Hotels and Casinos, Inc. ("CHC"). The
accompanying financial statements include the parent's investment in CHC using
the equity method of accounting, and have been prepared solely to accompany the
financial statements of CHC. The financial statements of Coast Resorts, Inc.
(parent company only) should be read in conjunction with the financial
statements of CHC included in this form 10-K.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 5, 1999,
except for Note 2 as to which
the date is March 4, 1999
F-24
<PAGE> 56
COAST RESORTS, INC.
(PARENT COMPANY ONLY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 3 $ 3
--------- ---------
TOTAL CURRENT ASSETS .................................... 3 3
INVESTMENT IN SUBSIDIARIES ................................... 94,767 103,054
--------- ---------
$ 94,770 $ 103,057
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to affiliates ......................................... $ 301 $ 601
Accrued liabilities ....................................... 30 30
--------- ---------
TOTAL CURRENT LIABILITIES ............................... 331 631
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 500,000 shares authorized,
None issued and outstanding ............................. -- --
Common stock, $.01 par value, 2,000,000 shares authorized,
1,494,353 shares issued and outstanding ................. 15 15
Additional paid-in capital ................................ 95,398 95,398
Retained earnings (deficit) ............................... (974) 7,013
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .............................. 94,439 102,426
--------- ---------
$ 94,770 $ 103,057
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 57
COAST RESORTS, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Equity interest in income (loss) from subsidiaries ...... $ 3,689 $ (4,335) $ 8,287
General and administrative expenses ..................... (81) (261) (134)
----------- ----------- -----------
Income (loss) before income taxes ....................... 3,608 (4,596) 8,153
Income tax provision (benefit) .......................... (28) 14 166
=========== =========== ===========
NET INCOME (LOSS) ....................................... $ 3,636 $ (4,610) $ 7,987
=========== =========== ===========
Basic and diluted net income (loss) per
share of common stock ................................... $ 2.47 $ (3.08) $ 5.34
=========== =========== ===========
Weighted average common shares outstanding .............. 1,472,742 1,494,353 1,494,353
=========== =========== ===========
UNAUDITED PRO FORMA DATA (reflecting
reorganization and change in tax status of subsidiaries):
Income (loss) before income taxes ....................... $ 6,108
Provision (benefit) for income taxes .................... (28)
-----------
Net income (loss) ....................................... $ 6,136
===========
Basic and diluted net income (loss) per share of
Common stock ............................................ $ 4.17
===========
Weighed average common shares outstanding ............... 1,472,742
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 58
COAST RESORTS, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
--------------------------- ADDITIONAL GAINS RETAINED
SHARES AMOUNT PAID-IN CAPITAL (LOSSES) EARNINGS TOTAL
---------- ---------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ............. 1,000,000 $ 10 $ 19,340 $ -- $ 23,538 $ 42,888
Exchange of notes payable of
subsidiary for common stock .......... 494,353 5 52,520 52,525
Reclassification of undistributed
earnings to additional paid-in capital
upon termination of partnership
status ............................... 23,538 (23,538) --
Net income .............................. 3,636 3,636
---------- ---------- ---------- ----- ---------- ----------
Balances at December 31, 1996 ............. 1,494,353 15 95,398 -- 3,636 99,049
Net loss ................................ (4,610) (4,610)
---------- ---------- ---------- ----- ---------- ----------
Balances at December 31, 1997 ............. 1,494,353 15 95,398 -- (974) 94,439
Net income .............................. 7,987 7,987
---------- ---------- ---------- ----- ---------- ----------
Balances at December 31, 1998 ............. 1,494,353 $ 15 $ 95,398 $ -- $ 7,013 $ 102,426
========== ========== ========== ===== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 59
COAST RESORTS, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 3,636 $(4,610) $ 7,987
------- ------- -------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Equity interest in net (income) loss from subsidiaries (3,689) 4,335 (8,287)
Accrued liabilities .................................. -- 30 --
Due to affiliates .................................... 53 245 300
------- ------- -------
TOTAL ADJUSTMENTS ................................. (3,636) 4,610 (7,987)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... -- -- --
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ -- -- --
CASH AND CASH EQUIVALENTS, at beginning of year ..................... 3 3 3
------- ------- -------
CASH AND CASH EQUIVALENTS, at end of year ........................... $ 3 $ 3 $ 3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 60
COAST RESORTS, INC.
(PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background Information and Basis of Presentation
Coast Resorts, Inc. ("Coast Resorts" or the "Company") is a Nevada
corporation and serves as a holding company for Coast Hotels and Casinos, Inc.
("Coast Hotels") and Coast West, Inc. ("Coast West"), also Nevada corporations.
The Company has no material business activity other than that conducted through
Coast Hotels.
On July 21, 1998, the Company contributed the common stock of Coast West
to Coast Hotels, as a result of which Coast West became a wholly owned
subsidiary of Coast Hotels.
The accompanying financial statements present the financial position and
results of operations of Coast Resorts as a parent company only, and thus
include Coast Resort's investment in Coast Hotels, as well as Coast Resort's
equity interest in its results of operations. Accordingly, these financial
statements should be read in conjunction with the financial statements of Coast
Hotels.
Net Income (Loss) Per Common Share
Net income per common share for the years ended December 31, 1996, 1997
and 1998 is computed by dividing net income by the weighted average number of
shares of common stock outstanding, which weighted average totaled 1,472,742
shares, 1,494,353 shares and 1,494,353 shares, respectively. The Company has no
dilutive securities outstanding for any of the periods presented.
In February 1997, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 is effective for periods ending after December 15, 1997 and
replaces currently reported earnings per share with "basic", or undiluted,
earnings per share and "diluted" earnings per share. Basic earnings per share is
computed based on weighted average shares outstanding while diluted earnings per
share reflects the additional dilution for all potential dilutive securities,
such as stock options and warrants.
The Company has adopted the provisions of SFAS 128 in its fiscal 1997
and 1998 financial statements. The retroactive adoption had no impact on the
Company's operating results for the year ended December 31, 1996.
NOTE 2--SUBSEQUENT EVENT
Coast Hotel's First Mortgage Notes Repurchase
On February 19, 1999, Coast Hotels commenced an offer to purchase and
consent solicitation with respect to the $175 million principal amount of 13%
First Mortgage Notes. Coast Hotels expects to fund the tender offer with the
proceeds from a new note offering and a bank credit facility which are
anticipated to be completed by Coast Hotels during 1999. In connection with
these transactions, Coast Hotels also expects to repurchase the $16.8 million
principal amount of 10 7/8% First Mortgage Notes. Upon completion of the
repurchase transactions, Coast Hotels anticipates that it will record an
extraordinary loss, net of tax benefit, of approximately $27.1 million which is
comprised of an estimated $33.0 million repurchase premium, the write-off of
unamortized debt issue costs of $4.8 million and the write-off of $4.0 million
of original issue discount associated with the 13% First Mortgage Notes, and a
related tax benefit at a rate of 35%.
There can be no assurance that Coast Hotels will complete the
aforementioned repurchase and debt offering transactions.
Stock Option Plan
Effective January 1, 1999, Coast Resorts issued options to purchase
30,415 shares of its common stock to its chief operating officer, who is also
the chief operating officer of Coast Hotels. The options vest in 1/3 increments
on January 1, 1999, January 1, 2000 and January 1, 2001. The exercise price on
the options is at $100 per share, which is equivalent to the estimated fair
value of Coast Resorts' common stock at the grant date, as estimated by Coast
Resorts from recent sales of common stock between shareholders.
F-29
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder of
Coast Hotels and Casinos, Inc. and Subsidiary
Our report on the consolidated financial statements of Coast Hotels and Casinos,
Inc. (a wholly owned subsidiary of Coast Resorts, Inc.) and Subsidiary is
included in this report on Form 10-K. In connection with our audits of such
consolidated financial statements, we have also audited the following financial
statement schedule in this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 5, 1999
F-30
<PAGE> 62
SCHEDULE II
COAST HOTELS AND CASINOS, INC.
(A WHOLLY OWNED SUBSIDIARY OF COAST RESORTS, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGES TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) YEAR
- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts (casino receivables)
Year ended December 31, 1996 ....................... $ 374 $ 94 $-- $ 89 $ 379
====== ====== === ====== ======
Year ended December 31, 1997 ....................... $ 379 $ 448 $-- $ 633 $ 194
====== ====== === ====== ======
Year ended December 31, 1998 ....................... $ 194 $1,499 $-- $1,099 $ 594
====== ====== === ====== ======
Allowance for doubtful accounts (advances to Coast West)
Year ended December 31, 1996 ....................... $ 500 $2,060 $-- $ -- $2,560
====== ====== === ====== ======
Year ended December 31, 1997 ....................... $2,560 $2,120 $-- $ -- $4,680
====== ====== === ====== ======
Year ended December 31, 1998 ....................... $4,680 $1,090 $-- $5,770 $ --
====== ====== === ====== ======
</TABLE>
- --------------
(1) On July 21, 1998, Coast Resorts contributed the capital stock of Coast
West to the Company. The allowance for doubtful accounts on advances
previously made by the Company to Coast West ($5,770,000) was eliminated
in connection with such transaction.
F-31
<PAGE> 1
EXHIBIT 10.33
THE CIT GROUP FINANCING
MASTER SECURITY AGREEMENT
1. GRANT OF SECURITY INTEREST; DESCRIPTION OF COLLATERAL.
The Debtor named below grants to Secured Party a security interest in the
property described in the Schedules of Indebtedness and Collateral now or
hereafter executed by or pursuant to the authority of the Debtor and accepted
by Secured Party in writing (individually, a "Schedule" and collectively, the
"Schedules"), along with all present and future attachments and accessories
thereto and replacements and proceeds thereof, including amounts payable under
any insurance policy, all hereinafter referred to collectively as "Collateral."
