10-Q 1 cc2002q2.txt COAST CASINOS, INC. -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to _________ Commission file number 0-26922 COAST CASINOS, INC. (Exact name of registrant as specified in its charter) Nevada 88-0345704 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 4500 West Tropicana Avenue, Las Vegas, Nevada 89103 (Address of principal executive offices) (Zip code) (702) 365-7000 (Registrant's telephone number, including area code) Coast Resorts, Inc. (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Common Stock outstanding as of August 14, 2002: 1,461,178 -------------------------------------------------------------------------------- Part I - FINANCIAL INFORMATION Item 1. Financial Statements COAST CASINOS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) June 30, 2002 December 31, (unaudited) 2001 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents................... $ 29,360 $ 43,350 Accounts receivable, net.................... 7,374 6,371 Other current assets........................ 20,324 20,339 ----------- ----------- TOTAL CURRENT ASSETS........................ 57,058 70,060 PROPERTY AND EQUIPMENT, net................... 664,714 579,545 OTHER ASSETS.................................. 11,970 7,807 ----------- ----------- $ 733,742 $ 657,412 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................ $ 11,864 $ 13,138 Accrued liabilities......................... 49,062 41,061 Construction accounts payable............... 22,399 34,053 Current portion of long-term debt........... 162 148 ----------- ----------- TOTAL CURRENT LIABILITIES................... 83,487 88,400 LONG-TERM DEBT, less current portion.......... 422,979 369,376 DEFERRED INCOME TAXES......................... 22,781 19,251 DEFERRED RENT................................. 25,506 23,868 ----------- ----------- TOTAL LIABILITIES........................... 554,753 500,895 ----------- ----------- 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 1,461,178 shares outstanding.......... 15 15 Treasury stock (33,175 shares).............. (3,333) (3,333) Additional paid-in capital.................. 95,398 95,398 Retained earnings .......................... 86,909 64,437 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY.................. 178,989 156,517 ----------- ----------- $ 733,742 $ 657,412 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 1 COAST CASINOS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Six Months Ended June 30, 2002 and 2001 (dollars in thousands, except share and per share data) (unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- OPERATING REVENUES: Casino......................... $ 102,397 $ 93,963 $ 203,305 $ 188,684 Food and beverage.............. 27,588 26,442 55,563 53,135 Hotel.......................... 9,954 9,533 20,043 19,478 Other.......................... 9,767 9,148 19,114 17,934 --------- --------- --------- --------- GROSS OPERATING REVENUES..... 149,706 139,086 298,025 279,231 Less: promotional allowances... (13,251) (12,391) (26,495) (24,988) --------- --------- --------- --------- NET OPERATING REVENUES....... 136,455 126,695 271,530 254,243 --------- --------- --------- --------- OPERATING EXPENSES: Casino......................... 45,563 42,755 89,885 85,924 Food and beverage.............. 20,876 19,753 41,541 38,618 Hotel.......................... 4,089 3,872 8,074 7,655 Other.......................... 7,447 6,794 14,362 13,493 General and administrative..... 26,407 23,982 51,202 46,897 Deferred rent.................. 795 885 1,639 1,769 Depreciation and amortization.. 10,164 8,749 19,443 17,317 --------- --------- --------- --------- TOTAL OPERATING EXPENSES..... 115,341 106,790 226,146 211,673 --------- --------- --------- --------- OPERATING INCOME................. 21,114 19,905 45,384 42,570 --------- --------- --------- --------- OTHER INCOME (EXPENSES): Interest expense, net.......... (7,866) (7,701) (15,036) (15,682) Interest capitalized .......... 858 137 1,446 199 Gain (loss) on disposal of assets ...................... 7 (1,656) (311) (122) Other income .................. 2,809 -- 2,809 -- --------- --------- --------- --------- TOTAL OTHER INCOME (EXPENSES).... (4,192) (9,220) (11,092) (15,605) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES....... 16,922 10,685 34,292 26,965 Income tax provision ............ 5,833 3,659 11,820 9,280 --------- --------- --------- --------- NET INCOME....................... $ 11,089 $ 7,026 $ 22,472 $ 17,685 ========= ========= ========= ========= PER SHARE INFORMATION: Basic net income per share of common stock................ $ 7.59 $ 4.80 $ 15.38 $ 12.09 ========= ========= ========= ========= Diluted net income per share of common stock................ $ 7.46 $ 4.69 $ 15.12 $ 11.80 ========= ========= ========= ========= Basic weighted-average shares outstanding............. 1,461,178 1,463,178 1,461,178 1,463,178 ========= ========= ========= ========= Diluted weighted-average shares outstanding............. 1,486,054 1,498,593 1,486,054 1,498,593 ========= ========= ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 2 COAST CASINOS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001 (dollars in thousands) (unaudited) Six Months Ended June 30, -------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 22,472 $ 17,685 -------- -------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization.................... 19,443 17,317 Amortization of debt offering costs.............. 732 596 Loss on disposal of assets....................... 311 122 Deferred income taxes............................ 3,190 911 Deferred rent.................................... 1,639 1,769 Changes in assets and liabilities: Net (increase) decrease in accounts receivable and other assets............................. (3,992) 2,224 Net increase (decrease) in accounts payable and accrued liabilities...................... 6,727 (1,919) -------- -------- TOTAL ADJUSTMENTS.................................... 28,050 21,020 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES............ 50,522 38,705 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net of amounts in construction accounts payable...................... (117,513) (37,697) Proceeds from sale of assets......................... 958 9,415 -------- -------- NET CASH USED IN INVESTING ACTIVITIES................ (116,555) (28,282) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt, including original issue premium, net of financing costs..... 103,191 49,071 Principal payments on long-term debt................. (148) (2,508) Proceeds from borrowings under bank line of credit... 56,500 6,000 Repayments of borrowings under bank line of credit... (107,500) (68,000) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.. 52,043 (15,437) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (13,990) (5,014) CASH AND CASH EQUIVALENTS, at beginning of period...... 43,350 43,560 -------- -------- CASH AND CASH EQUIVALENTS, at end of period............ $ 29,360 $ 38,546 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. 3 COAST CASINOS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Year Ended December 31, 2001 and For the Six Months Ended June 30, 2002 (dollars in thousands, except share data)
