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 Casinos, Inc. (“Coast Casinos”). Coast Casinos changed its name from Coast Resorts, Inc. on July 2, 2002. We own and operate four Las Vegas hotel-casinos:
• 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.
• 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.
• 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.
• 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, 2003:
Our principal executive office is located at 4500 West Tropicana Avenue, Las Vegas, Nevada 89103. The telephone number is (702) 365-7000.
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other information with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at www.sec.gov. In addition, a link to the Company’s SEC filings is provided on the Company’s website, www.coastcasinos.com.
Item 1. Business (continued)
Merger Agreement
On February 6, 2004, Coast Casinos entered into a definitive merger agreement with Boyd Gaming Corporation (“Boyd”). Under the agreement, Coast Casinos will merge into a subsidiary of Boyd and become a wholly owned subsidiary of Boyd. Coast will be positioned in Boyd as a separate operating unit managed by the current Coast management. In the merger, each issued and outstanding share of Coast Casinos common stock held by each Coast Casinos stockholder (other than Michael J. Gaughan, the Chairman and Chief Executive Officer of Coast Casinos, Jerry Herbst, a director and the Treasurer of Coast Casinos, and Franklin Toti, a director and the Vice President of Casino Operations of Coast Casinos) will be converted into the right to receive $550 in cash, unless an election is made by such Coast Casinos stockholder to receive 32.8025 shares of Boyd Gaming common stock for such share of Coast Casinos common stock. The maximum aggregate number of shares of Boyd Gaming common stock issuable in the merger to Coast Casinos stockholders, other than Messrs. Gaughan and Toti, will be 1,009,194 shares, unless an adjustment is required in order to qualify the merger as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The amount of stock consideration and cash consideration that each Coast Casinos stockholder, other than Messrs. Gaughan and Toti, will be entitled to receive at the effective time of the merger will have an aggregate value of at least $550 per share of Coast Casinos common stock exchanged in the merger. Because the aggregate number of shares of Boyd Gaming common stock that may be issued in the merger is limited to 1,009,194 shares, it is possible that a substantial portion of the merger consideration received by each such Coast Casinos stockholder will be in the form of cash consideration, regardless of the election made by such stockholder.
At the effective time of the merger, each issued and outstanding share of Coast Casinos common stock held by Messrs. Gaughan and Toti will be converted into the right to receive 32.8025 shares of Boyd Gaming common stock. In addition, each issued and outstanding share of Coast Casinos common stock held by Mr. Herbst will be converted into the right to receive $550 in cash. The merger is subject to receipt of approvals of the stockholders of both Coast Casinos and Boyd, gaming and other government and regulatory approvals and other customary closing conditions. Stockholders of the Company, representing approximately 56% of the voting power of Coast Casinos shares, have agreed for a period of two years to vote their shares in favor of the Boyd merger and against any other combination. Should, however, the merger agreement be terminated as a result of certain matters set forth therein and, within 30 months after the date of the merger agreement, Coast Casinos enters into a takeover transaction with another entity, a $30.0 million termination fee will be payable to Boyd Gaming on the date of consummation of such takeover transaction. The merger is expected to be completed immediately upon receipt of necessary third party approvals. However, no assurance can be given that all conditions to the consummation of the merger will be satisfied or that the merger will be consummated.
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.
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 restaurants, entertainment and amenities. Additionally, we offer Las Vegas visitors spacious, well-appointed and competitively priced guest rooms.
• 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 is conveniently located adjacent to the fast-growing Summerlin master-planned community in suburban west Las Vegas. The Barbary Coast is located on the corner of the Strip and Flamingo Road.
• 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.
• 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 and by providing 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. For visitors to Las Vegas, we offer quality guest rooms at rates generally lower than Las Vegas Strip room rates.
• 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 a special events arena, movie theaters, bowling centers, quality restaurants and a variety of musical entertainment.
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.
The Orleans features an approximately 135,000 square foot casino, including approximately 2,976 slot machines, 64 table games, a keno lounge, a poker parlor and race and sports books. The Orleans has 1,426 hotel rooms, a spa and fitness center, 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, seven 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 8,000 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. A special events arena that seats up to 9,500 patrons, the Orleans Arena, opened in May 2003. During 2003, the Orleans Arena hosted a variety of events including concerts, equestrian events, a circus, boxing, ice hockey and other sporting events.
Item 1. Business (continued)
Casino Properties (continued)
In the fourth quarter of 2003, we commenced construction of a new hotel tower at The Orleans. The project includes 461 hotel rooms and a remodeled and expanded swimming pool area. The project has a budget of $40.0 million and is expected to be completed in the fourth quarter of 2004.
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 87,000 square foot casino, including approximately 2,047 slot machines, 52 table games, a keno lounge, a 160-seat race and sports book and a 700-seat bingo parlor. Our eleven-story tower includes 711 hotel rooms and suites, a swimming pool and fitness center. The Gold Coast also 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 28,000 square feet of banquet and meeting facilities, four bars, an entertainment lounge and a showroom/dance hall with live musical entertainment. Other amenities include a gift shop, a liquor store, a beauty salon, a barber shop, a childcare facility and approximately 3,000 parking spaces.
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 2,359 slot machines, 60 table games, a 150-seat race and sports book and a 600-seat bingo parlor. The Suncoast has 419 spacious hotel rooms and suites, 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.
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 primary customer base is 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 601 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.
Item 1. Business (continued)
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.
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. There are several undeveloped properties in the 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 locals-oriented 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 and several tribes have expanded, opened or plan to open casinos in California. An increase in gaming in California could have a material adverse effect on our business and results of operations.