Each Schedule shall be serially numbered. Unless and only to the extent
otherwise expressly provided in a Schedule, no Schedule shall replace any
previous Schedule but shall be supplementary to all previous Schedules.
2. WHAT OBLIGATIONS THE COLLATERAL SECURES.
Each item of Collateral shall secure not only the specific amount which Debtor
promises to pay in each Schedule, but also all other present and future
indebtedness or obligations of Debtor to Secured Party of every kind and nature
arising under this Security Agreement (collectively, the "Obligations").
3. PROMISE TO PAY; TERMS AND PLACE OF PAYMENT.
Debtor promises to pay Secured Party the amounts set forth on each Schedule at
the rate and upon such terms as provided therein.
4. USE OF COLLATERAL.
Debtor warrants and agrees that the Collateral is to be used primarily for
business or commercial purposes (other than agricultural).
Debtor and Secured Party agree that regardless of the manner of affixation, the
Collateral shall remain personal property and not become part of the real
estate. Debtor agrees to keep the Collateral at the location set forth in the
applicable Schedule, and will notify Secured Party promptly in writing of any
change in the location of the Collateral within such State, but will not remove
the collateral from such State without the prior written consent of Secured
Party.
5. LATE CHARGES AND OTHER FEES.
Any payment not made when due shall, at the option of Secured Party, bear late
charges thereon calculated at the rate of 1 1/2% per month, but in no event
greater than the highest rate permitted by relevant law. Debtor shall be
responsible for and pay to Secured Party a returned check fee, not to exceed
the maximum permitted by law, which fee will be equal to the sum of (i) the
actual bank charges incurred by Secured Party plus (ii) all other actual costs
and expenses incurred by Secured Party. Returned check fees are payable upon
demand as Obligations secured by the Collateral under this Security Agreement.
6. DEBTOR'S WARRANTIES AND REPRESENTATIONS.
To induce Secured Party to enter into this Security Agreement and to make the
loans contemplated hereby, Debtor warrants and represents that:
(a) Debtor is justly indebted to Secured Party for the full amount of the
Obligations set forth on each Schedule;
(b) except for the security interest granted hereby, the Collateral is free
from and will be kept free from all liens, claims, security interests and
encumbrances;
(c) Debtor is not aware of any financing statement covering the Collateral or
any proceeds thereof on file in favor of anyone other than Secured Party,
but if such other financing statement is on file, it will be terminated or
subordinated;
(d) all material information supplied and material statements made by Debtor
in any financial, credit or accounting statement or application for credit
prior to, contemporaneously with or subsequent to the execution of this
Security Agreement with respect to this transaction are and shall be true,
correct, valid and genuine;
(e) Debtor has full authority to enter into, deliver and perform this Security
Agreement and each of the other documents heretofore, now or hereafter
executed by Debtor in favor of or delivered to Secured Party in respect to
the transactions contemplated by this Security Agreement (collectively,
the "Loan Documents") to which it is a party, and in so doing it is not
violating its charter or by-laws, any law or regulation or agreement with
third parties, and it has taken all such action as may be necessary or
appropriate to make this Security Agreement and the other Loan Documents
binding upon it;
(f) the Collateral is new and in good operating condition and repair;
<PAGE> 2
(g) Debtor is a corporation duly organized, validly existing and in good
standing under the laws of the State of Nevada. Debtor has duly qualified
and is authorized to do business and is in good standing as a foreign
corporation in all states and jurisdictions where the character of its
properties or the nature of its activities make such qualification
necessary;
(h) this Security Agreement is, and each of the other Loan Documents when
delivered will be, a legal, valid and binding obligation of Debtor
enforceable against it in accordance with their respective terms;
(i) Debtor has all governmental licenses, consents, approvals, authorizations,
permits, certificates, inspections, and franchises necessary to conduct
its business as heretofore or proposed to be conducted by it and to own or
lease and operate its properties as now owned or leased by it;
(j) there are no actions, suits, proceedings or investigations pending, or to
the knowledge or Debtor, threatened, against or affecting Debtor or any of
its properties in any court or before any governmental authority or
arbitration board or tribunal, that if determined adversely, would have a
material adverse effect on its financial condition, business, properties
or operations, or its ability to perform its obligations under this
Security Agreement and all other Loan Documents to which it is a party;
(k) Debtor has filed all federal, state and local tax returns and other
reports it is required by applicable law to file and has paid, or made
provision for the payment of, all taxes, assessments, levies, claims or
charges upon Debtor, its income or sales or any of its properties that are
due and payable;
(l) Debtor has duly complied with, and its properties and business operations
are in compliance in all respects with, the provisions of all applicable
laws;
(m) no Event of Default (as defined below) exists or will exist or result from
the execution and delivery of this Security Agreement or Debtor's
performance hereunder;
(n) the balance sheets of Debtor as of March 31, 1996 and the related
statements of income, changes in stockholders' equity, and changes in
financial position for the period entered on such date, have been prepared
in accordance with generally accepted accounting principles ("GAAP")
(except for changes in application in which Debtor's independent certified
public accountants concur), and present fairly the financial position of
Debtor at such dates and the results of Debtor's operations for such
periods. Since March 31, 1996 there has been no material change in the
condition, financial or otherwise, of Debtor, except changes in the
ordinary course of business, none of which individually or in the
aggregate has been materially adverse; and
(o) there are no claims for brokerage commissions, finder's fees or investment
banking fees in connection with the transactions contemplated by this
Security Agreement.
Debtor warrants to Secured Party that all representations and warranties of
Debtor contained in this Security Agreement and all other Loan Documents shall
be true at the time of Debtor's execution of this Security Agreement and shall
survive the execution, delivery and acceptance hereof by the parties hereto and
the closing of the transactions described herein or related thereto.
7. DEBTOR'S AGREEMENTS.
Debtor agrees:
(a) to defend at Debtor's own cost any action, proceeding, or claim affecting
the Collateral;
(b) to pay reasonable attorneys' fees and other expenses incurred by Secured
Party in enforcing its rights against Debtor under this Security Agreement
subsequent to an Event of Default hereunder or the occurrence of an event
which with the lapse of time or the giving of notice or both would become
an Event of Default;
(c) to pay promptly all taxes, assessments, license fees and other public or
private charges when levied or assessed against the Collateral or this
Security Agreement, and this obligation shall survive the termination of
this Security Agreement;
(d) that if a certificate of title be required or permitted by law, Debtor
shall obtain such certificate with respect to the Collateral, showing the
security interest of Secured Party thereon and in any event do everything
necessary or expedient to preserve or perfect the security interest of
Secured Party;
(e) that Debtor will not misuse, fail to keep in good repair, secrete or
without the prior written consent of Secured Party, sell, rent, lend,
encumber or transfer any of the Collateral notwithstanding the Secured
Party's right to proceeds;
(f) that Secured Party may enter upon Debtor's premises or wherever the
Collateral may be located at any reasonable time to inspect the Collateral
and Debtor's books and records pertaining to the Collateral, and Debtor
shall assist Secured Party in making such inspection;
(g) that the security interest granted by Debtor to Secured Party shall
continue effective irrespective of any retaking or redelivery of any
collateral and irrespective of the payment of the Obligations described in
any Schedule so long as there are any Obligations of any kind, including
obligations under guaranties or assignments, owed by Debtor to Secured
Party, provided, however, upon any assignment of any Schedule under this
Security Agreement the Assignee shall thereafter be deemed for the purpose
of this Paragraph the Secured Party under this Security Agreement with
respect to such Schedule;
(h) to preserve and maintain its separate corporate existence and all rights,
privileges, and franchises in connection therewith, and maintain its
qualification and good standing in all states in which such qualification
is necessary;
(i) to comply with all applicable laws and obtain and keep in force any and
all licenses, permits, franchises, or other governmental authorizations
necessary to the ownership of its properties or to the conduct of its
business;
(j) to notify Secured Party in writing: (i) promptly after Debtor's learning
thereof, of the commencement of any litigation or the institution of any
administrative proceeding which Debtor reasonably believes, if determined
adversely, may materially and adversely affect Debtor's operations,
financial condition, properties or business or Secured Party's lien upon
any of the Collateral; (ii) promptly after Debtor's learning thereof, of
any material default by Debtor under any note, indenture, loan agreement,
mortgage, lease, deed, guaranty or other similar agreement relating to any
Indebtedness of Debtor exceeding $1,000,000 (iii) promptly after the
occurrence thereof, of any Event of Default or any event or condition the
occurrence of which would, with the lapse of time or the giving of notice,
or both, become an Event of Default; and (iv) promptly after the rendition
thereof, of any judgment, order or decree rendered against Debtor in excess
of $1,000,000;
(k) to permit Secured Party to communicate directly with any of the following
persons and entities concerning Debtor, its business and the Collateral
(and Secured Party is irrevocably authorized to communicate with each such
persons) upon at least 24 hours' oral or written notice to Debtor (unless
an Event of Default exists, in which event no notice shall be required):
(a) and service bureau, warehousing service, landlords or trade creditors;
(b) any person employed by the Debtor (but no prior notice shall be
required for Secured Party to discuss any matters pertaining to Debtor, its
business or the Collateral with any officer of Debtor or attorney for
Debtor or any other person designated by an officer of Debtor to deal on a
day-to-day basis with Secured Party); and (c) Debtor's present and future
independent public accountants; and each of the foregoing is authorized by
Debtor to communicate with Secured Party and to disclose to Secured Party
any and all matters relating to Debtor, its financial condition and
business prospects, and the Collateral;
(l) that Debtor will not enter into any transaction with any person or entity
which is a stockholder of Debtor or which directly or indirectly controls,
or is controlled by, or is under common control with, Debtor or which
beneficially owns or holds 5% or more of any class of voting securities of
Debtor, or 5% or more of the voting securities or equity interest of which
is beneficially owned or held by Debtor, except in the ordinary course and
pursuant to the reasonable requirements of Debtor's business and upon fair
and reasonable terms, and, with respect to any such transaction which
affects the Collateral, upon fair and reasonable terms which are fully
disclosed to Secured Party;
(m) that Debtor will not transfer its principal place of business or chief
executive office to any location other than those at which the same is
presently kept or maintained, except upon at least sixty (60) days prior
written notice to Secured Party and after the delivery to Secured Party of
duly executed UCC-1 financing statements, if required by Secured Party, in
form satisfactory to Secured Party to perfect or continue the perfection of
Secured Party's lien and security interest hereunder;
(n) to cause to be prepared and furnished to Secured Party the following (all
to be kept and prepared in accordance with GAAP applied on a consistent
basis, unless Debtor's certified public accountants concur in any change
therein and such change is disclosed to Secured Party and is consistent
with GAAP): (i) as soon as possible, but not later than ninety (90) days
after the close of each fiscal year of Debtor, unqualified audited
financial statements of Debtor as of the end of such year, certified by a
firm of independent certified public accountants of recognized national
standing or otherwise acceptable to Secured Party; and (ii) as soon as
possible, but not later than forty-five (45) days after the end of each of
Debtor's fiscal quarters hereafter, unaudited interim financial statements
of Debtor as of the end of such quarter and of the portion of Debtor's
fiscal year then elapsed, certified by the principal financial officer of
Debtor as prepared in accordance with GAAP and fairly presenting the
financial position and results of operations of Debtor for such quarter and
period. Concurrently with the delivery of the financial statements
described in clause (1) of this Paragraph, Debtor shall furnish to Secured
Party a copy of the accountants "letter to Debtor's management, if any,
that is prepared in connection with such financial statements. Concurrently
with the delivery of the financial statements described in this Paragraph,
Debtor shall cause to be prepared and furnished to Secured Party a
certificate from the chief financial officer of Debtor certifying to
Secured Party that to the best of his knowledge, Debtor has kept, observed,
performed and fulfilled each and every covenant, obligation and agreement
binding upon Debtor in this Security Agreement and the other Loan Documents
and that no Event of Default has occurred, or, if such Event of Default has
occurred, specifying the nature hereof;
(o) that all the covenants and agreements made by Debtor, Coast Resorts, Inc.