Common Stock Additional ----------------- Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total --------- ------ -------- -------- -------- -------- Balances at December 31, 2000.. 1,463,178 $ 15 $ 95,398 $ 28,006 $ (3,118) $120,301 Repurchase of common stock... (2,000) -- -- -- (215) (215) Net income................... -- -- -- 36,431 -- 36,431 --------- ------ -------- -------- -------- -------- Balances at December 31, 2001.. 1,461,178 15 95,398 64,437 (3,333) 156,517 Net income (unaudited)....... -- -- -- 22,472 -- 22,472 --------- ------ -------- -------- -------- -------- Balances at June 30, 2002 (unaudited).................. 1,461,178 $ 15 $ 95,398 $ 86,909 $ (3,333) $178,989 ========= ====== ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 COAST CASINOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BACKGROUND INFORMATION AND BASIS OF PRESENTATION Background Information Coast Casinos, Inc. ("Coast Casinos" or the "Company"), is a Nevada corporation and serves as a holding company for Coast Hotels and Casinos, Inc. ("Coast Hotels"), which is also a Nevada corporation. Coast Casinos changed its name from Coast Resorts, Inc. on July 2, 2002. Through its wholly owned subsidiary, Coast Hotels, the Company owns and operates four Las Vegas hotel-casinos: o The Suncoast Hotel and Casino, which is located in the west end of the Las Vegas valley. o The Orleans Hotel and Casino, which is located approximately one mile west of the Las Vegas Strip on Tropicana Avenue. o Gold Coast Hotel and Casino, which is located approximately one mile west of the Las Vegas Strip on Flamingo Road. o Barbary Coast Hotel and Casino, which is located on the Las Vegas Strip. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments and normal recurring accruals considered necessary for a fair presentation of the results for the interim periods have been included. The interim results reflected in the unaudited consolidated financial statements are not necessarily indicative of expected results for the full year. 5 COAST CASINOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - LONG-TERM DEBT Long-term debt consists of the following as of June 30, 2002 and December 31, 2001: June 30, December 31, 2002 2001 ----------- ----------- (in thousands) 9.5% senior subordinated notes due April 2009, with interest payable semiannually on April 1 and October 1, including unamortized original issue premium of $4,765 in 2002 and $0 in 2001................................... $ 329,765 $ 225,000 Senior secured credit facility due September 2004, collateralized by substantially all of the assets of Coast Hotels and Casinos, Inc................. 93,000 144,000 Other notes payable................................ 376 524 ----------- ----------- 423,141 369,524 Less: current portion.............................. 162 148 ----------- ----------- $ 422,979 $ 369,376 =========== =========== In March 1999, Coast Hotels issued $175.0 million principal amount of 9.5% senior subordinated notes with interest payable on April 1 and October 1 beginning October 1, 1999 and entered into a $75.0 million senior secured credit facility due 2004 to facilitate a refinancing. Availability under the credit facility was increased to $200.0 million in September 1999, subject to automatic reductions in availability from September 2001 through June 2004, as described below. Coast Casinos is a guarantor of the indebtedness under both of these debt agreements. Borrowings under the credit facility bear interest, at our option, at a premium over the one-, two-, three- or six-month London Interbank Offered Rate ("LIBOR"). The premium varies depending on Coast Hotels' ratio of total debt to EBITDA and can vary between 125 and 250 basis points. As of June 30, 2002, the premium over LIBOR was 1.75% (175 basis points) and the interest rate was 3.58%. For the six months ended June 30, 2002, the weighted average interest rate for the senior secured credit facility was 3.62%. Coast Hotels incurs a commitment fee, payable quarterly in arrears, on the unused portion of the credit facility. This variable fee is currently at a rate of 0.375% per annum times the average unused portion of the facility. The availability under the senior secured credit facility was reduced by $6.0 million to $194.0 million on September 30, 2001, by $6.0 million to $188.0 million on December 31, 2001, by $6.0 million to $182.0 million on March 31, 2002 and by $6.0 million to $176.0 million on June 30, 2002. The quarterly reduction will increase to $8.5 million on each of September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003; and to $11.5 million on each of September 30, 2003, December 31, 2003, March 31, 2004 and June 30, 2004. As of June 30, 2002, Coast Hotels had $83.0 million of availability under the credit facility. On February 2, 2001, Coast Hotels issued $50.0 million additional principal amount of senior subordinated notes. The net proceeds of approximately $49.1 million were used to reduce borrowings under the senior secured credit facility. On March 19, 2002, Coast Hotels issued $100.0 million additional principal amount of senior subordinated notes and received a $5.0 million original issue premium in connection with the issuance. The net proceeds of approximately $103.2 million were used to reduce borrowings under the credit facility. The notes that were issued in 2001 and 2002 were issued under the same indenture and have the same terms, interest rate and maturity date as the $175.0 million principal amount of senior subordinated notes issued in 1999. 