SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 2001
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 Avenue, 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 29, 2002 was 1,000 shares, none of which was held by non-affiliates of the
Registrant.
COAST HOTELS AND CASINOS, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2001
PAGE
----
PART I
Item 1. Business ................................................... 1
Item 2. Properties ................................................. 11
Item 3. Legal Proceedings .......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ........ 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................ 13
Item 6. Selected Historical Financial Data ......................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.. 25
Item 8. Financial Statements and Supplementary Data ................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 25
PART III
Item 10 Directors and Executive Officers of the Registrant ......... 26
Item 11. Executive Compensation ..................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................. 29
Item 13. Certain Relationships and Related Transactions ............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K ........................................................ 32
PART I
Item 1. Business
The Company
Coast Hotels and Casinos, Inc. (the "Company" or "Coast Hotels") is a
Nevada corporation and a wholly owned subsidiary of Coast Resorts, Inc. ("Coast
Resorts"). We own and operate four Las Vegas hotel-casinos:
o The Orleans Hotel and Casino, which opened in December 1996, is located
approximately one and one-half miles west of the Las Vegas Strip on
Tropicana Avenue.
o The Gold Coast Hotel and Casino, which opened in December 1986, is located
approximately one mile west of the Las Vegas Strip on Flamingo Road.
o The Suncoast Hotel and Casino, which opened in September 2000, is located
near Summerlin in the west end of the Las Vegas valley, approximately nine
miles from the Las Vegas Strip.
o The Barbary Coast Hotel and Casino, which opened in March 1979, is located
on the Las Vegas Strip.
The following chart provides certain information about our properties as of
December 31, 2001:
Casino Slots and
Hotel Square Video Gaming
Property Rooms Footage Poker Tables
- ------------- ----- ------- --------- ------
The Orleans.. 840 105,000 2,428 64
Gold Coast... 712 82,000 1,864 44
Suncoast..... 419 82,000 2,313 50
Barbary Coast 197 30,000 609 36
Our principal executive office is located at 4500 West Tropicana Road, Las
Vegas, Nevada 89103. The telephone number is (702) 365-7000.
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, the Gold Coast and
the Suncoast consists of value-oriented local middle-market customers who gamble
frequently. The Barbary Coast's customer base is primarily composed of visitors
to the Las Vegas area.
While a significant portion of our customers are local residents, the same
factors that appeal to local residents also appeal to visitors to Las Vegas,
including better odds on slot and video poker machines and lower minimum wager
limits on our table games than those traditionally found at Strip casinos. In
addition to the growing local resident market, Las Vegas is one of the fastest
growing entertainment markets in the United States.
1
Item 1. Business (continued)
Business and Marketing Strategy (continued)
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.
Additionally, we offer Las Vegas visitors spacious, well-appointed and
competitively priced guest rooms.
o Convenient, Strategic Locations. The Orleans and the Gold Coast are easily
accessible and offer ample parking, providing our customers with convenient
alternatives to the congestion on the Strip. The Suncoast has a suburban
location conveniently located adjacent to the fast-growing Summerlin
master-planned community. The Barbary Coast is located on the corner of the
Strip and Flamingo Road.
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 slot and video
poker machines with better odds than those traditionally found at Strip
casinos. Locals' perception of value is also influenced by such things as
slot clubs that reward frequent play. We also offer value in our many
restaurants and bars, where patrons are served their favorite beverages and
generous portions of quality food 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.
o Tourist Customers. Las Vegas is one of the fastest growing entertainment
markets in the United States. The same factors that appeal to local
residents also appeal to visitors to Las Vegas, including better odds and
lower minimum wager limits than those traditionally found at Strip casinos.
Additionally, our casinos are strategically situated to benefit from the
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.
Casino Properties
The Orleans. The Orleans is strategically located on Tropicana Avenue, a
short distance from the Las Vegas Strip and McCarran International Airport. The
Orleans provides an upscale, off-Strip experience in an exciting New Orleans
French Quarter-themed environment.
2
Item 1. Business (continued)
Casino Properties (continued)
The Orleans features an approximately 105,000 square foot casino, including
approximately 2,428 slot machines, 64 table games, a keno lounge, a poker parlor
and race and sports books. The Orleans has 840 hotel rooms, 18 "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, six full-service restaurants and a multi-station buffet,
specialty themed bars, a swimming pool, a barber shop, a beauty salon, a child
care facility, a video arcade and approximately 6,000 parking spaces. The
Orleans also includes an 850-seat showroom that features headliner entertainment
and other special events, allowing us to attract more tourists who would
otherwise gamble at Strip casinos.
In January 2001, we commenced an approximately $150.0 million expansion of
The Orleans. The project is expected to be paid for with operating cash flows
and borrowings under our senior secured credit facility and is expected to be
completed in phases through the second quarter of 2003. Featured in the
expansion are an additional 40,000 square feet of new gaming area and public
space, a multi-purpose special-events arena, an approximately 600-room hotel
tower, a 2,600-car parking garage, six additional movie theaters, two
restaurants and an Irish pub. Through December 31, 2001, we had spent
approximately $51.0 million and had opened the two restaurants, the Irish pub,
the movie theaters and a substantial portion of the parking garage. On March 8,
2002, we opened the additional 40,000 square feet of new gaming area and public
space.
Gold Coast. The Gold Coast is located on West Flamingo Road approximately
one mile west of the Las Vegas Strip and one-quarter mile west of Interstate 15,
the major highway linking Las Vegas and Southern California. Its strategic
location offers easy access from all four directions in the Las Vegas valley.
The Gold Coast features an approximately 82,000 square foot casino,
including approximately 1,864 slot machines, 44 table games, a keno lounge, a
160-seat race and sports book and a 700-seat bingo parlor. Our eleven-story
tower includes 712 hotel rooms and suites, a swimming pool and fitness center.
The Gold Coast features four full-service restaurants, a multi-station buffet
restaurant, a fast-food restaurant, a snack bar and an ice cream parlor.