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, both in Nevada and in other jurisdictions. We own approximately 60 acres of land located in a gaming enterprise district on Las Vegas Boulevard South, adjacent to Interstate 15 and approximately 6 miles south of Tropicana Avenue. Subject to market conditions, availability of financing and receipt of required governmental approvals, we intend to develop a hotel-casino, the “South Coast,” on the site. We are currently developing plans for the project and anticipate beginning construction in the second quarter of 2004 and opening in the second half of 2005. There is no guarantee that we will actually develop the project in the anticipated time frame or at all. In August 2002, Omaha Partners, LLC was formed by Coast Hotels and certain partners to pursue a possible gaming license in Omaha, Nebraska should gaming be approved in that state. We have an 80% interest in Omaha Partners. In November 2003, we acquired a 75% interest in Orange County Development, LLC to pursue a possible gaming license in Indiana. We cannot assure you that licenses will be obtained or projects developed in Nebraska, Indiana or any other jurisdictions where we investigate opportunities.
Employees
At December 31, 2003, we had 7,742 employees. We have not experienced any significant work stoppages and believe our labor relations are good. 314 employees at the Barbary Coast are covered by a collective bargaining agreement; none of our other employees are covered by a collective bargaining agreement.
Nevada Regulation and Licensing
The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the “Nevada Act”), and (ii) various local regulations. Our gaming operations are subject to the licensing and regulatory control of the Nevada Commission, the Nevada Board and the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”). The Nevada Commission, the Nevada Board and the Clark County Board are collectively referred to as the “Nevada Gaming Authorities.”
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.
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
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 Casinos 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 Casinos, 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 Casinos 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 Casinos 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.
If the Nevada Gaming Authorities were to find an officer, director or key employee of Coast Hotels or Coast Casinos unsuitable for licensing or unsuitable to continue having a relationship with Coast Hotels or Coast Casinos, we would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and Coast Casinos 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 Casinos 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 Casinos 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.
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
Any beneficial holder of a Registered Corporation’s voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of a Registered Corporation’s voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation’s voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation’s voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 15% of a Registered Corporation’s voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of a Registered Corporation, any change in a Registered Corporation’s corporate charter, bylaws, management, policies or operations, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the voting securities of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. 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 Casinos, 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.
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
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 Casinos 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 Casinos. Approval of a public offering, if given, will not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission with respect to a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as a part of the approval process relating to the transaction.
Item 1. Business (continued)
Nevada Regulation and Licensing (continued)
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 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.
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.
Item 1. Business (continued)
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:
• increased competition, both in Nevada and other states, including increased competition from California Native American gaming;
• dependence on the Las Vegas area and Southern California for a majority of our customers;
• substantial leverage and uncertainty that we will be able to service our debt;
• uncertainties associated with construction projects, including the related disruption of operations and the availability of financing, if necessary;
• changes in laws or regulations, third party relations and approvals, decisions of courts, regulators and governmental bodies;
• uncertainties related to the economy;
• uncertainties related to the consummation of the merger with Boyd; and
• uncertainties related to the effects of possible future terrorist activities.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by our cautionary statements. The forward-looking statements included are made only as of the date of this Form 10-K. We do not intend, and undertake no obligation, to update these forward-looking statements.
Item 2.
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 stockholder and director of Coast Casinos and 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 is located in the west end of the Las Vegas valley and occupies an approximately 50-acre site 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 that we lease pursuant to a lease dated May 1, 1993. We exercised the first of two 30-year renewal options on May 1, 2003, providing for rental payments of $190,000 per year during the first 10 years. Rental payments increase every 10 years to a maximum of $240,000 per year in the twenty-first year of the final 30-year renewal option period. We own approximately 2.5 additional acres of real property located adjacent to the Barbary Coast that we use for valet parking and as a parking lot for our employees. We purchased the land (which we previously leased) for $18.1 million on January 17, 2003.
We own land totaling approximately 60 acres for possible future development. The land is located in a gaming enterprise district on Las Vegas Boulevard South, adjacent to Interstate 15 and approximately 6 miles south of Tropicana Avenue. Subject to market conditions, availability of financing and receipt of required governmental approvals, we intend to develop a hotel-, the “South Coast,” on the site. We are currently developing plans for the project and anticipate beginning construction in the second quarter of 2004 and opening in the second half of 2005. There is no guarantee that we will actually develop the project in the anticipated time frame or at all.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our stockholder during the quarter ended December 31, 2003.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
We are a wholly owned subsidiary of Coast Casinos. None of our equity securities are publicly traded.
Item 6.
Item 6. Selected Financial Data
The following Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. The balance sheet and statements of operations data as of and for each of the five years in the period ended December 31, 2003 are derived from our audited consolidated financial statements (see footnote 4 to this table). Our consolidated financial statements as of December 31, 2002 and 2003 and for each of the three years in the period ended December 31, 2003 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.
See Footnotes to Selected Financial Data.
Item 6. Selected Financial Data (continued)
See Footnotes to Selected Financial Data.
Footnotes to Selected Financial Data
(1) Includes casino, food and beverage, hotel and other expenses.
(2) Relates to the Suncoast, which opened September 2000.
(3) Includes interest income of (dollars in thousands) $450 (1999), $470 (2000), $405 (2001), $58 (2002) and $36 (2003) and capitalized interest of $612 (1999), $4,511 (2000), $1,048 (2001), $2,950 (2002) and $1,250 (2003).
(4) In connection with the repurchase of certain debt during 1999, we incurred repurchase premiums of $31.0 million. The repurchase premiums and the write-offs of unamortized debt issuance costs and original issue discount resulted in an extraordinary loss of $41.6 million in 1999. In April 2002, the Financial Accounting Standards Board issued Statement No. 145 (“SFAS 145”) “Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13.” SFAS 145 addresses the presentation for losses on early retirements of debt in the statement of operations. Due to the adoption of SFAS 145, we will not present losses on early retirements of debt as an extraordinary item. Accordingly, the 1999 extraordinary loss has been reclassified to conform to this new presentation.
Item 7.