6 COAST CASINOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - LONG-TERM DEBT (continued) The loan agreement governing the senior secured credit facility contains covenants that, among other things, limit the ability of Coast Hotels to pay dividends or make advances to Coast Casinos, to make certain capital expenditures, to repay certain existing indebtedness, to incur additional indebtedness or to sell material assets of Coast Hotels. Additionally, the loan agreement requires that Coast Hotels maintain certain financial ratios with respect to its leverage and fixed charge coverage. The agreement was amended in December 2001 and in March 2002 to increase the amount of certain capital expenditures that may be made. Coast Hotels is also subject to certain covenants associated with the indenture governing the senior subordinated notes, including, in part, limitations on certain restricted payments, the incurrence of additional indebtedness and asset sales. At June 30, 2002, Coast Hotels was in compliance with all covenants and required ratios. On April 2, 2002, Coast Hotels entered into an interest rate swap agreement with a member of Coast Hotels' bank group wherein $100.0 million notional amount of Coast Hotels' fixed rate debt was converted to a floating rate. The fixed rate paid to Coast Hotels was 5.77% and the floating rate paid to the bank was based on six-month LIBOR and set at 2.33% for the six months ending September 30, 2002. On July 16, 2002, Coast Hotels terminated the swap agreement and received $3.75 million, including $1.0 million of accrued interest receivable. Based on quoted market values as of June 30, 2002, the estimated fair value of the swap agreement was $2.8 million. As of and for the three- and six-month periods ended June 30, 2002, the Company has recorded the estimated fair value of the swap agreement in the accompanying financial statements as an other current asset with the gain reported in other income. 7 COAST CASINOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - 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 following is a breakdown of these complimentary revenues for the three months and six months ended June 30, 2002 and 2001: Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Complimentary revenues: Food and beverage............. $ 10,636 $ 10,183 $ 21,452 $ 20,802 Hotel......................... 1,727 1,500 3,359 2,979 Other......................... 888 708 1,684 1,207 --------- --------- --------- --------- Promotional allowances...... $ 13,251 $ 12,391 $ 26,495 $ 24,988 ========= ========= ========= ========= The estimated cost of providing these complimentary services is as follows for the three months and six months ended June 30, 2002 and 2001: Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Food and beverage............. $ 10,821 $ 10,532 $ 21,566 $ 21,417 Hotel......................... 712 647 1,386 1,213 Other......................... 312 238 567 347 --------- --------- --------- --------- $ 11,845 $ 11,417 $ 23,519 $ 22,977 ========= ========= ========= ========= The cost of promotional allowances has been allocated to expense as follows for the three months and six months ended June 30, 2002 and 2001: Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Casino........................ $ 11,055 $ 10,713 $ 21,778 $ 21,146 General and administrative.... 790 704 1,741 1,831 --------- --------- --------- --------- $ 11,845 $ 11,417 $ 23,519 $ 22,977 ========= ========= ========= ========= 8 COAST CASINOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - EARNINGS PER SHARE Basic net income per common share excludes dilution and is computed by dividing income applicable to common shareholders by the weighted-average number of common shares outstanding. Diluted net income per common share is computed based on the weighted-average number of common shares outstanding after consideration of the dilutive effect of stock options. The computations of basic net income per common share and diluted net income per common share, for the three months and six months ended June 30, 2002 and 2001, are as follows (in thousands, except share and per share data): Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net income applicable to computations....................... $ 11,089 $ 7,026 $ 22,472 $ 17,685 ========= ========= ========= ========= Weighted-average common shares applicable to net income per common share....................... 1,461,178 1,463,178 1,461,178 1,463,178 Effect of dilutive securities: Stock option incremental shares.... 24,876 35,415 24,876 35,415 --------- --------- --------- --------- Weighted-average common shares applicable to net income per common share, assuming dilution.... 1,486,054 1,498,593 1,486,054 1,498,593 ========= ========= ========= ========= Basic net income per share of common stock....................... $ 7.59 $ 4.80 $ 15.38 $ 12.09 ========= ========= ========= ========= Diluted net income per share of common stock....................... $ 7.46 $ 4.69 $ 15.12 $ 11.80 ========= ========= ========= ========= NOTE 5 - INITIAL PUBLIC OFFERING On May 24, 2002, Coast Casinos filed a registration statement with the Securities and Exchange Commission with respect to a proposed initial public offering of its common stock. The timing of the initial public offering is indefinite and subject to market conditions. There is no guarantee that an initial public offering will take place. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Critical Accounting Policies and Estimates We have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate those estimates, including those related to asset impairment, accruals for slot marketing points, self-insurance, compensation and related benefits, revenue recognition, allowance for doubtful accounts, contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We believe that the following critical accounting policies require significant judgments and estimates used in the preparation of our financial statements: o We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. We determine the adequacy of this allowance by periodically evaluating individual customer receivables and considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. o We maintain accruals for health and workers compensation self-insurance and slot club point redemption, which are classified as accrued liabilities in the balance sheets. We determine the adequacy of these accruals by periodically evaluating the historical experience and projected trends related to these accruals. If such information indicates that the accruals are overstated or understated, we will adjust the assumptions utilized in the methodologies and reduce or provide for additional accruals as appropriate. o We are subject to various claims and legal actions in the ordinary course of business. Some of these matters include personal injuries to customers and damage to customers' personal assets. We estimate guest claims and accrue for such liability based on historical experience in accrued liabilities in the balance sheets. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations The following table sets forth, for the periods indicated, certain financial information regarding our results of operations: Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- (in thousands) (in thousands) Net operating revenues...... $ 136,455 $ 126,695 $ 271,530 $ 254,243 Operating expenses.......... 115,341 106,790 226,146 211,673 --------- --------- --------- --------- Operating income ........... $ 21,114 $ 19,905 $ 45,384 $ 42,570 ========= ========= ========= ========= Net income.................. $ 11,089 $ 7,026 $ 22,472 $ 17,685 ========= ========= ========= ========= EBITDA (1).................. $ 32,073 $ 29,539 $ 66,466 $ 61,656 ========= ========= ========= ========= Cash provided by operating activities................ $ 25,557 $ 12,246 $ 50,522 $ 38,705 ========= ========= ========= ========= Cash used in investing activities................ $ (60,751) $ (24,463) $(116,555) $ (28,282) ========= ========= ========= ========= Cash provided by (used in) financing activities...... $ 28,498 $ (7,045) $ 52,043 $ (15,437) ========= ========= ========= ========= (1) "EBITDA" means earnings before interest, taxes, depreciation, amortization, deferred (non-cash) rent expense, certain other non-cash expenses and pre-opening expenses (for all periods presented, the only non-cash expenses were deferred rent, gains and losses on disposal of assets and other income associated with the interest rate swap agreement). EBITDA is defined in our senior secured credit facility and in the indenture governing our senior subordinated notes. EBITDA is presented as supplemental disclosure because the calculation of EBITDA is necessary to determine our compliance with certain covenants under these financing agreements and because management believes that it is a widely used measure of operating performance in the gaming industry. 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 our 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. 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. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 and Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 In the quarter and six months ended June 30, 2002, we experienced increases in revenues, operating income, net income and EBITDA, primarily due to continued improvement in revenues at the Suncoast, which opened in September 2000. The Suncoast improvement was offset somewhat by lower hotel room occupancy levels at our four hotel-casino properties, consistent with the general slowdown in tourism after the September 11, 2001 terrorist attacks. Net revenues in the second quarter were $136.5 million compared to $126.7 million in 2001, an increase of 7.7%. Net operating revenues were up 25.5% at the Suncoast and 6.9% at the Gold Coast, but were down 3.8% at The Orleans and relatively flat at the Barbary Coast. Operating income was $21.1 million in the quarter compared to $19.9 million in 2001, an increase of 6.1%. Net income was $11.1 million compared to 2001 second quarter net income of $7.0 million, an increase of 57.8%. EBITDA was $32.1 million in the quarter, an increase of 8.6% over EBITDA of $29.5 million in the second quarter of 2001. In the six months ended June 30, 2002, net revenues were $271.5 million compared to $254.2 million in the first six months of 2001. Operating income was $45.4 million in the first half of 2002 compared to $42.6 million in the first half of 2001, an increase of 6.6%. Net income in the six months ended June 30, 2002 was $22.5 million, an increase of 27.1% over net income of $17.7 million in the first half of 2001. EBITDA in the first half of 2002 was $66.5 million compared to $61.7 million in 2001, an increase of 7.8%. Casino. Casino revenues were $102.4 million in the three months ended June 30, 2002 compared to $94.0 million in the same period in 2001, an increase of 9.0% due primarily to a 24.5% increase at the Suncoast. Gold Coast casino revenues increased 8.1% in the quarter, Barbary Coast revenues increased 2.8%, but casino revenues at The Orleans declined 2.8% due, in part, to increased competition and construction disruption. In the six months ended June 30, 2002, casino revenues were $203.3 million compared to $188.7 million in the first six months of 2001, an increase of 7.7%. Casino revenues at the Suncoast increased 27.8% year-to-date over last year. Gold Coast and Barbary Coast casino revenues increased 4.4% and 1.5%, respectively, over the first half of 2001, but The Orleans casino revenues decreased 5.1% in the period due to increased competition and construction disruption. Casino expenses increased $2.8 million (6.6%) in the second quarter, primarily due to an 8.9% increase at the Suncoast because of the increased gaming activity there and an 11.4% increase at the Gold Coast due to increased casino promotional expenses. Year-to-date, casino expenses increased $4.0 million (4.6%) due to a 10.9% increase at the Suncoast and a 7.5% increase at the Gold Coast. Food and Beverage. Food and beverage revenues were $27.6 million in the second quarter of 2002 compared to $26.4 million in 2001, an increase of 4.3%. Food and beverage revenues at the Suncoast increased 20.5%, in line with the overall increase in business at that property. Gold Coast food and beverage revenues increased 7.7%, primarily due to a new, expanded buffet. The increases were partially offset by a 6.2% decrease in food and beverage revenues at The Orleans, in line with the overall decrease in revenues at The Orleans discussed above, and a 2.8% decrease in food and beverage revenues at the Barbary Coast. Food and beverage expenses increased 5.7% to $20.9 million in 2002 compared to $19.8 million in 2001, primarily due to the overall increase in business at the Suncoast and the additional expenses related to the larger new buffet at the Gold Coast. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 and Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 (continued) Food and Beverage (continued). In the six months ended June 30, 2002, food and beverage revenues were $55.6 million, an increase of 4.6% over revenues of $53.1 million in the first half of 2001. The increases were primarily at the Suncoast and the Gold Coast, for the reasons described above. Food and beverage expenses were $41.5 million in the first six months of 2002 compared to $38.6 million in 2001, an increase of 7.6% due primarily to the new buffet at the Gold Coast and the overall increase in customer volume at the Suncoast. Hotel. Hotel room revenues were $10.0 million in the second quarter of 2002 compared to $9.5 million in 2001, an increase of 4.4%. Lower room occupancy percentages and lower average room rates due to a slowdown in tourism after September 11, 2001 led to decreases at the Gold Coast, Barbary Coast and The Orleans. The decreases were offset by increases at the Suncoast, which opened 216 additional hotel rooms in August 2001. Hotel expenses were $4.1 million in the second quarter compared to $3.9 million in 2001, an increase of 5.6% due primarily to the additional rooms at the Suncoast. In the six months ended June 30, 2002, hotel room revenues were $20.0 million compared to $19.5 million in 2001, an increase of 2.9%. Hotel expenses in the first half of 2002 were $8.1 million compared to $7.7 million in the first half of 2001, an increase of 5.5%. The increased revenues and expenses were primarily attributable to the additional hotel rooms opened at the Suncoast in August 2001. Other. Other revenues were $9.8 million in the second quarter of 2002 compared to $9.1 million in 2001, an increase of 6.8% primarily due to increases at the Suncoast. Slight increases at the Gold Coast and Barbary Coast were offset by an 8.1% decrease at The Orleans due to an overall decrease in customer volume related to increased competition and construction disruption. Year-to-date, other revenues were $19.1 million compared to $17.9 million in the first six months of 2001, an increase of 6.6% due primarily to increased customer volume at the Suncoast. General and Administrative. General and administrative expenses were $26.4 million in the second quarter of 2002 compared to $24.0 million in 2001, an increase of 10.1%, primarily due to increases in salaries, property taxes and property and liability insurance costs. Year-to-date, general and administrative expenses were $51.2 million compared to $46.9 million in the first six months of 2001, an increase of 9.2%, also due to the increases described above. Depreciation and Amortization. Depreciation and amortization expense was $10.2 million in the second quarter of 2002 compared to $8.7 million in 2001, an increase of 16.2% due to the depreciation of remodeling expenditures and equipment purchases at the Gold Coast and additional rooms and slot machines at the Suncoast. In the six months ended June 30, 2002, depreciation and amortization expense was $19.4 million compared to $17.3 million, an increase of 12.3%, also due to the increases described above. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 and Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 (continued) Other Income (Expenses). Despite a lower weighted-average interest rate on our debt, net interest expense was $7.9 million in the second quarter compared to $7.7 million in the second quarter of 2001, an increase of 2.1% due to higher aggregate indebtedness related to the construction projects at The Orleans and the Gold Coast. The effect of the higher aggregate indebtedness was partially offset by $860,000 in interest savings created by an interest rate swap agreement we entered into in April 2002 (see "Liquidity and Capital Resources"). In the six months ended June 30, 2002, net interest expense was $15.0 million compared to $15.7 million in the first six months of 2001. The decrease was due primarily to a lower weighted-average interest rate on our outstanding indebtedness and the $860,000 in interest savings from the swap agreement. Capitalized interest was $858,000 in the second quarter, compared to $137,000 in the second quarter of 2001 due to ongoing expansion projects at the Gold Coast and The Orleans. Capitalized interest was $1.4 million in the first six months of 2002 compared to $199,000 in the same period in 2001 also due to the ongoing expansion projects. Other income was $2.8 million in the second quarter and first six months of 2002 due to the recording of the estimated fair value of the swap agreement as of June 30, 2002, compared to no other income in the 2001 periods. On July 16, 2002 we terminated the swap agreement and received $3.75 million, including $1.0 million of accrued interest receivable. Aggregate Indebtedness and Fixed Payment Obligations Our total long-term indebtedness (including current maturities) and fixed payment obligations on the land leases for the twelve-month periods ending June 30 are summarized by year below:
2003 2004 2005 2006 2007 Thereafter -------- -------- -------- -------- -------- ---------- (dollars in thousands) Long-Term Indebtedness: Senior subordinated notes.... $ -- $ -- $ -- $ -- $ -- $325,000 Bank credit facility......... -- -- 93,000 -- -- -- Other........................ 162 177 3 3 3 28 Fixed Payment Obligations for Land Leases: Barbary Coast - land lease... 178 190 190 190 190 5,208 Barbary Coast - parking lot.. 63 -- -- -- -- -- The Orleans - land lease..... 2,700 2,700 2,700 2,700 2,800 194,311 Suncoast - land lease........ 2,450 2,510 2,570 2,630 2,690 202,480 -------- -------- -------- -------- -------- -------- Total Indebtedness and Fixed Payment Obligations...... $ 5,553 $ 5,577 $ 98,463 $ 5,523 $ 5,683 $727,027 ======== ======== ======== ======== ======== ========