and Coast West, Inc. in the $175,000,000 13% First Mortgage Notes Indenture
dated as of January 30, 1996 (the "Indenture") by and among Debtor, Coast
West, Inc., Coast Resorts, Inc., and American Bank National Association as
trustee, are incorporated herein and made part hereof as
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such covenants and agreements were in effect on July 1, 1996 (without
giving effect to any waiver or amendment of such covenants and agreements
after July 1, 1996 except as provided in the last paragraph of this
Section 7);
(p) within ten (10) business days of the date of this Security Agreement, to
execute and deliver to the Nevada Gaming Commission a report in compliance
with Regulation 8.130 of that Commission reporting the loan made under
this Security Agreement and the other Loan Documents, and to give
simultaneously a copy of the filed report to Secured Party;
(q) it will not declare or pay any dividend (other than a dividend payable in
stock of the Debtor) or authorize or make any other distribution on any
stock of the Debtor, whether now or hereafter outstanding which would
exceed (i) 50% of the Debtor's after tax net profit for the preceding
fiscal year or (ii) $3,000,000.00 annually, whichever is less; and
(r) it will not consent or agree to the sale, lease, transfer, conveyance, or
other disposition (other than by way of merger or consolidation with Coast
Resorts, Inc.) of all or substantially all of the Debtor's assets.
Debtor's obligation to comply with the covenants and agreements in the
Indenture as such covenants and agreements were in effect on July 1, 1996,
applies only to amendments which (i) impair Secured Party's rights in the
Collateral or (ii) materially impair Debtor's ability to pay the Obligations.
With respect to amendments not covered by clauses (i) and (ii), Secured Party
agrees that Debtor shall comply with the applicable covenant or agreement as
amended. With respect to amendments which (y) do impair Secured Party's rights
in the Collateral or (z) do materially impair Debtor's ability to pay the
Obligations, such amendments shall be accorded no effect for purposes hereof
and Debtor shall comply with the applicable covenant or agreement as if it had
not been amended.
The parties hereto agree that any and all amendments and other
modifications of whatever kind to Section 4.09 of the Indenture subsequent to
July 1, 1996 shall be deemed to (i) impair Secured Party's rights in the
collateral and (ii) materially impair Debtor's ability to pay the Obligations,
and shall be accorded no effect for the purposes hereof and Debtor shall comply
with Section 4.09 as if it had not been amended or modified.
8. INSURANCE AND RISK OF LOSS.
All risk of loss, damage to or destruction of the Collateral shall at all times
be on Debtor. Debtor will procure forthwith and maintain at Debtor's expense
insurance against all risks of loss or physical damage to the Collateral for the
full insurable value thereof for the life of this Security Agreement plus breach
of warranty insurance and such other insurance thereon in amounts and against
such risks as Secured Party may specify, and shall promptly deliver each policy
to Secured Party with a standard long-term mortgagee endorsement attached
thereto showing loss payable to Secured Party; and providing Secured Party with
not less than 30 days written notice of cancellation; each such policy shall be
in form, terms and amount and with insurance carriers satisfactory to Secured
Party; Secured Party's acceptance of policies in lesser amounts or risks shall
not be a waiver of Debtor's foregoing obligations. As to Secured Party's
interest in such policy, no act or omission of Debtor or any of its officers,
agents, employees or representatives shall affect the obligations of the insurer
to pay the full amount of any loss. The insurance maintained by Debtor should be
primary without any right of contribution from insurance which may be maintained
by Secured Party. Debtor shall be liable for all deductible portions of all
required insurance.
Debtor hereby assigns to Secured Party any moneys which may become payable
under any such policy of insurance and irrevocably constitutes and appoints
Secured Party as Debtor's attorney in fact (a) to hold each original insurance
policy, (b) to make, settle and adjust claims under each policy of insurance,
(c) to make claims for any moneys which may become payable under such and other
insurance on the Collateral including returned or unearned premiums, and (d) to
endorse Debtor's name on any check, draft or other instrument received in
payment of claims or returned or unearned premiums under each policy and to
apply the funds to the payment of the Obligations owing to Secured Party;
provided, however, Secured Party is under no obligation to do any of the
foregoing.
Should Debtor fail to furnish such insurance policy to Secured Party, or to
maintain such policy in full force, or to pay any premium in whole or in part
relating thereto, then Secured Party, without waiving or releasing any default
or obligation by Debtor, may (but shall be under no obligation to) obtain and
maintain insurance and pay the premium therefor on behalf of Debtor and charge
the premium to Debtor's Obligations under this Security Agreement. The full
amount of any such premium paid by Secured Party shall be payable by Debtor
upon demand, and failure to pay same shall constitute an event of default under
this Security Agreement.
9. EVENTS OF DEFAULT; ACCELERATION.
A VERY IMPORTANT ELEMENT OF THIS SECURITY AGREEMENT IS THAT DEBTOR MAKE ALL ITS
PAYMENTS PROMPTLY AS AGREED UPON. IT IS ESSENTIAL THAT THE COLLATERAL REMAIN IN
GOOD CONDITION AND ADEQUATE SECURITY FOR THE OBLIGATIONS. EACH OF THE FOLLOWING
IS AN EVENT OF DEFAULT UNDER THIS SECURITY AGREEMENT WHICH WILL ALLOW SECURED
PARTY TO TAKE SUCH ACTION UNDER THIS PARAGRAPH AND UNDER PARAGRAPH 10 AS IT
DEEMS NECESSARY:
(a) Debtor shall fail to pay any installment of principal or interest owing
with respect to a Schedule within fifteen (15) days after the due date
thereof;
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(b) Debtor shall fail to pay any of the Obligations not evidenced by a Schedule
on the due date thereof (whether due at stated maturity, on demand, upon
acceleration or otherwise) and such failure shall not be cured within
fifteen (15) days after the date on which Secured Party gives to Debtor
written notice of Debtor's failure to make such payment on or before the
due date thereof;
(c) Debtor breaches any warranty or provision hereof, or of any other Loan
Document, any note or of any other instrument or agreement delivered by
Debtor to Secured Party in connection with this or any other transaction;
(d) Coast Resorts, Inc. shall fail to comply with the terms of the non-spinoff
letter dated October 24, 1996;
(e) it is determined that Debtor has given Secured Party materially
misleading information regarding its financial condition;
(f) there shall occur any loss, theft, damage or destruction of Collateral not
fully covered by insurance (as required by this Security Agreement and not
subject to such deductibles as Secured Party shall have agreed to in
writing), or the making of any levy, seizure, or attachment thereof or
thereon;
(g) Debtor shall (i) admit in writing its inability to pay its debts generally
as they become due, (ii) make an assignment for the benefit of its
creditors, or (iii) commence a proceeding for the appointment of a
receiver, trustee, liquidator or conservator of itself or of the whole or
any substantial part of its property, or (iv) a complaint or petition or
answer seeking reorganization or arrangement or any similar relief under
the Federal bankruptcy laws or any other applicable law or statute of the
United States of America or any state is filed by or against the Debtor
and, if filed against the Debtor, continues unstayed and in effect for
a period of 60 days, or (v) a court of competent jurisdiction, trustee or
conservator shall otherwise assume custody or control of the Debtor or of
the whole or any substantial part of its assets;
(h) Debtor fails to maintain any and all licenses, permits, approvals or
authorizations of any kind necessary under Nevada statutes or required by
the Nevada Gaming Commission to engage in the business of operating a
Casino. For the purposes hereof "Casino" shall mean a gaming establishment
and other property or assets ancillary thereto or used in
connection therewith, including restaurants, hotels, theaters, non-gaming
retail businesses, and golf courses and other recreation and entertainment
facilities;
(i) [intentionally left blank]
(j) there shall occur any default or event of default on the part of Debtor
under any agreement, document or instrument to which Debtor is a party or
by which Debtor or any of its property is bound, creating or relating to
any indebtedness;
(k) there shall occur any material adverse change in the financial condition
or business prospects of Debtor;
(l) Debtor, Coast Resorts, Inc., or Coast West, Inc. shall breach any of the
covenants set forth in the Indenture in effect on July 1, 1996 (without
giving effect to any waiver or amendment of any such covenant on or after
July 1, 1996 except as provided in the last paragraph of Section 7 and
without regarding whether the payment or maturity of the indebtedness
incurred under the indenture is accelerated in consequence of such breach);
(m) there shall occur any default or event of default on the part of Coast
Resorts, Inc. under any agreement, document or instrument (other than the
indenture and related documents) to which it is a party or by which it or
any of its property is bound, provided Coast Resorts, Inc.'s obligations
owing upon such default under or related to such agreement, document or
instrument exceeds $5,000,000 or its foreign currency equivalent; and
(n) there shall occur any Event of Default on the part of Coast Resorts, Inc.,
under the Stock Pledge and Security Agreement (the "Pledge Agreement")
dated as of January 30, 1996, (as Event of Default is defined in such
Pledge Agreement) in favor of American Bank National Association as
trustee ("Trustee"), and as a result thereof, such Trustee exercises any
rights or remedies with regard to Shareholder's Stock (as such term is
defined in the Pledge Agreement).