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:
• 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. In accordance with Emerging Issues Task Force Issue 00-22, cash discounts and certain other cash incentives related to gaming play are recorded as a reduction to gross casino revenues.
• 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.
• 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.
• 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Policies and Estimates (continued)
• At December 31, 2003, we had net property and equipment of $743.3 million, representing approximately 89% of our total assets. We depreciate the property and equipment on a straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as our current operating strategy. Future events, such as property expansions, property developments, new competition and new regulations, could result in a change in the manner in which we are using certain assets, requiring a change in the estimated useful lives of such assets. In assessing the recoverability of the carrying value of property and equipment, if events and circumstances warrant such an assessment, we must make assumptions regarding estimated future cash flows and other factors. If these estimates or the related assumptions change, we may be required to record an impairment loss for these assets. Such an impairment loss would be recognized as a non-cash component of operating income.
• We have entered into lease agreements where the rental payments increase on an 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 results of our operations:
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fiscal 2003 Compared to 2002
In the year ended December 31, 2003, revenues, operating income and net income all improved over 2002 primarily due to improvements at The Orleans where customer visitation increased as a result of the 586 new hotel rooms, additional casino space and other amenities added in the August 2002 expansion. The elimination of construction disruption at The Orleans also improved access for customers, contributing to the improved operating results.
Net revenues were $592.5 million in 2003 compared to $545.1 million in 2002, an increase of 8.7% primarily due to a 14.5% increase at The Orleans for the reasons described above. Net revenues at the Suncoast, Gold Coast and Barbary Coast improved in 2003, primarily due to increased casino and hotel revenues.
Operating income was $104.8 million in 2003 compared to $78.1 million in 2002, an increase of 34.2% due to the increases in revenues at all four of our properties. Operating income increased by 54.8%, 19.5%, 31.4% and 38.2% at The Orleans, the Suncoast, the Gold Coast and the Barbary Coast, respectively.
Casino. Casino revenues were $431.2 million in 2003 compared to $406.2 million in 2002, an increase of 6.2%. At The Orleans, casino revenues increased 11.1% due to increased wagering activity at the gaming tables, slot machines and the sports book. Gaming revenues at the Suncoast and the Gold Coast also increased in 2003, primarily due to increased wagering activity at their slot machines. Barbary Coast gaming revenues also increased, primarily due to an increase in table games wagering volume.
The casino operating margin improved to 59.4% in 2003 compared to 55.2% in 2002, primarily due to the improved revenues as well as a reduction in casino advertising and promotional expenses at each of our four hotel-casinos.
Food and Beverage. Food and beverage revenues were $115.3 million in 2003 compared to $112.8 million in 2002, an increase of 2.2% primarily as a result of a 5.5% increase at The Orleans due to increased tourist activity related to the new hotel rooms opened in August 2002. Food and beverage revenues also increased at the Gold Coast and Barbary Coast, but were off slightly at the Suncoast.
Food and beverage expenses increased by 2.2% in 2003, in line with the increase in revenues described above.
Hotel. Hotel revenues were $52.6 million in 2003 compared to $41.8 million in 2002, an increase of 25.8% primarily due to an increase of 45% at The Orleans related to the new hotel rooms opened in August 2002. Total occupied rooms at The Orleans increased by 36.1% in 2003 and the average daily room rate increased by $3.00. Hotel revenues also increased at the Suncoast and the Gold Coast as the average room occupancy percentage and the average daily rate increased at both properties compared to 2002. Barbary Coast room revenues remained relatively flat compared to 2002.
Hotel expenses were $20.9 million in 2003 compared to $17.3 million in 2002, an increase of 20.8%, in line with the overall increase in room occupancy.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fiscal 2003 Compared to 2002 (continued)
Other. Other revenues are derived primarily from bowling, retail, entertainment and leased facilities. In the year ended December 31, 2003, other revenues were $46.5 million compared to $39.7 million in 2002, an increase of $6.8 million (17.1%). Other revenues at The Orleans increased by 37.4%, primarily due to the Orleans Arena, which opened in May 2003. Other revenues at the Suncoast and Gold Coast increased slightly in 2003, but other revenues at the Barbary Coast decreased primarily due to the cancellation in 2003 of a sales booth space rental agreement with a time-share company. Expenses related to the other revenues increased by $10.4 million in 2003, primarily due to costs associated with the Orleans Arena.
General and Administrative. General and administrative expenses were $108.9 million in 2003 compared to $104.2 million in 2002, an increase of 4.5% primarily due to the recent expansion at The Orleans. Security, engineering and internal maintenance payroll costs increased due to the expansion, as did utilities, property taxes and insurance costs.
Depreciation and Amortization. Depreciation and amortization expense was $49.0 million in 2003 compared to $41.6 million in 2002, an increase of 17.8% due to the depreciation of expansion and remodeling projects at The Orleans and the Gold Coast.
Other Income (Expenses). Interest expense was $37.6 million in 2003 compared to $33.2 million in 2002, an increase of 13.3%, primarily due to higher aggregate indebtedness related to financing of various expansion projects completed in 2002 and the first half of 2003 at the Gold Coast and The Orleans. Interest expense in 2002 was offset by approximately $1.7 million of interest earned on an interest rate swap agreement that was entered into in April 2002 and terminated in July 2002. Capitalized interest was $1.3 million in 2003 compared to $3.0 million in 2002 primarily due to the completion of the expansion projects at The Orleans, including the new room tower opened in August 2002 and the arena that opened in May 2003. Other expense was $678,000 consisting of losses on the disposal or abandonment of fixed assets. In 2002, other income was $425,000, including a loss on the disposal or abandonment of fixed assets of $2.3 million offset by a gain of $2.7 million on the interest rate swap agreement that was terminated in July 2002.