For the six months ended June 30, 2002 we made principal payments of $51.0 million, net of borrowings, on the senior secured credit facility and $148,000 in principal payments on other long-term debt. We have debt service payments due aggregating $162,000 during the next twelve months on other long-term debt obligations. We also have fixed payment obligations under leases due during the next twelve months of $5.4 million. Total remaining fixed payment obligations under leases is $429.5 million. The fixed payment obligations represent payments due under operating lease agreements primarily for land on which three of our properties are located. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Aggregate Indebtedness and Fixed Payment Obligations (continued) 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 Coast Hotels and the Tiberti Company, a Nevada general partnership of which J. Tito Tiberti, a director of Coast Hotels, is managing partner. The lease had an effective commencement date of 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 $200,000 per month through February 2002, $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. The Suncoast occupies the approximately 50-acre site located at the corner of Rampart Boulevard and Alta Drive in the west end of the Las Vegas valley that we lease 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 the 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. 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 dated May 1, 1993. The lease provides for rental payments of $175,000 per year during the initial term of the lease that expires on May 1, 2003. We have exercised the first of two 30-year lease extension options, with rental payments increasing to $190,000 per year during the first ten years of the renewal period. We have an option to purchase the leased property at any time during the six month period prior to the expiration of the initial term 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. Should the landlord desire to sell the real property during the initial term of the lease, we have a right of first refusal. We also lease approximately 2.5 additional acres of real property located adjacent to the Barbary Coast. The lease expires on December 31, 2002. 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). 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources Our principal sources of liquidity have consisted of cash provided by operating activities and debt financing. Cash provided by operating activities was $50.5 million in the six months ended June 30, 2002 and $38.7 million in the six months ended June 30, 2001. Cash used in investing activities in the six months ended June 30, 2002 and 2001 was $116.6 million and $28.3 million, respectively, and was primarily for capital expenditures. Cash provided by financing activities was $52.0 million in the first half of 2002 primarily from the issuance in March 2002 of $100.0 million principal amount of senior subordinated notes. The net proceeds of $103.2 million were used to repay borrowings under our line of credit. In the first half of 2001, cash used in financing activities was $15.4 million, primarily from repayment of borrowings under our credit facility offset by proceeds from the issuance in February 2001 of $50.0 million principal amount of senior subordinated notes. Our primary cash requirements for the next twelve months include the payment of principal and interest on our debt, maintenance capital expenditures, the completion of the expansion and remodeling project at the Gold Coast, the continued expansion of The Orleans and the expansion of the Suncoast (see Capital Expenditures below). We believe that existing cash balances, operating cash flow and available borrowings under our senior secured credit facility will provide sufficient resources to meet our debt and lease payment obligations, budgeted capital expenditure requirements at our hotel-casino properties and operating needs for the next 12 months. In March 1999, Coast Hotels issued $175.0 million principal amount of 9.5% senior subordinated notes with interest payable on April 1 and October 1 and entered into a $75.0 million senior secured credit facility due 2004 to facilitate a refinancing. Availability under the credit facility was increased to $200.0 million in September 1999, subject to automatic reductions in availability from September 2001 through June 2004, as described below. Coast Casinos is a guarantor of the indebtedness under both of these debt agreements. Borrowings under the credit facility bear interest, at Coast Hotels' option, at a premium over the one-, two-, three- or six-month London Interbank Offered Rate ("LIBOR"). The premium varies depending on their ratio of total debt to EBITDA and can vary between 125 and 250 basis points. As of June 30, 2002, the premium over LIBOR was 1.75% (175 basis points) and the interest rate was 3.58%. For the six months ended June 30, 2002, the weighted average interest rate for the senior secured credit facility was 3.62%. Coast Hotels incurs a commitment fee, payable quarterly in arrears, on the unused portion of the credit facility. This variable fee is currently at a rate of 0.375% per annum times the average unused portion of the facility. The availability under the senior secured credit facility was reduced by $6.0 million to $194.0 million on September 30, 2001, by $6.0 million to $188.0 million on December 31, 2001, by $6.0 million to $182.0 million on March 31, 2002 and by $6.0 million to $176.0 million on June 30, 2002. The quarterly reduction will increase to $8.5 million on each of September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003, and to $11.5 million on each of September 30, 2003, December 31, 2003, March 31, 2004 and June 30, 2004. As of June 30, 2002, Coast Hotels had $83.0 million of availability under the credit facility. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources (continued) On February 2, 2001, Coast Hotels issued $50.0 million additional principal amount of senior subordinated notes. The net proceeds of approximately $49.1 million were used to reduce borrowings under their senior secured credit facility. On March 19, 2002, Coast Hotels issued $100.0 million additional principal amount of our senior subordinated notes. The notes were issued at a premium and the net proceeds of approximately $103.2 million were used to reduce borrowings under their senior secured credit facility. As a result, Coast Hotels has additional availability under the credit facility to complete the capital improvement projects as described under "Capital Expenditures" below. The notes that were issued in 2001 and 2002 were issued under the same indenture and have the same terms, interest rate and maturity date as our the $175.0 million principal amount of senior subordinated notes issued in March 1999. The loan agreement