Entertainment amenities include a 70-lane bowling center, approximately 16,000
square feet of banquet and meeting facilities, four bars, an entertainment
lounge 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 approximately 3,000 parking spaces.
In the fourth quarter of 2000, we commenced an approximately $60.0 million
expansion and remodel of the Gold Coast. The project is expected to be paid with
operating cash flows and borrowings under our senior secured credit facility and
is expected to be completed in phases through the third quarter of 2002. The
expansion features a multi-station buffet, a sports bar, an Asian-themed
restaurant, an Italian restaurant, a parking garage and expanded porte-cochere,
16,000 square feet of additional meeting space, 20,000 square feet of new gaming
area, a new bingo parlor, the conversion of our old bingo parlor into a
ballroom, the renovation of our standard hotel guest rooms and the redesign of
most of the Gold Coast's public areas. Through December 31, 2001, we had spent
approximately $31.0 million and had opened the multi-station buffet, the sports
bar, the two restaurants, 6,000-square feet of the 16,000 square feet of
additional meeting space and we had substantially completed the redesign of the
public areas.
3
Item 1. Business (continued)
Casino Properties (continued)
Suncoast. The Suncoast serves one of the fastest growing areas of the Las
Vegas valley and is located on approximately 50 acres in Peccole Ranch, a
master-planned community adjacent to Summerlin. The Suncoast is strategically
located at the intersection of Rampart Boulevard and Alta Drive, readily
accessible from most major points in Las Vegas, including downtown
(approximately eight miles) and the Strip (approximately nine miles).
The Suncoast is a Mediterranean-themed facility featuring approximately
82,000 square feet of casino space, including approximately 2,313 slot machines,
50 table games, a 150-seat race and sports book and a 600-seat bingo parlor. The
Suncoast has 419 spacious hotel rooms and suites, including 216 rooms
constructed in 2001, approximately 25,000 square feet of banquet and meeting
facilities, 16 "stadium seating" movie theaters, four full-service restaurants,
a multi-station buffet restaurant, a 64-lane bowling center, a swimming pool and
approximately 6,000 parking spaces. In 2001, we spent approximately $15.5
million to add 216 new hotel rooms and a swimming pool and to expand the buffet
restaurant.
Barbary Coast. The Barbary Coast is located at the intersection of Flamingo
Road and Las Vegas Boulevard, 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.
The Barbary Coast features an approximately 30,000 square foot casino,
including approximately 609 slot machines, 36 table games, a race and sports
book 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.
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.
4
Item 1. Business (continued)
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.
Competition
There is intense competition among companies in the gaming industry. The
Orleans, the Gold Coast and the Suncoast compete primarily with Las Vegas
hotel-casinos and non-hotel gaming facilities that target local residents. Some
of these competitors have recently completed expansions or new projects,
including a hotel-casino recently opened adjacent to the Gold Coast.
Furthermore, there are several undeveloped properties in the immediate vicinity
of The Orleans, the Gold Coast and 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 hotel-casinos could have a negative
impact on our business.
In contrast to our other casinos, the Barbary Coast competes for customers
primarily with the hotel-casinos located on the Strip. The construction of new
properties and the expansion or enhancement of existing properties on the Strip
by competitors could materially adversely affect business and results of
operations of the Barbary Coast.
In addition, each of our properties competes, to a lesser extent, with all
other casinos and hotels in the Las Vegas area. A number of new hotel-casinos or
expansions have opened in Las Vegas over the last several years, and several
others have been announced. This additional gaming and room capacity may have a
negative impact on our business.
We also 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 other 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. California
law permits limited Las Vegas-style gaming activities to be conducted by
California Native American tribes. The governor has entered into compacts with
nearly 60 tribes that allow the tribes to operate slot and video poker machines,
banked card games and lotteries. An increase in gaming in California could have
a material adverse effect on our business and results of operations.
Employees
At December 31, 2001, we had approximately 7,147 employees. We have not
experienced any significant work stoppages and believe our labor relations are
good. The Las Vegas job market for qualified employees is very competitive.
Approximately 350 employees at the Barbary Coast are covered by a collective
bargaining agreement; none of our other employees are covered by a collective
bargaining agreement.
5
Item 1. Business (continued)
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."
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 our gaming operations.
We operate the Gold Coast, the Barbary Coast, The Orleans and the Suncoast,
and are licensed by the Nevada Gaming Authorities. 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 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. Coast
Hotels 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, Coast Hotels 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 Coast Hotels 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 Coast Hotels who are actively and directly involved in
gaming activities 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.
6
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
If the Nevada Gaming Authorities were to find an officer, director or key
employee of Coast Hotels or Coast Resorts unsuitable for licensing or unsuitable
to continue having a relationship with Coast Hotels or Coast Resorts, we 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.
Coast Hotels 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 Coast
Hotels must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Coast Hotels, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Coast Hotels, 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 our gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of our gaming properties) could be forfeited to
the State of Nevada. Limitation, conditioning or 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
7
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
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. Coast Hotels 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 Coast Hotels or Coast
Resorts, we (i) pay that person any dividend or interest upon voting securities
of our company, (ii) allow that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pay
remuneration in any form to that person for services rendered or otherwise, or
(iv) fail 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, at 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.
Coast Hotels 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. Coast Hotels is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require our stock certificates to bear a legend
indicating that the securities are subject to the Nevada Act.
Licensed Corporations and Registered Corporations such as Coast Hotels 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 Coast Hotels 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.
8
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
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 Licensed Corporations, 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.
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.
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 grounds of personal unsuitability.
9
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
Coast Hotels 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
Coast Hotels 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 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-K, 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 the impact on the travel and leisure industry, and Las Vegas in particular,
of the September 11, 2001 terrorist attacks and the United States' response
to the attacks; and
o uncertainties related to the cost and/or availability of electricity and
natural gas.
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.
10
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 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.
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. We use the
warehouse primarily as a storage facility.
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 given notice to the landlord of our intention to exercise the first of two
30-year 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, 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).