IF AN EVENT OF DEFAULT SHALL OCCUR, THE OBLIGATIONS DESCRIBED IN EACH SCHEDULE
AND ALL OTHER OBLIGATIONS THEN OWING BY DEBTOR TO SECURED PARTY UNDER THIS OR
ANY OTHER PRESENT OR FUTURE AGREEMENT SHALL, IF SECURED PARTY SHALL SO ELECT,
BECOME IMMEDIATELY DUE AND PAYABLE. AFTER ACCELERATION:
(a) the unpaid principal balance of the Obligations described in any Schedule
in which interest has been precomputed shall bear interest at the rate of
18% per annum (or, if less, the maximum rate permitted by law) until paid
in full; and
(b) the unpaid principal balance of the Obligations described in any Schedule
in which interest has not been precomputed shall bear interest at the same
rate as before acceleration until paid in full.
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In no event shall the Debtor upon demand by Secured Party for payment of the
Obligations, by acceleration of the maturity thereof or otherwise, be obligated
to pay any interest in excess of the amount permitted by law. Any acceleration
of the Obligations, if elected by Secured Party, shall be subject to all
applicable laws, including laws relating to rebates and refunds of unearned
charges.
Secured Party agrees that notwithstanding anything herein to the contrary, it
shall not exercise its remedies pursuant to Section 10 with respect to Events of
Default under clauses (c) through (l), with the exception of clauses (g) and
clause (c) as applied to Section 7(o), unless (i) Secured Party first notifies
Debtor that such Event of Default has occurred and (ii) permits Debtor fifteen
(15) days to cure such Event of Default. With respect to clause (g), Secured
Party is not required to give notice prior to declaring an Event of Default, and
the cure periods applicable thereto are set forth therein. With respect to
clause (l) and clause (c) as applied to Section 7(o), an Event of Default shall
not be deemed to have occurred until Debtor shall have failed to cure the
default under the Indenture within a reasonable period. If such default is not
curable within a reasonable time period, Debtor shall provide Secured Party with
such additional documents, security or assurances as Secured Party shall
reasonably request.
10. SECURED PARTY'S REMEDIES AFTER DEFAULT; CONSENT TO ENTER PREMISES.
Upon the occurrence of an Event of Default (and the failure of Debtor to remedy
such Event of Default during the time period, if any, provided Debtor to remedy
such Event of Default) and at any time thereafter, Secured Party shall have all
the rights and remedies of a Secured Party under the Uniform Commercial Code and
any other applicable laws, including the right to any deficiency remaining after
disposition of the Collateral for which Debtor hereby agrees to remain fully
liable. Debtor agrees that Secured Party, by itself or its Agent, may without
notice to any person and without judicial process of any kind, enter into any
premises or upon any land owned, leased or otherwise under the real or apparent
control of Debtor or any Agent of Debtor where the Collateral may be or where
Secured Party believes the Collateral may be, and disassemble, render unusable
and/or repossess all or any item of the Collateral, disconnecting and separating
all Collateral from any other property and using all force necessary. Debtor
expressly waives all further rights to possession of the Collateral after
default and all claims for injuries suffered through or loss caused by such
entering and/or repossession. Secured Party may require Debtor to assemble the
Collateral and return it to Secured Party at a place to be designated by Secured
Party which is reasonably convenient to both parties.
Secured Party may sell or lease the Collateral at a time and location of its
choosing provided that the Secured Party acts in good faith and in a
commercially reasonable manner. Secured Party will give Debtor reasonable notice
of the time and place of any public sale of the Collateral or of the time after
which any private sale or any other intended disposition of the Collateral is to
be made. Unless otherwise provided by law, the requirement of reasonable notice
shall be met if such notice is mailed, postage prepaid, to the address of Debtor
shown herein at least ten days before the time of the sale or disposition.
Expenses of retaking, holding, preparing for sale, selling and the like shall
include reasonable attorneys' fees and other legal expenses. Debtor understands
that Secured Party's rights are cumulative and not alternative.
Secured Party is hereby granted a license or other right to use, without charge,
Debtor's labels, patents, copyrights, rights of use of any name, trade secrets,
tradenames, trademarks and advertising matter, or any property of similar
nature, as it pertains to the Collateral, in advertising for sale and selling
any Collateral and Debtor's rights under all licenses and all franchise
agreements shall inure to Secured Party's benefit.
The proceeds realized from the sale of any Collateral may be applied, after
allowing two (2) business days for collection, first to the reasonable costs,
expenses and attorneys' fees and expenses incurred by Secured Party for
collection and for acquisition, completion, protection, removal, storage, sale
and delivery of the Collateral; secondly, to interest due upon any of the
Obligations; and thirdly, to the principal of the Obligations. If any deficiency
shall arise, Debtor and Guarantor shall remain liable to Secured Party therefor.
11. WAIVER OF DEFAULTS; AGREEMENT INCLUSIVE.
Secured Party may in its sole discretion waive an Event of Default, or cure, at
Debtor's expense, an Event of Default. Any such waiver in a particular instance
or of a particular Event of Default shall not be a waiver of any other Events of
Default or the same kind of default at another time. No modification or change
in this Security Agreement or any related note, instrument or agreement shall
bind Secured Party unless in writing signed by Secured Party. No oral agreement
shall be binding.
12. FINANCING STATEMENTS; CERTAIN EXPENSES.
If permitted by law, Debtor authorizes Secured Party to file a financing
statement with respect to the Collateral signed only by Secured Party, and to
file a carbon, photocopy or other reproduction of this Security Agreement or of
a financing statement. At the request of Secured Party, Debtor will execute any
financing statements, agreements or documents, in form satisfactory to Secured
Party which Secured Party may deem necessary or advisable to establish and
maintain a perfected security interest in the Collateral.
13. WAIVER OF DEFENSES ACKNOWLEDGMENT.
If Secured Party assigns a Schedule under this Security Agreement to a third
party ("Assignee"), then after such assignment:
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(a) Debtor will make all payments due under such Schedule directly to such
Assignee at such place as Assignee may from time to time designate in
writing;
(b) Debtor agrees that it will settle all claims, defenses, setoffs and
counterclaims it may have against Secured Party directly with Secured
Party and will not set up any such claim, defense, setoff or counterclaim
against Assignee, Secured Party hereby agreeing to remain responsible
therefor;
(c) Secured Party shall not be Assignee's agent for any purpose and shall have
no authority to change or modify such Schedule or any related document or
instrument; and
(d) Assignee shall have all of the rights and remedies of Secured Party
hereunder with respect to such assigned Schedule but none of Secured
Party's obligations.
14. MISCELLANEOUS.
Debtor waives all exemptions. Secured Party may correct patent errors herein and
fill in such blanks as serial numbers, date of first payment and the like. Any
provisions hereof contrary to, prohibited by or invalid under applicable laws or
regulations shall be inapplicable and deemed omitted herefrom, but shall not
invalidate the remaining provisions hereof.
Debtor and Secured Party each hereby waive any right to a trial by jury in any
action or proceeding with respect to, in connection with, or arising out of this
Security Agreement, or any note or document delivered pursuant to this Security
Agreement. Except as otherwise provided herein or by applicable law, the Debtor
shall have no right to prepay the indebtedness described in any Schedule. Debtor
acknowledges receipt of a true copy and waives acceptance hereof.
If Debtor is a corporation, this Security Agreement is executed pursuant to
authority of its Board of Directors. Except where the context otherwise
requires, "Debtor" and "Secured Party" include the heirs, executors or
administrators, successors or assigns of those parties; nothing herein shall
authorize Debtor to assign this Security Agreement or its rights in and to the
Collateral. If more than one Debtor executes this Security Agreement, their
obligations under this Security Agreement shall be joint and several.
If at any time this transaction would be usurious under applicable law, then
regardless of any provision contained in this Security Agreement or in any other
agreement made in connection with this transaction, it is agreed that:
(a) the total of all consideration which constitutes interest under applicable
law that is contracted for, charged or received upon this Security
Agreement or any such other agreement shall under no circumstances exceed
the maximum rate of interest authorized by applicable law and any excess
shall be credited to the Debtor; and
(b) If Secured Party elects to accelerate the maturity of, or if Secured Party
permits Debtor to prepay the Obligations described in Paragraph 3, any
amounts which because of such action would constitute interest may never
include more than the maximum rate of interest authorized by applicable law
and any excess interest, if any, provided for in this Security Agreement or
otherwise, shall be credited to Debtor automatically as of the date of
acceleration or prepayment.