Fiscal 2002 Compared to 2001
In the year ended December 31, 2002, revenues increased but net income decreased as we faced many challenges including a weakened economy, construction disruption, increased competition and a continued slowdown in tourist visitation to Las Vegas as a result of the events of September 11, 2001. Most of the increase in revenues was from the continued growth at the Suncoast, but revenues also increased slightly at the Gold Coast and Barbary Coast. Revenues were lower at The Orleans for the year, but increased by 10.8% in the fourth quarter as we began to see the positive effects of the 586 new rooms opened in August 2002 and a decrease in construction disruption as the two-year expansion project neared completion.
Operating income for the year ended December 31, 2002 was lower by $8.2 million, primarily due to an increase in general and administrative expenses and depreciation. Net income was $31.7 million in 2002 compared to $36.5 million in 2001, a decrease of 13.2%.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fiscal 2002 Compared to 2001 (continued)
Casino. Casino revenues were $406.2 million in 2002 compared to $387.5 million in 2001, an increase of $18.7 million (4.8%) primarily due to a 15.2% increase at the Suncoast as we continued to attract customers from the growing market in the Summerlin area of western Las Vegas. Casino revenues at the Gold Coast increased 2.2% for the year, but were down 3.4% in the fourth quarter due, in part, to construction disruption from the new parking garage. The main section of the garage was completed in December 2002, eliminating most of the construction barriers to customer traffic flow. Casino revenues at the Barbary Coast were up 5.0% in 2002, primarily from an increase in table games wagering volume. The Barbary Coast table games win percentage also improved compared to the lower-than-expected win percentage in 2001. Casino revenues at The Orleans were down 3.0% in the year ended December 31, 2002, but were 6.0% higher in the fourth quarter due, in part, to an increase in tourist customers because of the 586 new hotel rooms opened in August.
Casino expenses were $182.1 million in 2002 compared to $174.2 million in 2001, an increase of 4.5%. The increase was primarily due to increased salaries at the recently expanded Gold Coast and The Orleans, as well as to increased promotional expenses at the Suncoast.
Food and Beverage. Gross food and beverage revenues were $112.8 million in 2002 compared to $106.9 million in 2001, an increase of 5.5%. The increase was primarily due to a 12.5% increase at the Suncoast, in line with the continued increase in customer volume, and an increase of 7.6% at the Gold Coast due to the greater number of meals served in its larger new buffet, opened in December 2001. Food and beverage revenues at The Orleans and the Barbary Coast in 2002 were relatively flat compared to 2001.
Food and beverage expenses were $83.9 million in 2002 compared to $77.8 million in 2001, an increase of 7.8% due primarily to the larger new buffet that opened at the Gold Coast in December 2001. Costs in the Gold Coast buffet increased in 2002 due to higher staffing levels and more elaborate food offerings than in the old buffet.
Hotel. Gross hotel room revenues were $41.8 million in 2002 compared to $38.4 million in 2001, an increase of 8.9%, primarily due to increases at the Suncoast and The Orleans because of an increased number of rooms at those properties. The Suncoast added 216 rooms in August 2001 and The Orleans added 586 new rooms in August 2002. Despite a lower occupancy percentage at those two properties, the total number of occupied rooms increased in the year, contributing to the increase in revenues. 2002 average room rates were lower by approximately 4.4% than in 2001 due to pressures from reduced rates at the larger “Strip” hotels as they attempted to increase tourist traffic that had diminished because of September 11, 2001 events and a weakened economy. Slightly lower room rates and occupancy rates contributed to lower hotel revenues at the Gold Coast and Barbary Coast in 2002.
Hotel expenses were $17.3 million in 2002 compared to $15.1 million in 2001, an increase of 14.6%. Gold Coast and Barbary Coast expenses were relatively flat compared to the prior year, but expenses at The Orleans and the Suncoast increased 24.9% and 34.5%, respectively, due to the increased number of rooms at those properties.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fiscal 2002 Compared to 2001 (continued)
Other. Other revenues are derived primarily from bowling, retail, entertainment and leased facilities. In the year ended December 31, 2002, other revenues were $39.7 million compared to $36.7 million in 2001. The increase of 8.2% was due primarily to a 21.8% increase at the Suncoast, where retail sales and showroom revenue were up 30.5% and 78.5%, respectively, because of increased customer volume. Gold Coast other revenues also increased by 5.9% due to the relocation of retail facilities to a high-traffic-area near the hotel front desk. Other revenues at The Orleans were relatively flat compared to the prior year, but Barbary Coast other revenues were 17.3% higher due to a one year lease of space to a third party.
Other expenses were $29.4 million in 2002 compared to $27.9 million in 2001, an increase of 5.4%, in line with the increase in other revenues. Other expenses at the Barbary Coast and The Orleans were relatively flat compared to the prior year, but Gold Coast other expenses increased by 7.7% and Suncoast other expenses increased by 15.4%.
General and Administrative. General and administrative expenses were $104.2 million in 2002 compared to $91.5 million in 2001, an increase of 13.9%, primarily due to increases in payroll and related costs, utilities expenses, property taxes and insurance costs.
Payroll and related costs increased by $5.3 million (10.3%), affected by increased staffing levels at The Orleans and the Gold Coast due to the recent expansions at those properties, as well as third quarter 2002 pay raises and higher health insurance costs. Utilities expenses were $15.2 million in 2002 compared to $13.6 million in 2001, an increase of 11.8% primarily due to recently completed expansions at The Orleans and the Gold Coast and higher utility rates. Property taxes were $5.7 million in 2002 compared to $4.7 million in 2001, an increase of 21.3% primarily because of the expansions. General insurance costs were $2.4 million in 2002 compared to $1.3 million in 2001, an increase of 84.6% because of increased premiums after the terrorist activities of September 11, 2001.