11
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 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
---------------------------------------------------
No matters were submitted to our shareholder during the quarter ended
December 31, 2001.
12
PART II
Item 5. Market for 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 Historical Financial Data
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Form 10-K. The balance sheets and statements of
operations data as of and for each of the five years in the period ended
December 31, 2001 are derived from the audited financial statements of Coast
Hotels (except as indicated in footnote 1 to the following table). The financial
statements of Coast Hotels as of December 31, 2000 and 2001 and for each of the
three years in the period ended December 31, 2001 are included in this report on
Form 10-K. The historical results are not necessarily indicative of the results
of operations to be expected in the future.
Year Ended December 31,
------------------------------------------------
1997(1) 1998(1) 1999(1) 2000(1)(2) 2001
-------- -------- -------- -------- --------
(dollars in thousands)
STATEMENTS OF OPERATIONS
DATA:
Net revenues.............. $292,360 $328,824 $358,324 $408,925 $517,984
Departmental operating
expenses(3)............. 195,677 205,565 216,082 237,796 295,036
General and administrative
expenses................ 54,351 55,879 60,445 69,408 91,511
Pre-opening expenses...... -- -- 235 6,161 --
Land leases............... 2,100 3,190 3,770 3,396 5,060
Deferred rent............. 2,378 3,198 2,918 2,538 3,538
Depreciation and
amortization........... 18,278 20,607 21,613 25,375 36,549
-------- -------- -------- -------- --------
Operating income.......... 19,576 40,385 53,261 64,251 86,290
Interest expense, net(4).. (25,228) (26,570) (21,441) (22,973) (29,182)
Other income (expense).... 919 168 (192) (60) (1,815)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item....... (4,733) 13,983 31,628 41,218 55,293
Provision (benefit) for
income taxes............ (1,401) 5,225 10,382 14,268 18,815
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... (3,332) 8,758 21,246 26,950 36,478
Extraordinary item - loss
on early retirement of
debt, net of applicable
income tax benefit
($14,543)............... -- -- (27,007) -- --
-------- -------- -------- -------- --------
Net income (loss)......... $ (3,332) $ 8,758 $ (5,761) $ 26,950 $ 36,478
======== ======== ======== ======== ========
See Footnotes to Selected Historical Financial Data
13
Item 6. Selected Historical Financial Data (continued)
As of December 31,
------------------------------------------------
1997 1998 1999 2000(1) 2001
-------- -------- -------- -------- --------
(dollars in thousands)
Balance Sheet Data:
Cash and cash
equivalents............. $ 29,426 $ 41,595 $ 38,616 $ 43,560 $ 43,347
Total assets.............. $366,861 $367,034 $408,173 $570,998 $661,480
Total debt................ $215,249 $207,859 $237,239 $355,767 $369,524
Stockholder's equity...... $ 97,346 $102,918 $ 97,157 $124,107 $160,585
See Footnotes to Selected Historical Financial Data.
Footnotes to Selected Historical Financial Data
(1) Financial data for 1997, 1998, 1999 and 2000 has been restated to reflect
the reclassification of certain cash incentives of (dollars in thousands)
$1,523, $3,539, $4,207 and $10,602, respectively, in connection with the
adoption of Emerging Issues Task Force Issue 00-22 ("EITF 00-22"). The
adoption of EITF 00-22 had no effect on net income. See "Item 14 -
Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial
Statements Index - Notes to Financial Statements - Note 1 - Background
Information and Basis of Presentation - Basis of Presentation".
(2) The Suncoast opened September 2000.
(3) Includes casino, food and beverage, hotel and other expenses.
(4) Includes interest income of (dollars in thousands) $98 (1997), $695 (1998),
$450 (1999), $470 (2000) and $405 (2001) and capitalized interest of $1,016
(1997), $58 (1998), $612 (1999), $4,511 (2000) and $1,048 (2001).
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 affect
significant judgments and estimates used in the preparation of our financial
statements:
o We recognize revenue as net wins and losses occur in our casinos, upon the
occupancy of our hotel rooms, upon the delivery of food, beverage and other
services, and upon performance for entertainment 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. Effective January
1, 2001, we adopted Emerging Issues Task Force Issue 00-22 (the "Issue")
which requires cash discounts and certain other cash incentives related to
gaming play be recorded as a reduction to gross casino revenues. The Issue
requires that prior periods be restated. We previously recorded incentives
as an operating expense and have reclassified prior period amounts.
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 continually evaluating individual customer receivables,
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.
o Effective January 1, 1999, pre-opening costs related to the construction of
new projects are expensed as incurred. Pre-opening costs were expensed
during the years ended December 31, 1999 and 2000, respectively, in
connection with the development of the Suncoast. There were no pre-opening
costs during the year ended December 31, 2001.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Critical Accounting Policies and Estimates (continued)
o We have entered into lease agreements where the rental payments increase on
either a monthly or annual basis. We recognize the related rent expense on
the straight-line method over the term of the agreements. Deferred rent is
recorded to reflect the excess of rent expense over cash payments since the
inception of the leases.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial information regarding the historical results of Coast Hotels:
Year Ended December 31,
1999 2000 2001
--------- --------- ---------
(dollars in thousands)
Net operating revenues............. $ 358,324 $ 408,925 $ 517,984
Operating expenses................. 305,063 344,674 431,694
--------- --------- ---------
Operating income................... $ 53,261 $ 64,251 $ 86,290
========= ========= =========
Net income (loss).................. $ (5,761) $ 26,950 $ 36,478
========= ========= =========
EBITDA (1)......................... $ 78,027 $ 98,325 $ 126,377
========= ========= =========
Cash provided by operating
activities....................... $ 67,160 $ 69,871 $ 84,684
========= ========= =========
Cash used in investing activities.. $ (48,805) $(176,854) $(101,725)
========= ========= =========
Cash provided by (used in)
financing activities............ $ (21,334) $ 111,927 $ 16,828
========= ========= =========
- -------
(1) "EBITDA" means earnings before interest, taxes, depreciation,
amortization, deferred (non-cash) rent expense, other non-cash expenses
and certain non-recurring items, including pre-opening expenses and gains
and losses on disposal of equipment (for all periods presented, the only
non-cash expense was deferred rent and the only non-recurring items were
pre-opening expenses, gains and losses on disposal of assets and
extraordinary loss on retirement of debt). 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.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2001 Compared to 2000
Net revenues and operating income increased in the year ended December 31,
2001 due primarily to the strong performance of the Suncoast, which opened in
September 2000. Construction disruption at the Gold Coast and The Orleans, a
slowdown in tourist visitation to Las Vegas after the September 11, 2001
terrorist attacks, recessionary economic trends and competition from new
locals-oriented hotel-casinos resulted in decreases in revenues and operating
income at The Orleans, the Gold Coast and the Barbary Coast. Combined net
revenues in 2001 were $518.0 million compared to $408.9 million in 2000, an
increase of 26.7%. Operating income was $86.3 million in 2001 compared to $64.3
million in 2000, an increase of 34.3%. Operating expenses increased by 25.3%,
primarily as a result of the full year of operations at the Suncoast compared to
only three and one-half months of Suncoast operations in 2000. Net income in
2001 increased 35.4% to $36.5 million compared to $27.0 million in 2000 due to
the full-year results of the Suncoast.