Debtor hereby agrees to indemnify Secured Party and hold Secured Party harmless
from and against any liability, loss, damage, suit, action or proceeding ever
suffered or incurred by Secured Party as the result of Debtor's failure to
observe, perform or discharge Debtor's duties hereunder. Additionally, if any
taxes (excluding taxes imposed upon or measured by the net income of Secured
Party, but including, without limitation, any intangibles taxes, stamp taxes,
recording taxes, documentary taxes or franchise taxes) shall be payable by
Secured Party or Debtor on account of the execution or delivery of this Security
Agreement, or the execution, delivery, issuance or recording of any of the other
Loan Documents, or the creation of any of the Obligations hereunder, by reason
of any existing or hereafter enacted federal or state statute, Debtor will pay
all such taxes, including, but not limited to, any interest and penalties
thereon, and will indemnify and hold Secured Party harmless from and against
liability in connection therewith. The obligations of Debtor under this
Paragraph shall survive the payment in full of the Obligations and the
termination of this Security Agreement.
This Security Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
All notices, requests and demands to or upon a party hereto shall be in writing
and shall be sent by certified or registered mail, return receipt requested,
personal delivery against receipt or by telecopier or other facsimile
transmission and, unless otherwise expressly provided herein, shall be deemed to
have been validly served, given or delivered when delivered against receipt or
three (3) business days after deposit in the U.S. mail, postage prepaid, or in
the case of facsimile transmission, when received at the office of the noticed
party, addressed as follows:
(A) If to Secured Party: The CIT Group/Equipment
Financing, Inc.
900 Ashwood Parkway
Suite 600
6 of 8
<PAGE> 7
Atlanta, Georgia 30338
Attention: VP Credit
Telecopier No.: (404) 551-7865
(B) If to Debtor: Coast Hotels and Casinos, Inc.
4500 W. Tropicana Avenue
Las Vegas, Nevada 89103
Attention: Harlan Braaten, President
Telecopier: ________________
with copies to: Coast Resorts, Inc.
4000 W. Flamingo Road
Las Vegas, Nevada 89103
Attention: Barry Lieberman
Telecopier: (702) 351-3515
or to such other address as each party may designate for itself by like notice
given in accordance with this Paragraph (and Debtor shall be authorized to
designate another address for Coast Resorts, Inc.). Any written notice that is
not sent in conformity with the provisions hereof shall nevertheless be
effective on the date that such notice is actually received by the noticed
party.
This Security Agreement and the other Loan Documents, together with all other
instruments, agreements and certificates executed by the parties in connection
therewith or with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
inducements, whether express or implied, oral or written.
This Security Agreement has been delivered at, and shall be effective when
accepted by Secured Party in Atlanta, Georgia. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of Nevada.
Debtor waives (i) presentment, demand and protest and notice of presentment,
protest, default, non payment, maturity, release, compromise, settlement,
extension or renewal of any or all guaranties at any time held by Secured Party
on which Debtor may in any way be liable and hereby ratifies and confirms
whatever Secured Party may do in this regard; (ii) any right Debtor may have
upon payment in full of the Obligations to require Secured Party to terminate
its security interest in the Collateral or in any other property of Debtor until
termination of this Security Agreement in accordance with its terms and the
execution by Debtor, and by any person whose loans to Debtor are used in whole
or in part to satisfy the Obligations, of any agreement indemnifying Secured
Party from any loss or damage Secured Party may incur as the result of
dishonored checks or other items of payment received by Secured Party from
Debtor; and (iii) notice of acceptance hereof.
15. SPECIAL PROVISIONS.
Prepayment of the obligations under any Schedule shall be permitted as set forth
in such Schedule.
7 of 8
<PAGE> 8
Dated as of October 24, 1996
Secured Party: Debtor:
THE CIT GROUP/EQUIPMENT FINANCING, INC. COAST HOTELS AND CASINOS, INC.
By /s/ J.E. Palmer By /s/ Harlan Braaten
------------------------------- -------------------------------
J.E. Palmer
Senior Credit Operations
Title Manager Title President & CEO
---------------------------- -----------------------------
8 of 8
<PAGE> 1
EXHIBIT 10.34
Amendment No. 1 dated as of December 27, 1996 (the "Amendment") to Master
Security Agreement dated as of October 24, 1996
(the "Master Security Agreement")
between the CIT Group/Equipment Financing, Inc. as
Secured Party, and Coast Hotels and Casinos, Inc. as Debtor
Secured Party and Debtor desire, pursuant to the terms hereof, to amend the
Master Security Agreement as follows:
1. Notwithstanding anything to the contrary contained in the Master Security
Agreement, the parties agree that each Schedule executed in accordance with
the Master Security Agreement shall: (a) incorporate all of the terms and
conditions of the Master Security Agreement, (b) contain such additional
terms that the parties shall agree upon and, (c) constitute an agreement
separate and distinct from the Master Security Agreement and any other
Schedule.
2. In the event of a conflict between the provisions of the Master Security
Agreement and a Schedule, the provisions of the Schedule shall prevail with
respect to that Schedule.
3. This Amendment shall govern any and all Schedules executed in accordance
with the Master Security Agreement whether now or hereafter executed.
4. Miscellaneous
(a) All capitalized terms used herein and not otherwise defined shall have
the same definitions as set forth in the Master Security Agreement.
(b) This Amendment shall be binding on the parties hereto and their
respective successors and assigns.
(c) This Amendment may be executed in counterparts with the same effect as
if all parties had signed the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
day and year first above written.
Secured Party: Debtor:
The CIT Group/Equipment Coast Hotels & Casinos, Inc.
Financing, Inc.
By: /s/ J.E. PALMER By: /s/ Gage Parrish
------------------------------------ --------------------------
Title: SENIOR CREDIT OPERATIONS MANAGER Title: VP & CFO
--------------------------------- -------------------------
<PAGE> 1
EXHIBIT 10.35
STANDARD FORM OF AGREEMENT
BETWEEN OWNER AND CONTRACTOR
where the basis of payment is the
COST OF THE WORK PLUS A FEE
with or without a Guaranteed Maximum Price
1987 EDITION
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN ATTORNEY IS
ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION.
The 1987 Edition of AIA Document A201, General Conditions of the Contract for
Construction, is adopted in this document by reference. Do not use with other
general conditions unless this document is modified.
This document has been approved and endorsed by The Associated General
Contractors of America.
AGREEMENT
made as of the ninth day of February in the year of Nineteen Hundred and
Ninety-Nine
<TABLE>
<S> <C>
BETWEEN the Owner: COAST RESORTS, INC.
4500 West Tropicana
Las Vegas, NV 89103
and the Contractor: J.A. TIBERTI CONSTRUCTION CO., INC.
1806 Industrial Road
Las Vegas, NV 89102
the Project is: BUFFET RESTAURANT - TENANT IMPROVEMENT
The Orleans Hotel & Casino
4500 West Tropicana Avenue
Las Vegas, NV 89103
the Architect is: LEO A. DALY
911 Wilshire Blvd., Suite 2000
Los Angeles, CA 90017
</TABLE>
The Owner and Contractor agree as set forth below.
<PAGE> 2
ARTICLE 1
THE CONTRACT DOCUMENTS
1. The Contract Documents consist of this Agreement, Conditions of the
Contract (General, Supplementary, and other Conditions), Drawings,
Specifications, addenda issued prior to execution of this Agreement, other
documents listed in this Agreement and Modifications issued after execution
of this Agreement; these form the Contract, and are as fully a part of the
Contract as if attached to this Agreement or repeated herein. The Contract
represents the entire and integrated agreement between the parties hereto
and supersedes prior negotiations, representations or agreements, either
written or oral. An enumeration of the Contract Documents, other than
Modifications, appears in Article 16. If anything in the other Contract
Documents is inconsistent with this Agreement, this Agreement shall govern.
ARTICLE 2
THE WORK OF THIS CONTRACT
2.1 The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract
Documents to be the responsibility of others, or as follows:
See Attachment "A"
ARTICLE 3
RELATIONSHIP OF THE PARTIES
3.1 The Contractor accepts the relationship of trust and confidence established
by this Agreement and covenants with the Owner to cooperate with the
Architect and utilize the Contractor's best skill, efforts and judgment in
furthering the interests of the Owner; to furnish efficient business
administration and supervision; to make best efforts to furnish at all
times an adequate supply of workers and materials; and to perform the Work
in the best way and most expeditious and economical manner consistent with
the interests of the Owner. The Owner agrees to exercise best efforts to
enable the Contractor to perform the Work in the best way and most
expeditious manner by furnishing and approving in a timely way information
required by the Contractor and making payments to the Contractor in
accordance with requirements of the Contract Documents.
ARTICLE 4
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
4.1 The date of commencement is the date from which the Contract Time of
Subparagraph 4.2 is measured; it shall be the date of this Agreement, as
first written above, unless a different date is stated below or provision
is made for the date to be fixed in a notice to proceed issued by the
Owner on January 2, 1989.
4.2 The Contractor shall achieve Final Completion of the entire Work not later
than: May 14, 1999 if required by the Owner, the Contract Time will be
negotiated with and approved by the Contractor, subject to adjustments of
this Contract Time as provided in the Contract Documents.
THERE ARE NO PROVISIONS FOR LIQUIDATED DAMAGES IN THIS CONTRACT.
<PAGE> 3
ARTICLE 5
CONTRACT SUM
5.1 The Owner shall pay the Contractor in current funds for the
Contractor's performance of the Contract the Contract Sum consisting
of the Cost of the Work as defined in Article 7 and the Contractor's
Fee determined as follows: Per Attachment "B"
The Contractor's fee shall be 7% of the cost of the work. The
Contractor's fee shall be adjusted for changes in the work at 7% of
the cost of the changes.