Depreciation and Amortization. Depreciation and amortization expense was $41.6 million in 2002 compared to $36.5 million in 2001, an increase of 14.0% due to the depreciation of remodeling expenditures and equipment purchases at the Gold Coast and The Orleans. Depreciation expense at the Suncoast increased by 6.9% due to the opening of new hotel rooms in August 2001 and the addition of slot machines during 2002.
Other Income (Expenses). Interest expense was $33.2 million in 2002 compared to $30.6 million in 2001, an increase of 8.5%, primarily due to higher aggregate indebtedness related to financing of various expansion projects at the Gold Coast and The Orleans. Interest expense was offset by approximately $1.7 million of interest earned on an interest rate swap agreement that was entered into in April 2002 and terminated in July 2002. Capitalized interest was $3.0 million in 2002 compared to $1.0 million in 2001 due to the advanced stages of completion of the expansion projects at The Orleans, including the new room tower opened in August and the arena that opened in May 2003. Other income was $425,000 in 2002, including a loss on the disposal or abandonment of fixed assets of $2.3 million offset by a gain of $2.7 million on the interest rate swap agreement that was terminated in July 2002. Other expense of $1.8 million in 2001 was due to losses on disposals of equipment.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Aggregate Indebtedness and Fixed Payment Obligations
Our total long-term indebtedness (including current maturities) and fixed payment obligations on the land leases are summarized by year below:
We have fixed payment obligations on our leases and indebtedness due during 2004 of $5.4 million and $1.4 million, respectively. The total remaining fixed payment obligations under leases and indebtedness for years after 2004 are $416.2 million and $467.8 million, respectively. The fixed payment obligations represent payments due under operating lease agreements primarily for land on which three of our hotel-casinos are located.
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 both Coast Hotels and Coast Casinos, 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Aggregate Indebtedness and Fixed Payment Obligations (continued)
The Suncoast is located in the west end of the Las Vegas valley and occupies an approximately 50-acre site 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 that we lease pursuant to a lease dated May 1, 1993. We exercised the first of two 30-year renewal options on May 1, 2003, providing for rental payments of $190,000 per year during the first 10 years. Rental payments increase every 10 years to a maximum of $240,000 per year in twenty-first year of the final 30-year renewal option period.
See also Item 2 “Properties” for a discussion of our properties.
Liquidity and Capital Resources
Our principal sources of liquidity have consisted of cash provided by operating activities and debt financing. For 2004, we expect to fund operations, capital expenditures and our fixed payment obligations from cash provided by operating activities and availability under our credit facility. Cash provided by operating activities was $107.6 million in the year ended December 31, 2003, compared to $97.8 million in 2002 and $84.7 million in 2001.
Cash used in investing activities in each of the years ended December 31, 2002 and 2003 was primarily for capital expenditures. During 2003, cash used for capital expenditures was $91.0 million, including $12.6 million for construction accounts payable at December 31, 2002 related to expansion and remodeling projects at the Gold Coast and The Orleans, $27.2 million for the completion of the Orleans Arena, the Gold Coast expansion and luxury suites at the Suncoast, $18.1 million for the purchase of land at the Barbary Coast, $4.2 million for design work on the proposed Southcoast project, $1.2 million for capitalized interest and approximately $27.7 million for maintenance capital expenditures. Cash used in investing activities in 2002 was $198.0 million, primarily for capital expenditures, including $27.4 million for maintenance capital expenditures, $15.8 million for the purchase of an aircraft and approximately $156.3 million for expansion and remodeling projects at The Orleans and the Gold Coast. Cash used in investing activities in 2001 was $101.7 million, primarily for capital expenditures, including $24.9 million for maintenance capital expenditures, $11.9 million for the purchase of land held for future development, $15.5 million for additional hotel rooms at the Suncoast and approximately $55.2 million for expansion, remodeling and various other projects at The Orleans and the Gold Coast.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Cash used in financing activities was $5.3 million in 2003. Net proceeds of $195.9 million from the issuance of long-term debt and borrowings under revolving credit and term loan facilities were offset by repayments of borrowings under our prior credit facilities. In 2002, cash provided by financing activities was $94.3 million, primarily from the issuance in March 2002 of $100.0 million principal amount of senior subordinated notes. The net proceeds of $103.2 million were used to repay borrowings under our line of credit. In 2001, cash provided by financing activities was $16.8 million. 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.
In March 1999, Coast Hotels issued $175.0 million principal amount of 9.5% senior subordinated notes due in 2009 with interest payable on April 1 and October 1 of each year through their maturity in March 2009. On February 2, 2001, Coast Hotels issued an additional $50.0 million principal amount of senior subordinated notes. The net proceeds of approximately $49.1 million were used to reduce borrowings under the then existing credit facility. On March 19, 2002, Coast Hotels issued an additional $100.0 million principal amount of its senior subordinated notes. The notes were issued at a premium and the net proceeds of $103.2 million were used to reduce borrowings under the then existing credit facility. The notes issued in 2001 and 2002 were issued under the same indenture and have the same terms, interest rate and maturity date as the original $175.0 million principal amount of senior subordinated notes issued in 1999. Coast Casinos is a guarantor of this indebtedness.
In February 2003, Coast Hotels borrowed $18.0 million under a secured loan agreement, collateralized by our Canadair Challenger aircraft. The proceeds were used to reduce borrowings under the then existing credit facility. The loan bears interest at a premium of 2.25% over the 30-day London Interbank Offered Rate (“LIBOR”), which is adjusted monthly. As of December 31, 2003, the interest rate was 3.37%, and for the year ended December 31, 2003, the weighted average interest rate was 3.45%. Payments of interest only are required during the first twelve months. Commencing on March 28, 2004, Coast Hotels will be required to make monthly principal payments of $120,000 plus interest on the unpaid balance. A balloon payment of the remaining principal balance is due in February 2009.