Casino. Casino revenues were $387.5 million in 2001, an increase of 29.9%
over 2000 casino revenues of $298.4 million. The increase was primarily due to
the first full year of operations of the Suncoast. Construction disruption
during a remodeling project contributed to a 2.7% decline in gaming revenues at
the Gold Coast and the general slowdown in tourism after September 11
contributed to flat casino revenues at The Orleans and a 2.8% decline at the
Barbary Coast. Casino expenses increased by 27.0% primarily because of the
Suncoast, resulting in a casino operating margin of 55.0% in 2001 compared to
54.0% in 2000.
Food and Beverage. For the year ended December 31, 2001, gross food and
beverage revenues were $106.9 million, an increase of $22.1 million (26.1%) over
2000 revenues of $84.8 million, primarily due to the full year of operations at
the Suncoast, which was only open for three and one-half months in 2000. Food
and beverage expenses increased $15.7 million (25.3%), in line with the increase
in revenues.
Hotel. Gross hotel room revenues were $38.4 million in 2001, an increase of
$4.7 million (14.0%) over 2000 room revenues of $33.7 million. The increase was
due to a full year of operations of the Suncoast, which was only open for three
and one-half months in 2000, and the expansion of available rooms at the
Suncoast in September 2001 from 232 to 419. This more than offset a decline in
occupancy at all four properties after the terrorist attacks on September 11.
The average daily room rate increased to $59.05 in 2001 from $58.56 in 2000 due
to the higher room rates achieved by the Suncoast and increases at both The
Orleans and Gold Coast. Guest room occupancy levels declined from 93.0% in 2000
to 89.0% in 2001 as a result of the events of September 11 and generally lower
occupancy levels at the Gold Coast. Hotel expenses increased 9.3%, primarily due
to the full year of Suncoast operations.
Other. Other revenues increased 17.8% in 2001 to $36.7 million compared to
$31.2 million in 2000, due to the full year of operations at the Suncoast. Costs
related to the other revenues increased by 12.9% for the same reason.
General and Administrative. General and administrative expenses were $91.5
million in 2001 compared to $69.4 million in 2000, an increase of 31.9% due
primarily to the full year of operations at the Suncoast. General and
administrative expenses at the other properties increased $5.2 million or 8.8%
partly due to increased utility costs of $2.4 million.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2001 Compared to 2000 (continued)
Pre-opening, Rent and Depreciation. There were no pre-opening expenses in
2001 compared to $6.2 million in 2000 due to the opening of the Suncoast in
September 2000. Land lease expense and the related deferred rent expense were
both higher in 2001 because the rent on the Suncoast land was capitalized during
construction until it opened on September 12, 2000. Depreciation and
amortization expense was higher in 2001 due primarily to a full year of
operations at the Suncoast.
Other Expenses. Other expenses were $31.0 million in 2001, an increase of
34.6% over 2000 other expenses of $23.0 million, due primarily to higher average
debt levels and lower capitalized interest in 2001.
Fiscal 2000 Compared to 1999
Net revenues and operating income increased in the year ended December 31,
2000, primarily due to improved slot revenues at The Orleans and the opening in
September 2000 of the Suncoast. Net revenues in 2000 were $408.9 million
compared to $358.3 million in 1999, an increase of 14.1%. Operating income was
$64.3 million in 2000 compared to $53.3 million in 1999, an increase of 20.6%.
Operating expenses increased by 13.0%, in line with the increased revenues.
Net income in 2000 was $27.0 million compared to a net loss in 1999 of $5.8
million. The net loss in the prior year was primarily due to a one-time charge
of $27.0 million, net of income tax benefit, as a result of the early retirement
of debt in March 1999. Despite increased long-term debt due to construction of
the Suncoast, net interest expense increased by only $1.5 million (7.2%) as a
result of $4.5 million of interest being capitalized in 2000. Capitalized
interest was $612,000 in 1999.
Casino. Casino revenues were $298.4 million in 2000, an increase of 14.1%
over 1999 casino revenues of $261.5 million. The increase was primarily due to
improved slot revenues at The Orleans and the opening in September 2000 of the
Suncoast. Because of the improvement in high-margin slot revenues, casino
expenses increased only 7.9% contributing to an improved casino operating margin
of 54.0% in 2000 compared to 51.4% in 1999.
Food and Beverage. For the year ended December 31, 2000, gross food and
beverage revenues were $84.8 million, an increase of $12.1 million (16.6%) over
1999 revenues of $72.7 million. The increase was primarily due to increased
customer volume at The Orleans and the opening of the Suncoast. Food and
beverage expenses increased $11.1 million, in line with the increase in
revenues.