5.2 GUARANTEED MAXIMUM PRICE
5.2.1 The sum of the Cost of the Work and the Contractor's Fee is
guaranteed by the Contractor not to exceed: See Attachment "B"
subject to additions and deductions by Change Order as provided in
the Contract Documents. Such maximum sum is referred to in the
Contract Documents as the Guaranteed Maximum Price. Costs which would
cause the Guaranteed Maximum Price to be exceeded shall be paid by
the Contractor without reimbursement by the Owner.
5.2.2 The Guaranteed Maximum Price is based upon the following alternates,
if any, which are described in the Contract Documents and are hereby
accepted by the Owner:
5.2.3 The amounts agreed to for unit prices, if any, are as follows:
NONE
ARTICLE 6
CHANGES IN THE WORK
6.1 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
6.1.1 Adjustments to the Guaranteed Maximum Price on account of changes in
the Work may be determined by any of the methods listed in
Subparagraph 7.3.3 of the General Conditions.
6.1.2 In calculating adjustments to subcontracts (except those awarded with
the Owner's prior consent on the basis of cost plus a fee), the terms
"cost" and "fee" as used in clause 7.3.3.3 of the General Conditions
and the terms "costs" and "a reasonable allowance for overhead and
profit" as used in Subparagraph 7.3.6 of the General Conditions shall
have the meanings assigned to them in the General Conditions and
shall not be modified by Articles 5, 7 and 8 of this Agreement.
Adjustments to subcontracts awarded with the Owner's prior consent on
the basis of cost plus a fee shall be calculated in accordance with
the terms of those subcontracts.
6.1.3 In calculating adjustments to this Contract, the terms "cost" and
"costs" as used in the above-referenced provisions of the General
Conditions shall mean the Cost of the Work as defined in
<PAGE> 4
Article 7 of this Agreement and the terms "fee" and "a reasonable
allowance for overhead and profit" shall mean the Contractor's Fee as
defined in Paragraph 5.1 of this Agreement.
6.3 ALL CONTRACTS
6.3.1 If no specific provision is made in Paragraph 5.1 for adjustment of
the Contractor's Fee in the case of changes in the Work, or if the
extent of such changes is such, in the aggregate, that application of
the adjustment provisions of Paragraph 5.1 will cause substantial
inequity to the Owner or Contractor, the Contractor's Fee shall be
equitably adjusted on the basis of the Fee established for the
original Work.
ARTICLE 7
COSTS TO BE REIMBURSED
7.1 The term Cost of the Work shall mean costs reasonably and necessarily
incurred by the Contractor in the proper performance of the Work. Such
costs shall be at rates not higher than the standard paid at the place
of the Project except with prior consent of the Owner. The Cost of the
Work shall include only the items set forth in this Article 7.
7.1.1 LABOR COSTS
7.1.1.1 Reasonable wages of construction workers directly employed by the
Contractor to perform the construction of the Work at the site or,
with the Owner's agreement, at off-site workshops.
7.1.1.2 Reasonable wages or salaries of the Contractor's supervisory and
administrative personnel when stationed at the site with the Owner's
agreement. (if it is intended that the wages or salaries of certain
personnel stationed at the Contractor's principal or other offices
shall be included in the Cost of the Work, identify in Article 14
the personnel to be included and whether for all or only part of their
time.)
7.1.1.3 Reasonable wages and salaries of the Contractor's supervisory or
administrative personnel engaged, at factories, workshops or on the
road, in expediting the production or transportation of materials or
equipment required of the Work, but only for that portion of their
time required of the Work.
7.1.1.4 Costs paid or incurred by the Contractor for taxes, insurance,
contributions, assessments and benefits required by law or collective
bargaining agreements and, for personnel not covered by such
agreements, customary benefits such as sick leave, medical and health
benefits, holidays, vacations and pension, provided such costs are
based on wages and salaries included in the Cost of the Work under
Clauses 7.1.1.1 through 7.1.1.3.
7.1.2 SUBCONTRACT COSTS
Payments made by the Contractor to Subcontractors in accordance with
the requirements of the subcontracts.
7.1.3 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
7.1.3.1 Costs, including transportation, of materials and equipment
incorporated or to be incorporated in the completed construction.
7.1.3.2 Costs of materials described in the preceding Clause 7.1.3.1 in excess
of those actually installed but required to provide reasonable
allowance for waste and for spoilage. Unused excess materials, if any,
shall be handed over to the Owner at the completion of the Work or, at
the
<PAGE> 5
Owner's option, shall be sold by the Contractor; amounts realized, if
any, from such sales shall be credited to the Owner as a deduction
from the Cost of the Work.
7.1.4 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND
RELATED ITEMS
7.1.4.1 Reasonable costs, including transportation, installation, maintenance,
dismantling and removal of materials, supplies, temporary facilities,
machinery, equipment, and hand tools not customarily owned by the
construction workers, which are provided by the Contractor at the site
and fully consumed in the performance of the Work; and cost less
salvage value on such items if not fully consumed, whether sold to
others or retained by the Contractor. Cost for items previously used
by the Contractor shall mean fair market value.
7.1.4.2 Reasonable rental charges for temporary facilities, machinery,
equipment, and hand tools not customarily owned by the construction
workers, which are provided by the Contractor at the site, whether
rented from the Contractor or others, and costs of transportation,
installation, minor repairs and replacements, dismantling and removal
thereof. Rates and quantities of equipment rented shall be subject to
the Owner's prior approval.
7.1.4.3 Costs of removal of debris from the site.
7.1.4.4 Costs of long-distance telephone calls, postage and parcel delivery
charges, telephone service at the site incurred as a direct result of
the contractor's work on the project.
7.1.4.5 That portion of the reasonable travel and subsistence expenses of the
Contractor's personnel incurred while traveling in discharge of duties
connected with the Work.
7.1.5 MISCELLANEOUS COSTS
7.1.5.1 That portion directly attributable to this Contract of premiums for
insurance and bonds.
7.1.5.2 Sales, use or similar taxes imposed by a governmental authority which
are related to the Work and for which the Contractor is liable.
7.1.5.3 Fees and assessments for the building permit and for other permits,
licenses and inspections for which the Contractor is required by the
Contract documents to pay.
7.1.5.4 Fees of testing laboratories for tests required by the Contract
Documents, except those related to defective or nonconforming Work for
which reimbursement is excluded by Subparagraph 13.5.3 of the General
Conditions or other provisions of the Contract Documents and which do
not fall within the scope of Subparagraphs 7.2.2 through 7.2.4 below.
7.1.5.5 Royalties and license fees paid for the use of a particular design,
process or product required by the Contract Documents; the cost of
defending suits or claims for infringement of patent rights arising
from such requirement by the Contract Documents; payments made in
accordance with legal judgments against the Contractor resulting from
such suits or claims and payments of settlements made with the Owner's
consent; provided, however, that such costs of legal defenses,
judgments and settlements shall not be included in the calculation of
the Contractor's Fee or of a Guaranteed Maximum Price, if any, and
provided that such royalties, fees and costs are not executed by the
last sentence of Subparagraph 3.17.1 of the General Conditions or
other provisions of the Contract Documents.
7.1.5.6 Deposits lost for causes other than the Contractor's fault or
negligence.
<PAGE> 6
7.1.5.7 Certain general condition items specified by the owner requiring
little coordination by the contractor, such as bills, portable toilet
facilities, office supplies, etc. shall be reimbursed, but without
fee.
7.1.6 OTHER COSTS
7.1.6.1 Other costs incurred in the performance of the Work if and to the
extent approved in advance in writing by the Owner.
7.2 EMERGENCIES: REPAIRS TO DAMAGED, DEFECTIVE OR NONCONFORMING WORK
The Cost of the Work shall also include costs described in Paragraph
7.1 which are incurred by the Contractor:
7.2.1 In taking action to prevent threatened damage, injury or loss in case
of an emergency affecting the safety of persons and property, as
provided in Paragraph 10.3 of the General Conditions.
7.2.2. In repairing or correcting Work damaged or improperly executed by
construction workers in the employ of the Contractor, provided such
damage or improper execution did not result from the fault or
negligence of the Contractor or the Contractor's foremen, engineers or
superintendents, or other supervisory, administrative or managerial
personnel of the Contractor.
7.2.3 In repairing damaged work other than that described in Subparagraph
7.2.2, provided such damage did not result from the fault or
negligence of the Contractor or the Contractor's personnel, and only
to the extent that the cost of such repairs is not recoverable by the
Contractor from others and the Contractor is not compensated therefor
by insurance or otherwise.
7.2.4 In correcting defective or nonconforming Work performed or supplied by
a Subcontractor or material supplier and not corrected by them,
provided such defective or nonconforming Work did not result from the
fault or neglect of the Contractor or the Contractor's personnel
adequately to supervise and direct the Work of the Subcontractor or
material supplier, and only to the extent that the cost of correcting
the defective or nonconforming Work is not recoverable by the
Contractor from the Subcontractor or material supplier.
ARTICLE 8
COSTS NOT TO BE REIMBURSED
8.1 The Cost of the Work shall not include:
8.1.1 Salaries and other compensation of the Contractor's personnel
stationed at the Contractor's principal office or offices other than
the site office, except as specifically provided in Clauses 7.1.1.2
and 7.1.1.3 or as may be provided in Article 14.
8.1.2 Expenses of the Contractor's principal office and offices other than
the site office.
8.1.3 Overhead and general expenses, except as may be expressly included in
Article 7.
8.1.4 The Contractor's capital expenses, including interest on the
Contractor's capital employed for the Work.
8.1.5 Rental costs of machinery equipment, except as specifically provided
in Clause 7.1.4.2.