In September 2003, Coast Hotels replaced its existing credit facility with a $300.0 million senior secured credit facility due September 2008. The facility includes a $225.0 million revolving credit facility and a $75.0 million term loan. Subject to the satisfaction of certain conditions, Coast Hotels may increase the commitments under the senior secured credit facility by up to $50.0 million. Coast Casinos is a full and unconditional guarantor of the indebtedness under the senior secured credit facility. Borrowings under the senior secured credit facility bear interest, selected monthly at Coast Hotels’ option, at a premium over the base rate or the one-, two-, three- or six-month Eurodollar Rate (“Eurodollar”). The premium varies depending on a certain financial ratio and can vary, if determined by reference to the base rate, between 0.5% and 1.25% and, if determined by reference to Eurodollar, between 1.75% and 2.5%. As of December 31, 2003, using the one-month Eurodollar option, the premium over Eurodollar was 2.00% and the interest rate was 3.15%. For the year ended December 31, 2003, the weighted average interest rate for the senior secured credit facility (including the indebtedness replaced thereby) was 3.40%. Coast Hotels incurs a commitment fee, payable quarterly in arrears, on the unused portion of the senior secured credit facility. This fee varies depending on a certain financial ratio and can vary between 0.375% and 0.5% per annum. As of December 31, 2003, the fee was 0.375% per annum times the average unused portion of the facility.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
In accordance with the terms of the senior secured credit facility, commencing on December 31, 2005 and each quarter thereafter, Coast Hotels is required to repay the $75.0 million term loan in an amount equal to 8.3333% of the principal amount of the term loan then outstanding. Advances under the senior secured credit facility may be used for working capital, general corporate purposes, and certain improvements to existing properties. As of December 31, 2003, all of the $75.0 million term loan was outstanding and $51.0 million was drawn on the $225.0 million revolving line of credit with $173.9 million of availability remaining (net of a $119,000 letter of credit).
The credit agreement governing the senior secured credit facility contains covenants that, among other things, limit Coast Hotels’ ability to pay dividends or make advances to Coast Casinos, to make certain capital expenditures, to repay certain existing indebtedness, to incur additional indebtedness or to sell material assets. Additionally, the credit agreement requires that Coast Hotels maintain certain financial ratios with respect to leverage and fixed charge coverage. Coast Hotels is also subject to certain covenants associated with the indenture governing its senior subordinated notes, including, in part, limitations on certain restricted payments, the incurrence of additional indebtedness and asset sales. At December 31, 2003, Coast Hotels was in compliance with all covenants and required ratios.
If the merger with Boyd is consummated, holders of the senior subordinated notes will have the right to require the surviving corporation in the merger to purchase the outstanding senior subordinated notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, the consummation of the merger will result in a change of control that will result in a default under the credit agreement. Boyd has advised the Company that it will refinance the Company’s indebtedness upon consummation of the merger.
Subsequent Events
Merger Agreement
On February 6, 2004, Coast Casinos entered into a definitive merger agreement with Boyd Gaming Corporation (“Boyd”). Under the agreement, Coast Casinos will become a wholly owned subsidiary of Boyd and will be positioned as a separate operating unit run by the current Coast Casinos management. See Item 1. “Business - Merger Agreement.”
Construction Projects
We own approximately 60 acres of land located in a gaming enterprise district on Las Vegas Boulevard South, adjacent to Interstate 15 and approximately 6 miles south of Tropicana Avenue. Subject to market conditions, availability of financing and receipt of required governmental approvals, we intend to develop a hotel-casino, the “South Coast,” on the site. We are currently developing plans for the project and anticipate beginning construction in the second quarter of 2004 and opening in the second half of 2005. There is no guarantee that we will actually develop the project in the anticipated time frame or at all. Through December 31, 2003, we had capitalized $4.2 million on the project, primarily for architecture and design, and $11.9 million for the purchase of the land.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Construction Projects (continued)
In the fourth quarter of 2003, we commenced construction of a new hotel tower at The Orleans. The project includes 461 hotel rooms and a remodeled and expanded swimming pool area. The project has a budget of $40.0 million and is expected to be completed in the fourth quarter of 2004.
In the ordinary course of operating our hotel-casinos, it is necessary to upgrade or replace fixtures and equipment and to make improvements that will extend the life of our physical plants. These maintenance capital expenditures totaled $27.6 million in 2003.
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:
• 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;
• change orders and plan or specification modifications;
• changes and concessions required by governmental or regulatory authorities;
• delays in obtaining or inability to obtain all required licenses, permits and authorizations; and
• disruption of our operations at our hotel-casinos by construction activities.
Other Matters
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 (“SFAS 145”) “Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13.” SFAS 145 addresses the presentation for losses on early retirements of debt in the statement of operations. . Due to the adoption of SFAS 145, we have not presented losses on early retirements of debt as an extraordinary item.
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. At December 31, 2003, we do not have any outstanding guarantees and accordingly the adoption of FIN 45 did not have a material impact on our financial position, results of operations or cash flows.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other Matters (continued)
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. We have reviewed our major relationships and our overall economic interests with other companies consisting of related parties, companies in which we have an equity position, and other suppliers to determine the extent of our variable economic interest in these parties. The adoption of FIN 46 did not have a material impact on our financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). As the Company’s equity securities are not publicly traded, the Company is a nonpublic entity as defined by SFAS 150, this pronouncement will be effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of SFAS 150 will not have a material impact on our financial position, results of operations or cash flows as the Company currently does not have any such financial instruments.
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. Changes 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
We are 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.
Item 7A.
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 revolving bank credit facility. Assuming that the amount of our variable rate debt remained constant at $144.0 million during the next twelve months, a hypothetical 1% increase in our variable interest rate would increase our interest expense by $1.4 million. As of December 31, 2003, we did not have any investments 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 for the twelve-month period ended December 31,:
(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 rates for fixed rate indebtedness.