Hotel. Gross hotel room revenues were $33.7 million in 2000, an increase of
$3.4 million (11.3%) over 1999 room revenues of $30.3 million. The increase was
primarily due to the opening of the Suncoast and an increase in the average
daily room rate from $52.87 in 1999 to $58.56 in 2000 that was offset by a
slight decrease in room occupancy percentage from 94.2% in 1999 to 93.0% in
2000. The increase in hotel expenses was commensurate with the increase in
revenues.
Other. Other revenues increased 7.1% in 2000 to $31.2 million compared to
$29.1 million in 1999, primarily due to the opening of the Suncoast. Costs
related to the other revenues decreased slightly (1.2%).
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Fiscal 2000 Compared to 1999 (continued)
General and Administrative. General and administrative expenses were $69.4
million in 2000 compared to $60.4 million in 1999, an increase of 14.8% due
primarily to related expenses of the Suncoast.
Pre-opening, Rent and Depreciation. Pre-opening expenses were $6.2 million
in 2000 compared to $235,000 in 1999 due to the opening of the Suncoast. Land
lease expense and the related deferred rent expense were both lower in 2000
because the rent on the Suncoast land was capitalized during the construction
period, July 1, 1999 to September 12, 2000. Depreciation and amortization
expense was higher in 2000 because of the opening of the Suncoast.
Aggregate Indebtedness and Fixed Payment Obligations
Our total long-term indebtedness and fixed payment obligations on the land
leases are summarized by year below:
2002 2003 2004 2005 2006 Thereafter
-------- -------- -------- -------- -------- --------
(dollars in thousands)
Long-Term Indebtedness
Senior subordinated notes(1)... $ -- $ -- $ -- $ -- $ -- $225,000
Bank credit facility(1)........ -- 25,000 119,000 -- -- --
Other.......................... 148 162 177 3 3 31
Fixed Payment Obligations
for Land Leases
Barbary Coast - land lease..... 175 185 190 190 190 5,303
Barbary Coast - parking lot.... 125 125 -- -- -- --
The Orleans - land lease....... 2,650 2,700 2,700 2,700 2,950 195,811
Suncoast - land lease.......... 2,420 2,480 2,540 2,600 2,660 203,840
-------- -------- -------- -------- -------- --------
Total Indebtedness and Fixed
Payment Obligations.............. $ 5,518 $ 30,652 $124,607 $ 5,493 $ 5,803 $629,985
======== ======== ======== ======== ======== ========
(1) This excludes the March 19, 2002 issuance of an additional $100.0 million
of senior subordinated notes and related repayment of $103.0 million on our
bank credit facility.
During the year ended December 31, 2001 we made principal payments of $32.0
million net of borrowings on the senior secured credit facility and $4.2 million
in principal payments on other long-term debt. Coast Hotels has debt service
payments due aggregating $148,000 in 2002 on other long-term debt obligations.
We also have fixed payment obligations due during 2002 of $5.4 million.
Total remaining fixed payment obligations under leases is $432.5 million. The
fixed payment obligations represent payments due under operating lease
agreements primarily for land on which three of our properties are located.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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. See also Item 2 "Properties" for a discussion of our properties.
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 given notice to the landlord of our intention to exercise the first of two
30-year 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, 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).
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 $84.7 million in the year ended December 31, 2001, compared to $69.9 million
in 2000 and $67.2 million in 1999.
Cash used in investing activities in each of the years ended December 31,
1999, 2000 and 2001 was primarily for capital expenditures. During 2001, our
capital expenditures were $141.6 million, including construction accounts
payable of $34.1 million. $30.9 million was used in the expansion and remodel of
the Gold Coast, approximately $51.0 million was used in the expansion of The
Orleans, approximately $7.4 million was used in other projects at The Orleans
and $15.5 million was used at the Suncoast to add 216 hotel rooms and a swimming
pool and to complete other various projects. $11.9 million was used to purchase
three contiguous parcels of land totaling approximately 55 acres for possible
future development. The remaining $24.9 million was used for maintenance capital
expenditures.
Cash provided by financing activities was $16.8 million in 2001. Proceeds
from the issuance in February 2001 of $50.0 million principal amount of senior
subordinated notes and from borrowings under our senior secured credit facility
were partially offset by reductions of amounts outstanding under the credit
facility with cash flows from operations and approximately $49.1 million of net
proceeds from the senior subordinated notes issuance. Cash provided by financing
activities was $111.9 million in 2000, primarily from borrowings under our
senior secured credit facility, and cash used in financing activities was $21.3
million in 1999 primarily as a result of the refinancing of our debt. In March
1999, we issued $175.0 million principal amount of 9.5% senior subordinated
notes and entered into a $75.0 million senior secured credit facility due 2004
to facilitate the refinancing. The senior secured credit facility was increased
to $200.0 million in September 1999 to finance the construction of the Suncoast.
In 1999, with the proceeds from our $175.0 million principal amount of 9.5%
senior subordinated notes and borrowings under the senior secured credit
facility, we repurchased substantially all of the $175.0 million principal
amount outstanding of 13% first mortgage notes and all $16.8 million principal
amount of 10-7/8% first mortgage notes. In December 2000 we redeemed the
remaining 13% first mortgage notes. In connection with the 1999 repurchase of
the 13% notes and the 10-7/8% notes, we incurred repurchase premiums of $31.0
million and $2.1 million, respectively. The repurchase premiums and the
write-offs of unamortized debt issuance costs and original issue discount
resulted in an extraordinary loss in 1999 of $27.0 million, net of applicable
income tax benefit of $14.5 million.
On February 2, 2001 the Company 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 our senior secured credit facility.
On March 19, 2002 we 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 $103.0 million were used to reduce borrowings under
our senior secured credit facility. As a result, we have additional availability
under the credit facility to complete certain capital improvement projects as
further described 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 outstanding $225.0 million principal amount of senior subordinated
notes. Coast Hotels has entered into an interest rate swap agreement with a
member of the Company's bank group such that $100.0 million of the Company's
fixed rate debt has been converted to a floating rate based upon LIBOR.