8.1.6 Except as provided in Subparagraphs 7.2.2 through 7.2.4 and Paragraph
13.5 of this Agreement, costs due to the fault or negligence of the
Contractor, Subcontractors, anyone directly or indirectly employed by
any of them, or for whose acts any of them may be liable, including
but not limited to
<PAGE> 7
costs for the correction of damaged, defective or nonconforming Work,
disposal and replacement of materials and equipment incorrectly
ordered or supplied, and making good damage to property not forming
part of the Work.
8.1.7 Any cost not specifically and expressly described in Article 7.
8.1.8 Costs which would cause the Guaranteed Maximum Price, if any, to be
exceeded.
8.1.9 Any claims for impact or escalation that were not immediately brought
to the attention of the owner during the course of the project, and
approved by the owner.
ARTICLE 9
DISCOUNTS, REBATES AND REFUNDS
9.1 Cash discounts obtained on payments made by the contractor shall
accrue to the Owner if (1) before making the payment, the Contractor
included them in an Application for Payment and received payment
therefor from the Owner, or (2) the Owner has deposited funds with the
Contractor with which to make payments; otherwise, cash discounts
shall accrue to the Contractor. Trade discounts, rebates, refunds and
amounts received from sales of surplus materials and equipment shall
accrue to the Owner, and the Contractor shall make provisions so that
they can be secured.
9.2 Amounts which accrue to the Owner in accordance with the provisions
of Paragraph 9.1 shall be credited to the Owner as a deduction from
the Cost of the Work.
ARTICLE 10
SUBCONTRACTS AND OTHER AGREEMENTS
10.1 Those portions of the Work that the Contractor does not customarily
perform with the Contractor's own personnel shall be performed under
subcontracts or by other appropriate agreements with the Contractor.
The Contractor shall obtain bids from Subcontractors and from
suppliers of materials or equipment fabricated especially for the Work
and shall deliver such bids to the Architect. The Owner will then
determine, with the advice of the Contractor and subject to the
reasonable objection of the Architect, which bids will be accepted.
The Owner may designate specific persons or entities from whom the
Contractor shall obtain bids; however, if a Guaranteed Maximum Price
has been established, the Owner may not prohibit the Contractor from
obtaining bids from others. The Contractor shall not be required to
contract with anyone to whom the Contractor has reasonable objection.
10.3 Subcontracts or other agreements shall conform to the payment
provisions of Paragraphs 12.7 and 12.8, and shall not be awarded on
the basis of cost plus a fee without the prior consent of the Owner.
ARTICLE 11
ACCOUNTING RECORDS
11.1 The Contractor shall keep full and detailed accounts and exercise such
controls as may be necessary for proper financial management under
this Contract; the accounting and control systems shall be
satisfactory to the Owner. The Owner and the Owner's accountants shall
be afforded access to the Contractor's records, books, correspondence,
instructions, drawings, receipts, subcontracts, purchase orders,
vouchers, memoranda and other data relating to this Contract, and the
Contractor shall preserve these for a period of three years after
final payment, or for such longer period as may be required by law.
<PAGE> 8
ARTICLE 12
PROGRESS PAYMENTS
12.1 Based upon Applications for Payment submitted to the Architect by the
Contractor and Certificates for Payment issued by the Architect, the
Owner shall make progress payments on account of the Contract Sum to
the Contractor as provided below and elsewhere in the Contract
Documents.
12.2 The period covered by each Application for Payment shall be one
calendar month ending on the last day of the month, or as follows:
12.3 Provided an Application of Payment is received by the Architect not
later than the FIFTEENTH (15th) day of a month, the Owner shall make
payment to the Contractor not later than the THIRTIETH (30th) day of
the SAME month. If an Application for Payment is received by the
Architect after the application date fixed above, payment shall be
made by the Owner not later than FIFTEEN (15) days after the
Architect receives the Application for Payment.
12.4 With each Application for Payment the Contractor shall submit
payrolls, petty cash accounts, receipted invoices or invoices with
check vouchers attached, and any other evidence required by the Owner
or Architect to demonstrate that cash disbursements already made by
the Contractor on account of the Cost of the Work equal or exceed (1)
progress payments already received by the Contractor; less (2) that
portion of those payments attributable to the Contractor's Fee; plus
(3) payrolls for the period covered by the present Application for
Payment; plus (4) retainage provided in Subparagraph 12.5.4, if any,
applicable to prior progress payments.
12.5 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
12.5.1 Each Application for Payment shall be based upon the most recent
schedule of values submitted by the Contractor in accordance with the
Contract Documents. The schedule of values shall allocate the entire
Guaranteed Maximum Price among the various portions of the Work,
except that the Contractor's Fee shall be shown as a single separate
item. The schedule of values shall be prepared in such form and
supported by such data to substantiate its accuracy as the Architect
may require. This schedule, unless objected to by the Architect,
shall be used as a basis for reviewing the Contractor's Applications
for Payment.
12.5.2 Applications for Payment shall show the percentage completion of each
portion of the Work at the end of the period covered by the
Application for Payment. The percentage completion shall be the
lesser of (1) the percentage of that portion of the Work which has
actually been completed or (2) the percentage obtained by dividing
(a) the expense which has actually been incurred by the Contractor on
account of that portion of the Work for which the Contractor has made
or intends to make actual payment prior to the next Application for
Payment by (b) the share of the Guaranteed Maximum Price allocated to
that portion of the Work in the schedule of values.
12.5.3 Subject to other provisions of the Contract Documents, the amount of
each progress payment shall be computed as follows:
12.5.3.1 Take that portion of the Guaranteed Maximum Price properly
allocable to the completed Work as determined by multiplying the
percentage completion of each portion of the Work by the share of
the Guaranteed Maximum Price allocated to that portion of the Work
in the schedule of values.
<PAGE> 9
12.5.3.2 Add that portion of the Guaranteed Maximum Price properly allocable to
materials and equipment delivered and suitably stored at the site for
subsequent incorporation in the Work or, if approved in advance by the
Owner, suitably stored off the site at a location agreed upon in
writing.
12.5.3.3 Add the Contractor's Fee, less retainage of ZERO PERCENT (0%). The
Contractor's Fee shall be computed upon the Cost of the Work described
in the two preceding Clauses at the rate stated in paragraph 5.1 or,
if the Contractor's Fee is stated as a fixed sum in that Paragraph,
shall be an amount which bears the same ratio to that fixed-sum Fee as
the Cost of the Work in the two preceding Clauses bears to a
reasonable estimate of the probable Cost of the Work upon its
completion.
12.5.3.4 Subtract the aggregate of previous payments made by the Owner.
12.5.3.5 Subtract the shortfall, if any, indicated by the Contractor in the
documentation required by Paragraph 12.4 to substantiate prior
Applications for Payment, or resulting from errors subsequently
discovered by the Owner's accountants in such documentation.
12.5.3.6 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment as provided in Paragraph 9.5 of
the General Conditions.
12.5.4 Additional retainage, if any shall be as follows:
N/A
12.7 Except with the Owner's prior approval, payments to Subcontractors
included in the Contractor's Applications for Payment shall not exceed
an amount for each Subcontractor calculated as follows:
12.7.1 Take that portion of the Subcontract Sum properly allocable to
completed Work as determined by multiplying the percentage completion
of each portion of the Subcontractor's Work by the share of the total
Subcontract Sum allocated to that portion in the Subcontractor's
schedule of values, less retainage of TEN PERCENT (10%). Pending final
determination of amounts to be paid to the Subcontractor for changes
in the Work, amounts not in dispute may be included as provided in
Subparagraph 7.3.7 of the General Conditions even though the
Subcontract Sum has not yet been adjusted by Change Order.
12.7.2 Add that portion of the Subcontract Sum properly allocable to
materials and equipment delivered and suitably stored at the site for
subsequent incorporation in the Work or, if approved in advance by the
Owner, suitably stored off the site at a location agreed upon in
writing, less retainage of TEN PERCENT (10%).
12.7.3 Subtract the aggregate of previous payments made by the Contractor to
the Subcontractor.
12.7.4 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment by the Owner to the Contractor for
reasons which are the fault of the Subcontractor.
12.7.5 Add, upon Substantial Completion of the entire Work of the Contractor,
a sum sufficient to increase the total payments to the Subcontractor
to ONE HUNDRED PERCENT (100%) of the Subcontract Sum, less amounts, if
any, for incomplete Work and unsettled claims; and, if final
completion of the entire Work is thereafter materially delayed through
no fault of the Subcontractor, add any additional amounts payable on
account of Work of the Subcontractor in accordance with Subparagraph
9.10.3 of the General Conditions. The Subcontract Sum is the total
amount stipulated in the subcontract to be paid by the Contractor to
the Subcontractor for the Subcontractor's performance of the
subcontract.
<PAGE> 10
12.7.6 WHEN THE WORK IS 50% COMPLETE, AS A PERCENTAGE OF THE BILLING TO
GUARANTEED MAXIMUM PRICE, THE OWNER, AT HIS DISCRETION, MAY REDUCE
SUBCONTRACTOR RETAINAGE TO 5% OF THE SUBCONTRACT AMOUNT.
12.8 Except with the Owner's prior approval, the Contractor shall not make
advance payments to suppliers for materials or equipment which have
not been delivered and stored at the site.
12.9 In taking action on the Contractor's Applications for Payment, the
Architect shall be entitled to rely on the accuracy and completeness
of the information furnished by the Contractor and shall not be deemed
to represent that the Architect has made a detailed examination, audit
or arithmetic verification of the documentation submitted in
accordance with Paragraph 12.4 or other supporting data; that the
Architect has made exhaustive or continuous on-site inspections or
that the Architect has made examinations to ascertain how or for what
purposes the Contractor has used amounts previously paid on account of
the Contract. Such examinations, audits and verifications, if required
by the Owner, will be performed by the Owner's accountants acting in
the sole interest of the Owner.