governing the credit facility contains covenants that, among other things, limit Coast Hotels' ability to pay dividends or make advances to Coast Casinos, to make certain capital expenditures, to repay certain existing indebtedness, to incur additional indebtedness or to sell material assets. Additionally, the loan agreement requires that Coast Hotels maintain certain financial ratios with respect to its leverage and fixed charge coverage. The agreement was amended in December 2001 and in March 2002 to increase the amount of certain capital expenditures that may be made. Coast Hotels is also subject to certain covenants associated with the indenture governing our $325.0 million principal amount of senior subordinated notes, including, in part, limitations on certain restricted payments, the incurrence of additional indebtedness and asset sales. At June 30, 2002, Coast Hotels was in compliance with all covenants and required ratios. On April 2, 2002, Coast Hotels entered into an interest rate swap agreement with a member of their bank group wherein $100.0 million notional amount of their fixed rate debt was converted to a floating rate. The fixed rate paid to Coast Hotels was 5.77% and the floating rate paid to the bank was based on six-month LIBOR and was set at 2.33% for the six months ending September 30, 2002. Coast Hotels terminated the swap agreement in July 2002 and received $3.75 million, including $1.0 million in accrued interest receivable. Coast Hotels recorded $2.8 million as other income in the quarter ended June 30, 2002 related to the swap agreement which represented its estimated market value as of June 30, 2002. On May 24, 2002, Coast Casinos filed a registration statement with the Securities and Exchange Commission with respect to a proposed initial public offering of its common stock. The timing of the initial public offering is indefinite and subject to market conditions. There is no guarantee that an initial public offering will take place. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Capital Expenditures Subject to receiving the required governmental approvals, we plan to commence an approximately $65.0 million expansion of the Suncoast in the first half of 2003 and complete it in phases through the second half of 2004. The project is expected to be paid for with operating cash flows and borrowings under our senior secured credit facility. Should Coast Casinos complete an initial public offering, the proceeds may also be used to fund this project. The expansion is expected to feature a 70,000 square foot casino addition, including approximately 700 additional slot machines, a poker room, a new sports book, a sports bar, additional table games, a new casino bar, an approximately 1,600-car parking garage and four new restaurants. We anticipate that remaining 2002 cash outlays related to the expansion, consisting of architectural and design fees, will total approximately $1.0 million. Through June 30, 2002, we had spent $216,000 related to the expansion. In January 2001, we commenced an expansion of The Orleans. The project has an estimated cost of $150.0 million and is expected to be paid for with operating cash flows and borrowings under our senior secured credit facility. The expansion includes approximately 40,000 square feet of new gaming area and public space, a special-events arena, a 586-room hotel tower, spa and fitness facilities, a 2,600-car parking garage, six additional movie theaters, two restaurants and an Irish pub. Through June 30, 2002, we had completed the movie theaters, the parking garage, the restaurants, the Irish pub and the additional gaming and public area. We anticipate that 2002 cash outlays for the project will total approximately $80.0 million, of which $56.7 million had been spent in the six months ended June 30, 2002. In the fourth quarter of 2000, we commenced an expansion and remodel of the Gold Coast. The project was originally designed to include a new, expanded buffet restaurant, a sports bar, an Asian-themed restaurant, an Italian restaurant, 10,000 square feet of additional meeting space, the refurbishing of our standard hotel guest rooms and the redesign of most of the Gold Coast's public areas. In 2001 we expanded the scope of the project to include a 1,300-car parking garage, an expanded porte-cochere, a pedestrian bridge to the casino, 20,000 square feet of new gaming area and a new bingo parlor. Through June 30, 2002, we had spent approximately $48.9 million and had opened the multi-station buffet, the sports bar, the restaurants, the additional meeting space and the additional gaming space and we had completed the redesign of the public areas. We expect to complete the project by the fourth quarter of 2002 and to spend approximately $29.0 million in 2002, of which $17.9 million had been spent in the six months ended June 30, 2002. In the ordinary course of operating our hotel-casinos, it is necessary to upgrade or replace fixtures and equipment and to make improvements that will extend the life of our physical plants. We anticipate that these maintenance capital expenditures will total approximately $25.0 million in 2002. In the six months ended June 30, 2002 we had spent $12.1 million for maintenance capital expenditures. In addition, in June 2002 we purchased a 1996 Bombardier CRJ200 jet aircraft. The purchase price of the aircraft was $14.5 million plus the trade-in of our 1980 Hawker-Siddely 700, valued at $3.2 million. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Capital Expenditures (continued) A key element of our business strategy is the expansion or renovation of our existing properties as described above. The completion of these projects is subject to certain risks, including but not limited to: o general construction risks, including cost overruns, shortages of materials or skilled labor, labor disputes, unforeseen environmental or engineering problems, work stoppages, fire and other natural disasters, construction scheduling problems and weather interference; o change orders and plan or specification modifications; o changes and concessions required by governmental or regulatory authorities; o delays in obtaining or inability to obtain all required licenses, permits and authorizations; and o disruption of our operations at our hotel-casinos by construction activities. We believe that existing cash balances, operating cash flow and available borrowings under our credit facility will provide sufficient resources to meet our debt and lease payment obligations, budgeted capital expenditure requirements at our hotel-casino properties and operating needs for the next 12 months. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Other Matters In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets". SFAS 141 is effective as follows: (a) use of the pooling-of-interests method is prohibited for business combinations initiated after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001 which were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. In August 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". The objectives of SFAS 143 are to establish accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In October 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. In April 2002, the Financial Accounting Standards Board issued Statement No. 145 ("SFAS 145") "Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13." SFAS 145 addresses the presentation for losses on early retirements of debt in the statement of operations. Upon adoption of SFAS 145, the Company may no longer present losses on early retirements of debt as an extraordinary item. Additionally, prior period extraordinary losses may be required to be reclassified to conform to this new presentation. Adoption of SFAS 145 will have no impact on the Company's financial condition or cash flows. In June 2002, the Financial Accounting Standards Board issued Statement No. 146 ("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities." The provisions of SFAS 146 become effective for exit or disposal activities commenced subsequent to December 31, 2002 and the Company does not expect any impact on its financial condition, results of operations or cash flows. The adoption of SFAS 141, SFAS 142 and SFAS 144 had no impact on our financial position, results of operations or cash flows. We do not expect the impact of the adoption of SFAS 143, SFAS 145 or SFAS 146 to be material to our financial position, results of operations or cash flows. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Certain Forward-Looking Statements This Form 10-Q 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-Q are forward-looking statements. In addition, in those and other portions of this Form 10-Q, the words "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends" and similar expressions, as they relate to Coast Hotels 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-Q, including, without limitation, the following factors: o increased competition, both in Nevada and other states, including increased competition from California Native American gaming; o dependence on the Las Vegas area and Southern California for a majority of our customers; o substantial leverage and uncertainty that we will be able to service our debt; o uncertainties associated with construction projects, including the related disruption of operations and the availability of financing, if necessary; o changes in laws or regulations, third party relations and approvals, decisions of courts, regulators and governmental bodies; o uncertainties related to the economy; o uncertainties related to the cost and/or availability of electricity and natural gas; and o the impact on the travel and leisure industry, and Las Vegas in particular, of any terrorist attack or threat of terrorist attack, and of the United States' response to an attack or threat. 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-Q. We do not intend, and undertake no obligation, to update these forward-looking statements. 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our long-term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long-term fixed-rate borrowings and short-term borrowings under our revolving bank credit facility. Assuming that the amount of our variable rate debt remained constant at $93.0 million during the next twelve months, a hypothetical 1% increase in our variable interest rate would increase our interest expense by $930,000. On April 2, 2002, we entered into an interest rate swap agreement with a member of our bank group wherein $100.0 million notional amount of our fixed rate debt was converted to a floating rate. In July 2002 we terminated the swap agreement. (See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources".) The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents notional amounts and weighted average interest rates by contractual maturity dates for the twelve-month period ended June 30,:
Fair 2003 2004 2005 2006 2007 Thereafter Total Value (1) -------- -------- -------- -------- -------- ---------- -------- -------- (dollars in thousands) LIABILITIES Short-term debt Fixed rate.................. $ 162 $ -- $ -- $ -- $ -- $ -- $ 162 $ 162 Average interest rate(2).. 9.50% -- -- -- -- -- 9.50% -- Long-term debt Fixed rate.................. $ -- $ 177 $ 3 $ 3 $ 3 $325,028 $325,214 $337,402 Average interest rate(2).. -- 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% -- Variable rate............... $ -- $ -- $ 93,000 $ -- $ -- $ -- $ 93,000 $ 93,000 Average interest rate(2).. -- -- 3.58% -- -- -- 3.58% -- ----- (1) The fair values are based on the borrowing rate currently available for debt instruments with similar terms and maturities, and market quotes of our publicly traded debt. (2) Based upon contractual interest rates for fixed indebtedness or the LIBOR rate at June 30, 2002 for variable rate indebtedness.
22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits. The following are filed as exhibits to this Quarterly Report on Form 10-Q: 99.1 - Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act or 2002. (b) Reports on Form 8-K. On May 28, 2002, the Company filed a Form 8-K dated May 24, 2002 under Item 5, Other Events, with respect to the filing with the Securities and Exchange Commission of a registration statement relating to a proposed initial public offering of its common stock. On June 6, 2002, the Company filed a Form 8-K under Item 5, Other Events, with respect to the expiration of Coast Hotels' offer to exchange up to $100.0 million principal amount of newly issued 9 1/2% Senior Subordinated Notes Due 2009. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2002 COAST CASINOS, INC., a Nevada corporation By: /s/ Gage Parrish ----------------------------- Gage Parrish Vice President and Chief Financial Officer