21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
The availability under the senior secured credit facility was reduced by
$6.0 million to $194.0 million on September 30, 2001 and by $6.0 million to
$188.0 million on December 31, 2001, and will be reduced by an additional $6.0
million on each of March 31, 2002 and 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. Advances under the
facility may be used for working capital, general corporate purposes, and
certain improvements to our existing properties. As of March 19, 2002, after
completion of the $100.0 million offering and use of proceeds to repay debt
outstanding under the senior secured credit facility, we had $49.0 million
outstanding under the senior secured credit facility. Borrowings under the
senior secured 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 our ratio of total debt to EBITDA and can vary
between 125 and 250 basis points. As of December 31, 2001, the premium over
LIBOR was 2.0% (200 basis points) and the interest rate was 3.93%. The weighted
average interest rate on the senior secured credit facility was 6.09% in 2001.
The loan agreement governing the senior secured credit facility contains
covenants that, among other things, limit our ability to pay dividends or make
advances to Coast Resorts, 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 we maintain
certain financial ratios with respect to its leverage and fixed charge coverage.
We are also subject to certain covenants associated with the indenture governing
our senior subordinated notes, including, in part, limitations on certain
restricted payments, the incurrence of additional indebtedness and asset sales.
The agreement was amended in December 2001 and in March 2002 to increase the
limitations on certain capital expenditures. At December 31, 2001, we were in
compliance with all covenants and required ratios.
Capital Improvement Projects
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 a special-events arena, a 600-room hotel tower, a
2,600-car parking garage, six additional movie theaters, two restaurants, an
Irish pub and approximately 40,000 square feet of new gaming area and public
space. Through March 29, 2002, we had completed the movie theaters, the parking
garage, the restaurants, Irish pub and the additional gaming and public area. We
anticipate that 2002 cash outlays for the project will total approximately $80.0
million.
In the fourth quarter of 2000, we commenced an approximately $60.0 million
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 an additional approximately 20,000 square feet of slot and
table games area, a new bingo room, an expanded porte-cochere, a parking garage
and a moving walkway. We expect to complete the project by the fourth quarter of
2002 and to spend approximately $29.0 million in 2002.
22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Capital Improvement Projects (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 senior secured credit facility will provide sufficient
resources to meet our debt and lease payment obligations and foreseeable capital
expenditure requirements at our hotel-casino properties.
Other Matters
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133 ("SFAS 133") entitled "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific conditions are met, a derivative may be specifically
designated as a hedge of specific financial exposures. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and, if used in hedging activities, its effective use as a hedge.
SFAS 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after December 31, 2000. SFAS 133 should not be applied retroactively
to financial statements for prior periods. We adopted SFAS 133 on January 1,
2001 as required.
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.
23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Other Matters (continued)
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.
We are currently evaluating the provisions of SFAS 141, SFAS 142, SFAS 143
and SFAS 144 and we do not anticipate that the effects of these changes will
have an impact on our financial position or results of operations.
Impact of Inflation and Other Economic Factors
Absent changes in competitive and economic conditions or in specific prices
affecting the industry, we do not expect that inflation will have a significant
impact on our 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. We depend upon Las
Vegas and Southern California for a majority of our customers. Any economic
downturn in those areas could materially adversely affect our business and
results of operations and our ability to pay interest and principal on our debt.
Regulation and Taxes
Coast Hotels is subject to extensive regulation by the Nevada Gaming
Authorities. Changes in applicable laws or regulations could have a significant
impact on our operations.
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.
We believe that our 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 our operating results.
24
Item 7A. 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 bank credit facility. Through December 31, 2001,
we had not invested in derivative- or foreign currency-based financial
instruments.
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:
Fair
2002 2003 2004 2005 2006 Thereafter Total Value(1)
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
LIABILITIES
Short-term debt
Fixed rate....... $ 148 $ -- $ -- $ -- $ -- $ -- $ 148 $ 148
Average interest
rate(2)........ 9.50% -- -- -- -- -- 9.50%
Long-term debt
Fixed rate....... $ -- $ 162 $ 177 $ 3 $ 3 $225,031 $225,376 $216,129
Average interest
rate(2)........ -- 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
Variable rate.... $ -- $ 25,000 $119,000 $ -- $ -- $ -- $144,000 $144,000
Average interest
rate(2)........ -- 3.93% 3.93% -- -- -- 3.93%
(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 December 31, 2001 for variable rate indebtedness.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital Resources" and
see "Item 14 - Exhibits, Financial Statement Schedules and Reports on Form
8-K - Financial Statements Index - Notes to Financial Statements - Note 6 -
Long-Term Debt".
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 "Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K - Financial Statements, Financial Statement Schedules, and Exhibits".
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the names and ages of the directors and
executive officers of Coast Hotels and their respective positions as of December
31, 2001.
Name Age Position(s) Held
- --------------------- ------------------------------------------------
Michael J. Gaughan 58 Director, Chairman of the Board and
Chief Executive Officer
Harlan D. Braaten 51 Director, President and Chief Operating
Officer
Jerry Herbst 63 Director, Vice President, Treasurer and
Assistant Secretary
J. Tito Tiberti 56 Director, Vice President and Secretary
Gage Parrish 48 Director, Vice President, Chief
Financial Officer and Assistant Secretary
Franklin Toti 63 Director, Vice President of Casino
Operations
F. Michael Corrigan 65 Director
Charles Silverman 69 Director
Joseph A. Blasco 58 Director
Michael J. Gaughan. Mr. Gaughan has been a director of Coast Hotels since
its formation in September 1995 and is the Chairman of the Board and Chief
Executive Officer of Coast Hotels. His current term as a director expires in
2003. 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 Coast Hotels (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 Coast Hotels 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
2003. Mr. Braaten is also the President and Chief Operating Officer of Coast
Resorts. Prior to joining Coast Hotels, 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 23 years of experience in the Nevada gaming
industry.