ARTICLE 13
FINAL PAYMENT
13.1 Final payment shall be made by the Owner to the Contractor when (1)
the Contract has been fully performed by the Contractor except for the
Contractor's responsibility to correct defective or nonconforming
Work, as provided in Subparagraph 12.2.2 of the General Conditions,
and to satisfy other requirements, if any, which necessarily survive
final payment; (2) a final Application for Payment and a final
accounting for the Cost of the Work have been submitted by the
Contractor and reviewed by the Owner's representative and accountants;
and (3) a final Certificate for Payment has then been issued by the
Architect; such final payment shall be made by the Owner not more than
30 days after issuance of the Architect's final Certificate for
Payment, or as follows:
13.2 The amount of the final payment shall be calculated as follows:
13.2.1 Take the sum of the Cost of the Work substantiated by the Contractor's
final accounting and the Contractor's Fee; but not more than the
Guaranteed Maximum Price, if any.
13.2.2 Subtract amounts, if any, for which the Architect withholds, in whole
or in part, a final Certificate for Payment as provided in
Subparagraph 9.5.1 of the General Conditions or other provisions of
the Contract Documents.
13.2.3 Subtract the aggregate of previous payments made by the Owner. If the
aggregate of previous payments made by the Owner exceeds the amount
due the Contractor, the Contractor shall reimburse the difference to
the Owner.
13.3 The Owner's representatives and accountants will review and report in
writing on the Contractor's final accounting within 30 days after
delivery of the final accounting to the Architect by the Contractor.
Based upon such Cost of the Work as the Owner's accountants report to
be substantiated by the Contractor's final accounting, and provided
the other conditions of Paragraph 13.1 have been met, the Architect
will, within seven days after receipt of the written report of the
Owner's accountants, either issue to the Owner a final Certificate for
Payment with a copy to the Contractor, or notify the Contractor and
Owner in writing of the Architect's reasons for withholding a
certificate as provided in Subparagraph 9.5.1 of the General
Conditions. The time periods stated in this Paragraph 13.3 supersede
those stated in Subparagraph 9.4.1 of the General Conditions.
<PAGE> 11
13.4 If the Owner's accountants report the Cost of the Work as
substantiated by the Contractor's final accounting to be less than
claimed by the Contractor, the Contractor shall be entitled to demand
arbitration of the disputed amount without a further decision of the
Architect. Such demand for arbitration shall be made by the
Contractor within 30 days after the Contractor's receipt of a copy of
the Architect's final Certificate for Payment; failure to demand
arbitration within this 30-day period shall result in the
substantiated amount reported by the Owner's accountants becoming
binding on the Contractor. Pending a final resolution by arbitration,
the Owner shall pay the Contractor the amount certified in the
Architect's final Certificate for Payment.
13.5 If, subsequent to final payment and at the Owner's request, the
Contractor incurs costs described in Article 7 and not excluded by
Article 8 to correct defective or nonconforming Work, the Owner shall
reimburse the Contractor such costs and the Contractor's Fee
applicable thereto on the same basis as if such costs had been
incurred prior to final payment, but not in excess of the Guaranteed
Maximum Price, if any. If the Contractor has participated in savings
as provided in Paragraph 5.2, the amount of such savings shall be
recalculated and appropriate credit given to the Owner in determining
the net amount to be paid by the Owner to the Contractor.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 Where reference is made in this Agreement to a provision of the
General Conditions or another Contract Document, the reference refers
to that provision as amended or supplemented by other provisions of
the Contract Documents.
14.2 Payments due and unpaid under the Contract shall bear interest from
the date payment is due at the rate stated below, or in the absence
thereof, at the legal rate prevailing from time to time at the place
where the Project is located.
WELLS FARGO BANK, LAS VEGAS, NV PRIME RATE
ARTICLE 15
TERMINATION OR SUSPENSION
15.1 The Contract may be terminated by the Contractor as provided in
Article 14 of the General Conditions; however, the amount to be paid
to the Contractor under Subparagraph 14.1.2 of the General Conditions
shall not exceed the amount the Contractor would be entitled to
receive under Paragraph 15.3 below.
15.2 If a Guaranteed Maximum Price is established in Article 5, the
Contract may be terminated by the Owner for cause as provided in
Article 14 of the General Conditions; however, the amount, if any, to
be paid to the Contractor under Subparagraph 14.2.4 of the General
Conditions shall not cause the Guaranteed Maximum Price to be
exceeded, nor shall it exceed the amount the Contractor would be
entitled to receive under Paragraph 15.3 below.
15.3 If no Guaranteed Maximum Price is established in Article 5, the
Contract may be terminated by the Owner for cause as provided in
Article 14 of the General Conditions; however, the Owner shall then
pay the Contractor an amount calculated as follows:
15.3.1 Take the Cost of the Work incurred by the Contractor to the date of
termination.
<PAGE> 12
15.3.2 Add to the Contractor's Fee computed upon the Cost of the Work to the
date of termination at the rate stated in Paragraph 5.1 or, if the
Contractor's Fee is stated as a fixed sum in that Paragraph, an
amount which bears the same ratio to that fixed-sum Fee as the Cost
of the Work at the time of termination bears to a reasonable estimate
of the probable Cost of the Work upon its completion.
15.3.3 Subtract the aggregate of previous payments made by the Owner. The
Owner shall also pay the Contractor fair compensation, either by
purchase or rental at the election of the Owner, for any equipment
owned by the Contractor which the Owner elects to retain and which is
not otherwise included in the Cost of the Work under Subparagraph
15.3.1. To the extent that the Owner elects to take legal assignment
of subcontracts and purchase orders (including rental agreements),
the Contractor shall, as a condition of receiving the payments
referred to in this Article 15, execute and deliver all such papers
and take all such steps, including the legal assignment of such
subcontracts and other contractual rights of the Contractor, as the
Owner may require for the purpose of fully vesting in the Owner the
rights and benefits of the Contractor under such subcontracts or
purchase orders.
15.4 The Work may be suspended by the Owner as provided in Article 14 of
the General Conditions; in such case, the Guaranteed Maximum Price,
if any, shall be increased as provided in Subparagraph 14.3.2 of the
General Conditions except that the term "cost of performance of the
Contract" in that Subparagraph shall be understood to mean the Cost
of the Work and the term "profit" shall be understood to mean the
Contractor's Fee as described in Paragraphs 5.1 and 6.3 of this
Agreement.
ARTICLE 16
ENUMERATION OF CONTRACT DOCUMENTS
16.1 The Contract Documents, except for Modifications issued after
execution of this Agreement, are enumerated as follows:
16.1.1 The Agreement is this executed Standard Form of Agreement Between
Owner and Contractor, 1987 Edition, as hereby modified.
16.1.2 The General Conditions are the General Conditions of the Contract for
Construction, AIA Document A201, 1987 Edition.
16.1.3 The Supplementary and other Conditions of the Contract are those
contained as follows in the Project Manuals.
SEE ATTACHMENT "C"
16.1.4 The Specifications are those contained in the Project Manual dated as
in Paragraph 16.1.3, and are as follows:
OTHER THAN THE SPECIFICATIONS INCORPORATED INTO THE DRAWINGS, NO SEPARATE
SPECIFICATIONS WERE ISSUED.
16.1.5 The Drawings are as follows:
SEE ATTACHMENT "D"
16.1.6 The addenda, if any, are as follows:
None
Portions of Addenda relating to bidding requirements are not part of
the Contract Documents unless the bidding requirements are also
enumerated in this Article 16.
<PAGE> 13
16.1.7 Other Documents, if any, forming part of the Contract Documents are
as follows:
GENERAL CONDITIONS OF THE CONTRACT ARE MODIFIED AS FOLLOWS:
1. ARTICLE 4 -- ADMINISTRATION OF THE CONTRACT
THE OWNER SHALL PROVIDE ADMINISTRATION OF THE CONTRACT.
This agreement is entered into as of the day and year first written above and is
executed in at least three original copies of which one is to be delivered to
the Contractor, one to the Architect for use in the administration of the
Contract, and the remainder to the Owner.
OWNER CONTRACTOR
- --------------------------------------------------------------------------------
(Signature) (Signature)
MICHAEL GAUGHAN, C.E.O. TITO TIBERTI, PRESIDENT
- --------------------------------------------------------------------------------
(Printed name and title) (Printed name and title)
<PAGE> 14
ATTACHMENT "A"
THE ORLEANS HOTEL & CASINO - BUFFET EXPANSION
LIST OF EXCLUSIONS
January 4, 1999
1. All FF&E items.
2. All carpet.
3. All kitchen equipment, including installation.
4. All sound systems.
5. All surveillance system.
6. All telephone/communication systems.
7. All gaming equipment.
8. All POS systems.
9. All risk insurance.
10. All misc. signs and neon lighting.
11. All special/architectural lighting.
12. All UPS systems.
13. All blueprinting.
14. All design.
15. Any item not specifically included in our cost estimate, Attachment "B".
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COAST HOTELS
AND CASINOS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 29,426 41,595
<SECURITIES> 0 0
<RECEIVABLES> 5,616 4,301
<ALLOWANCES> 194 594
<INVENTORY> 5,085 4,912
<CURRENT-ASSETS> 54,994 60,138
<PP&E> 387,153 401,621
<DEPRECIATION> 81,733 100,369
<TOTAL-ASSETS> 366,861 367,034
<CURRENT-LIABILITIES> 47,325 44,484
<BONDS> 215,249 207,859
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 97,345 102,917
<TOTAL-LIABILITY-AND-EQUITY> 366,861 367,034
<SALES> 0 0
<TOTAL-REVENUES> 293,883 332,363
<CGS> 0 0
<TOTAL-COSTS> 197,200 209,104
<OTHER-EXPENSES> 77,107 82,874
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26,342 27,323
<INCOME-PRETAX> (4,733) 13,983
<INCOME-TAX> (1,401) 5,225
<INCOME-CONTINUING> (3,332) 8,758
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,332) 8,758
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
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