(3) Based upon a weighted average of the one-month Eurodollar rate, for the senior credit facility, and the one-month LIBOR rate, for the variable rate note due March 2009, at December 31, 2003, plus a variable premium.
See also “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources” and see “Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial Statements Index - Notes to Financial Statements - Note 6 - Long-Term Debt.”
Item 8.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors, financial statements, notes to financial statements and financial statement schedule are filed as part of this report. See “Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial Statements, Financial Statement Schedules, and Exhibits.”
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives.
As of December 31, 2003, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the foregoing, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective within the reasonableness assurance threshold described above. There have been no significant changes in our internal controls (including our internal controls over financial reporting) or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation, and no significant deficiencies or material weaknesses in such internal controls requiring corrective actions were identified.
PART III
Item 10.
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, 2003.
Name
Age
Position(s) Held
Michael J. Gaughan
Director, Chairman of the Board and Chief Executive Officer
Harlan D. Braaten
Director, President and Chief Operating Officer
Jerry Herbst
Director, Treasurer and Assistant Secretary
J. Tito Tiberti
Director and Secretary
Gage Parrish
Director, Vice President, Chief Financial Officer, Assistant Treasurer and Assistant Secretary
Franklin Toti
Director, Vice President of Casino Operations
F. Michael Corrigan
Director
Charles Silverman
Director
Joseph A. Blasco
Director
Thomas V. Girardi
Director
Peter M. Thomas
Director
Clyde T. Turner
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 2004. He is also a director and Chairman of the Board and Chief Executive Officer of Coast Casinos, 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 Casinos 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.
Item 10. Directors and Executive Officers of the Registrant (continued)
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 2004. Mr. Braaten is also the President and Chief Operating Officer of Coast Casinos. Prior to joining Coast Hotels, from February 1991 to September 1995, 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 25 years of experience in the Nevada gaming industry.
Jerry Herbst. Mr. Herbst has been a director and Treasurer of Coast Hotels since its formation in September 1995. His current term as a director expires in 2004. He is also a director and Treasurer of Coast Casinos. Mr. Herbst has been with the Terrible Herbst, Inc., an owner and operator of gas stations and car washes, since 1959, and is currently its Chief Executive Officer. 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 Reorganization. Mr. Herbst has served as a member of the board of directors of Nevada Power Companyor its successor, Sierra Pacific Resources 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 2004. He is also a director and Secretary of Coast Casinos. Mr. Tiberti is the President, a director and a stockholder of, and together with his immediate family, controls J.A. Tiberti Construction Co., Inc, a construction company that served as the general contractor for the construction of The Orleans, the Gold Coast and the Suncoast and is anticipated to serve as the general contractor for the construction of the South Coast. 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 25 years and was a general partner of the Barbary Coast Partnership prior to the Reorganization.
Gage Parrish. Mr. Parrish was named Vice President, Finance, Assistant Secretary, Assistant Treasurer and a director of Coast Hotels in October 1995 and was promoted to Chief Financial Officer in February 1996. He is also a Vice President, Director, Assistant Secretary and Assistant Treasurer of Coast Casinos. His current term as a director expires in 2004. From 1986 until the Reorganization, he was the Controller and Chief Financial Officer of the Gold Coast Partnership. 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 25 years of experience in the gaming industry.
Franklin Toti. Mr. Toti has been a director of Coast Hotels since October 5, 1998. His current term as director expires in 2004. He is also a director and Vice President of Coast Casinos. 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 the Reorganization. Mr. Toti has 43 years of experience in the gaming industry.
F. Michael Corrigan. Mr. Corrigan has been a director of Coast Hotels since March 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. He is a member of the Special Committee of Coast Hotels’ board of directors and the Audit Committee of Coast Casinos’ board of directors.
Item 10. Directors and Executive Officers of the Registrant (continued)
Charles Silverman. Mr. Silverman has been a director of Coast Hotels since March 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 principal designer for The Orleans and the Suncoast. Mr. Silverman has served as the president of Yates-Silverman, Inc. since its inception in 1971.
Joseph A. Blasco. Mr. Blasco has been a director of Coast Hotels since December 1996. His current term as a director expires in 2004. Mr. Blasco is the Managing Partner of United Realty Investments and Tropicana Trail L.P., real estate development and management companies that own and manage rental units and office buildings in Las Vegas. He is a member of the Special Committee of Coast Hotels’ board of directors and the Audit and Compensation Committees of Coast Casinos’ board of directors.
Thomas V. Girardi. Mr. Girardi was appointed as a director of Coast Hotels effective as of August 12, 2002. His current term as a director expires in 2004. He is currently a partner in the Los Angeles law firm of Girardi and Keese and has been practicing law since 1965, specializing in medical malpractice, product liability law, toxic torts and bad faith insurance cases. Mr. Girardi also is a member of the Board of Directors of Spectrum Laboratories, Inc. and Supergen, Inc.
Peter M. Thomas. Mr. Thomas was appointed as a director of Coast Hotels effective as of August 12, 2002. His current term as a director of the Company expires in 2004. Mr. Thomas has been the Managing Member of Thomas & Mack Co. Limited Liability Company, a commercial real estate development and management company with approximately two million square feet of office and industrial properties, for more than the last five years. Mr. Thomas served on the Board of Directors of Rio Suite Hotel and Casino, Inc. from 1995 through 1998. Mr. Thomas previously served as President and Chief Operating Officer of Bank of America, Nevada and, prior to the acquisition of Valley Capital Corporation by Bank of America, the President and Chief Operating Officer of Valley Bank of Nevada. Mr. Thomas is also a member of the Board of Directors of City National Corporation. He is a member of the Special Committee of Coast Hotels’ board of directors and the Audit Committee of Coast Casinos’ board of directors.