26
Item 10. Directors and Executive Officers of the Registrant (continued)
Jerry Herbst. Mr. Herbst has been a director, Treasurer and Assistant
Secretary of Coast Hotels since its formation in September 1995. His current
term as a director expires in 2002. 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 corporate general partner of the Gold
Coast Partnership prior to the formation of Coast Hotels. Mr. Herbst has served
as a member of the board of directors of Nevada Power Company since 1990 and of
Edelbrock Corporation since 1994.
J. Tito Tiberti. Mr. Tiberti has been a director and Secretary of Coast
Hotels since its formation in September 1995. His current term as a director
expires in 2002. 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 22 years and was a general partner of the Barbary
Coast Partnership prior to the formation of Coast Hotels.
Gage Parrish. Mr. Parrish was named Vice President, Finance, Assistant
Secretary and a director of Coast Hotels and Coast Resorts in October 1995 and
was promoted to Chief Financial Officer in February 1996. His current term as a
director expires in 2003. Since 1986, he had been the Controller and Chief
Financial Officer of the Gold Coast Partnership prior to the formation of Coast
Hotels. 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 23 years of experience in the gaming industry.
Franklin Toti. Mr. Toti has been a director of Coast Hotels and Coast
Resorts since October 5, 1998. His current term expires in 2002. He has been
Vice President of Casino Operations for Coast Hotels 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 41 years of experience in the gaming industry.
F. Michael Corrigan. Mr. Corrigan was elected as a director of Coast Hotels
and Coast Resorts effective as of March 1, 1996. His current term as a director
expires in 2004. 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 Coast Hotels
and Coast Resorts effective as of March 1, 1996. His current term as a director
expires in 2004. 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
the Suncoast. Mr. Silverman has served as the president of Yates-Silverman, Inc.
since its inception in 1971.
27
Item 10. Directors and Executive Officers of the Registrant (continued)
Joseph A. Blasco. Mr. Blasco was elected as a director of Coast Hotels and
Coast Resorts effective as of December 16, 1996. His current term as a director
expires in 2004. Since 1984, Mr. Blasco has been a partner in the real estate
development partnership that developed the Spanish Trail community in Las Vegas,
a project that 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 Coast Hotels who are also employees of Coast Hotels or Coast
Resorts receive no compensation for service on the 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.
Item 11. Executive Compensation
The following table sets forth all compensation earned by or paid by Coast
Hotels during 1999, 2000 and 2001 to each executive officer (the "Named
Executive Officers") whose compensation exceeded $100,000 in all capacities in
which they served.
Summary Compensation Table
Annual Compensation
--------------------------------------
All Other
Name and Principal Position Year Salary Bonus Compensation(1)
- ----------------------------------- ---- -------- -------- ------------
Michael J. Gaughan................. 2001 $300,000 $ -- $ 4,234
Chairman of the Board and Chief 2000 $300,000 $ -- $ 4,361
Executive Officer of Coast Hotels 1999 $300,000 $ -- $ 4,000
Harlan D. Braaten.................. 2001 $325,000 $162,500 $ 2,642
President and Chief Operating 2000 $300,000 $150,000 $ 4,361
Officer of Coast Hotels 1999 $275,000 $137,500 $ 3,150
Gage Parrish....................... 2001 $250,000 $ 25,000 $ 3,438
Vice President, Chief Financial 2000 $225,000 $ -- $ 4,361
Officer and Asst. Secretary of 1999 $212,500 $ 15,000 $ 3,900
Coast Hotels
(1) The amounts reflect matching contributions paid to our 401(k) Profit
Sharing Plan and Trust.
28
Item 11. Executive Compensation (continued)
Employment Agreement and Stock Options
Mr. Braaten was granted options to purchase 30,415 shares of Coast Resorts,
Inc. common stock for $100 per share. The options vested in one-third increments
on January 1, 1999, January 1, 2000 and January 1, 2001 and expire on December
31, 2008.
Mr. Parrish was granted options to purchase 5,000 shares of Coast Resorts,
Inc. common stock for $100 per share. The options vested in one-third increments
on June 14, 1999, June 14, 2000 and June 14, 2001 and expire on June 13, 2009.
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.
29
Item 13. Certain Relationships and Related Transactions
We maintain numerous racetrack dissemination contracts with Las Vegas
Dissemination Company, Inc. ("LVDC"). Michael J. Gaughan's son is the president
and sole stockholder of LVDC. LVDC provides certain dissemination and
pari-mutuel services to the Gold Coast, the Barbary Coast, The Orleans and the
Suncoast. LVDC 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 LVDC an average of 3% of the wagers accepted for races held at the
racetracks covered by the respective contracts. We also pay to LVDC a monthly
fee for race wire services. For the fiscal year ended December 31, 2001 we
incurred expenses payable to LVDC of approximately $1.4 million. The terms on
which such services are provided are regulated by the Nevada Gaming Authorities.
J. A. Tiberti Construction Company ("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 for the expansions
in 1997 and 1999, as well as the general contractor for the construction of the
Suncoast. J. Tito Tiberti owns approximately 6.8% of the outstanding common
stock of Coast Resorts, and is a director, Vice President and Secretary of Coast
Hotels 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 year ended December 31, 2001 we incurred expenses payable
to Tiberti Construction of approximately $63.4 million. At December 31, 2001, we
had construction accounts payable to Tiberti Construction of approximately $21.6
million. Although no formal contracts have been entered into, we anticipate that
we will incur expenses payable to Tiberti Construction of approximately $105.0
million in 2002 in connection with our proposed capital improvement projects
described under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Capital
Improvement Projects."
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 Coast Hotels and a director and stockholder
of Coast Resorts, is the managing partner of The Tiberti Company. We paid rental
expenses to The Tiberti Company of $2.4 million for the fiscal year ended
December 31, 2001.
Michael J. Gaughan and Franklin Toti are 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.
Messrs. Gaughan and Toti receive no compensation from LGT Advertising.
Advertising expenses payable to LGT Advertising were approximately $8.3 million
for the year ended December 31, 2001.
We have purchased certain of our equipment and inventory for our 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 year ended December 31, 2001 we incurred expenses
payable to RJS of approximately $2.7 million.
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. For the fiscal year ended December 31, 2001
we incurred expenses payable to Nevada Wallboards of approximately $252,000.
30
Item 13. Certain Relationships and Related Transactions (continued)
Charles Silverman, a director of Coast Hotels 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 year ended
December 31, 2001 we incurred expenses payable to Yates-Silverman of $947,000.
We anticipate incurring expenses payable in 2002 to Yates-Silverman of
approximately $600,000.
Coast Hotels promotes The Orleans by advertising on NASCAR racecars
operated by Orleans Motorsports, Inc. In 2001 we spent $332,000 in connection
with this promotion, and we anticipate spending $400,000 in 2002. Brendan
Gaughan, the main driver employed by Orleans Motorsports, is the son of Michael
J. Gaughan.
The foregoing transactions are believed to be 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.
31
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
PAGE
----
1. Financial Statements Index................................. F-1
2. Financial Statement Schedule Index:
Schedule II - Valuation and Qualifying Accounts............ F-31
32
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------
3.1 Amended Articles of Incorporation of Coast Hotels and Casinos,
Inc. (5)
3.2 First Amended Bylaws of Coast Hotels and Casinos, Inc. (5)
3.3 Articles of Incorporation of Coast Resorts, Inc. (1)
3.4 First Amended Bylaws of Coast Resorts, Inc. (1)
4.1 Indenture dated as of March 23, 1999 among Coast Hotels and
Casinos, Inc., as issuer of 9-1/2% Senior Subordinated Notes
due 2009, Coast Resorts, Inc., as guarantor, and Firstar Bank
of Minnesota, N.A., as trustee (8)
4.2 First Supplemental Indenture dated as of November 20, 2000
among Coast Hotels and Casinos, Inc., as issuer, Coast
Resorts, Inc., as guarantor, and Firstar Bank of Minnesota,
N.A., as trustee (11)
4.3 Second Supplemental Indenture dated as of February 2, 2001,
among Coast Hotels and Casinos, Inc., as issuer, Coast
Resorts, Inc., as guarantor, and Firstar Bank of Minnesota,
N.A., as trustee (11)
4.4 Third Supplemental Indenture dated as of March 19, 2002, among
Coast Hotels and Casinos, Inc., as issuer, Coast Resorts,
Inc., as guarantor, and U.S. Bank, N.A., as trustee (12)
4.5 Form of 9-1/2% Note (included in Exhibit 4.1) (10)
10.1 Tax Sharing Agreement dated as of January 30, 1996 by and
among Coast Resorts, Inc., Coast Hotels and Casinos, Inc., and
Coast West, Inc. (4)
10.2 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)
(3)
10.3 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 (1)
10.4 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 (1)
10.5 Form of Subordination Agreement between Coast Hotels and
Casinos, Inc. and certain former Gold Coast partners holding
Subordinated Notes (4)
10.6 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 (1)
10.7 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 (1)
10.8 Amended and Restated Loan Agreement dated as of September 16,
1999 among Coast Hotels and Casinos, Inc. as Borrower, the
Lenders referred to therein, and Bank of America National
Trust and Savings Association as Administrative Agent (9)
10.9 Security Agreement dated as of March 18, 1999 by Coast Hotels
and Casinos, Inc. in favor of Bank of American National Trust
and Savings Association as Administrative Agent (10)
33
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index (continued)
10.10 Security Agreement dated as of March 18, 1999 by Coast Resorts,
Inc. in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.11 Pledge Agreement dated as of September 1999 by Coast Resorts,
Inc. in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.12 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Orleans Hotel and Casino) (10)
10.13 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Gold Coast Hotel and Casino) (10)
10.14 Leasehold Deed of Trust, Assignment of Rents and Fixture Filing
dated as of March 18, 1999 by Coast Hotels and Casinos, Inc. in
favor of Bank of America National Trust and Savings Association
as Administrative Agent (The Suncoast) (10)
10.15 Guaranty dated March 18, 1999 by Coast Resorts, Inc. in favor
of Bank of America National Trust and Savings Association as
Administrative Agent
10.16 Trademark Security Interest Assignment dated as of March 18,
1999 by Coast Hotels and Casinos, Inc. and Coast Resorts, Inc.
in favor of Bank of America National Trust and Savings
Association as Administrative Agent (10)
10.17 Registration Rights Agreement dated as of February 2, 2001,
among Coast Hotels and Casinos, Inc. as issuer, Coast Resorts,
Inc., as guarantor, and Banc of America Securities, LLC, as
Representative of the Placement Agents (11)
10.18 Registration Rights Agreement dated as of March 19, 2002, among
Coast Hotels and Casinos, Inc. as issuer, Coast Resorts, Inc.,
as guarantor, and Banc of America Securities, LLC, as
Representative of the Placement Agents (12)
10.19 Placement Agreement dated as of January 23, 2001, by and among
Coast Hotels and Casinos, Inc., Coast Resorts, Inc., Banc of
America Securities LLC and Morgan Stanley & Co. Incorporated
(11)
10.20 Placement Agreement dated as of March 11, 2002, by and among
Coast Hotels and Casinos, Inc., Coast Resorts, Inc., Banc of
America Securities LLC and Morgan Stanley & Co. Incorporated
(12)
10.21 Amendment No. 1 to the Amended and Restated Loan Agreement
dated as of December 1, 2001.
10.22 Amendment No. 2 to the Amended and Restated Loan Agreement
dated as of March 8, 2002.
- -------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s General Form for Registration of Securities on
Form 10 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Amendment No. 1 to General Form for Registration
of Securities on Form 10 and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Amendment No. 2 to General Form for Registration
of Securities on Form 10 and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Annual Report on Form 10-K for the period ended
December 31, 1995 and incorporated herein by reference.
34
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Exhibit Index (continued)
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Coast Resorts, Inc.'s Registration Statement on Form S-4 filed May 2,
1996 and incor