Clyde T. Turner. Mr. Turner was appointed as a director of the Coast Hotels effective as of August 12, 2002. His current term as a director of the Company expires in 2004. Since 1992, Mr. Turner has been Chairman and Chief Executive Officer of Turner Investments, Ltd. and a number of special purpose real estate development companies known as the Spectrum Companies. He has been a director of Sierra Pacific Resources since 2001. Mr. Turner is a former member of the Nevada Gaming Commission. His previous positions in the gaming industry include Chairman and Chief Executive Officer of Circus Circus Enterprises, Inc. (now Mandalay Bay Group) until his retirement from those positions in 1998, Executive Vice President, Chief Financial Officer and Director of Golden Nugget, Inc./Mirage Casinos, Inc., and Director and Executive Committee member of the American Gaming Association. He is a member of the Special Committee of Coast Hotels’ board of directors and is Chairman of the Audit Committee of Coast Casinos’ board of directors.
Item 10. Directors and Executive Officers of the Registrant (continued)
The Company’s board of directors has a standing Special Committee that consists entirely of directors who are not employees of the Company. The members of the Special Committee are Messrs. Turner, Corrigan, Blasco and Thomas, who are the members of the Coast Casinos Audit Committee. The Special Committee holds joint meetings with the Coast Casinos Audit Committee and assists the Company’s board of directors in its general oversight of the Company’s financial reporting. Because the Company does not have an audit committee, it does not have an audit committee financial expert.
Compensation of Directors
Directors receive no compensation for service on the Coast Hotels Board of Directors or its committees. Directors of Coast Hotels are also directors of Coast Casinos, and all directors who are not employees of Coast Hotels or Coast Casinos receive fees from Coast Casinos.
Code of Ethics
Coast Hotels has not adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. Coast Casinos, which wholly owns Coast Hotels, has adopted such a code of ethics, and it is available on Coast Casinos’ website, www.coastcasinos.com under the caption “Investors.” Because the principal executive officer and senior financial officers of Coast Hotels each respectively performs substantially similar functions for Coast Casinos and is obligated to comply with Coast Casinos’ code of ethics, Coast Hotels does not believe that adopting such a code for Coast Hotels would meaningfully improve its corporate governance policies.
Item 11.
Item 11.
Executive Compensation
The following table sets forth all compensation earned by or paid by Coast Hotels during 2003, 2002 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
(1) The amounts for Mr. Gaughan reflect matching contributions paid to our 401(k) Profit Sharing Plan and Trust and personal usage of the company aircraft deemed to be compensation.
(2) The amounts for Messrs. Braaten and Parrish reflect matching contributions paid to our 401(k) Profit Sharing Plan and Trust.
Item 11. Executive Compensation (continued)
Stock Options
Mr. Braaten was granted options to purchase 30,415 shares of Coast Casinos, 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 Casinos, 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of our outstanding capital stock is owned by our parent company, Coast Casinos, Inc.
Item 13.
Item 13.
Certain Relationships and Related Transactions
Current amounts due from Coast Casinos primarily represent refundable advances for the payment of income taxes. The amounts due from Coast Casinos which are presented as a reduction to stockholder’s equity represent cash advances for payments of dividends and the purchase of treasury stock by Coast Casinos.
We maintain numerous racetrack dissemination contracts with Las Vegas Dissemination Company, Inc. (“LVDC”). Michael J. Gaughan’s son, John Gaughan, is the president and sole stockholder of LVDC. LVDC has been granted a license by the Nevada Gaming Authorities to disseminate live racing for those events and tracks for which it enters contracts and has been granted the exclusive right to disseminate all pari-mutuel services and race wire services to Nevada casinos. Under these dissemination contracts, we pay to LVDC between 3% and 5% of the wagers we accept for races held at the racetracks covered by the respective contracts. We also pay to LVDC a monthly fee for race wire services. The terms on which the dissemination services are provided are regulated by the Nevada Gaming Authorities. Additionally, we have other agreements with LVDC, which are not subject to regulation by Nevada Gaming Authorities, to provide ancillary services, equipment and support to our race and sports book operations. For the fiscal year ended December 31, 2003, we incurred expenses to LVDC of approximately $1.1 million.
J. A. Tiberti Construction Company (“Tiberti Construction”) served as the general contractor for the expansion of the Gold Coast and The Orleans the construction of the Orleans Arena, miscellaneous construction projects at the Suncoast and preconstruction services at the South Coast. J. Tito Tiberti owns approximately 5.7% of the outstanding common stock of Coast Casinos, and is a director and Secretary of both Coast Hotels and Coast Casinos. Mr. Tiberti is the president, a director and stockholder of, and together with his immediate family members, controls Tiberti Construction.
For the fiscal year ended December 31, 2003, we incurred expenses to Tiberti Construction of approximately $29.4 million. At December 31, 2003, we had construction accounts payable to Tiberti Construction of approximately $799,000.
In 1995, we entered into a long-term 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 Casinos, is the managing partner of the Tiberti Company. During the year ended December 31, 2003, we incurred rental expenses to the Tiberti Company of $4.5 million, of which $2.7 million was paid. Deferred rent payable to the Tiberti Company was $17.2 million as of December 31, 2003.
Item 13. Certain Relationships and Related Transactions (continued)
Until October 2002, Michael J. Gaughan and Franklin Toti (along with the Leo Lewis Trust) were owners of LGT Advertising, which served as our advertising agency. Effective November 1, 2002, we purchased the partnership interests of LGT Advertising from Messrs. Gaughan, Toti and the Leo Lewis Trust, for the sum of $1,000. Prior to the November 2002 acquisition, LGT Advertising provided advertising design services and purchases advertising for our casinos from third parties and passed any discounts directly through to us. LGT Advertising received no compensation or profit for such activities, and invoiced us for actual costs incurred. LGT Advertising used our facilities and employees in rendering its services, but did not pay any compensation to us for such use. Messrs. Gaughan and Toti received no compensation from LGT Advertising. Advertising expenses to LGT Advertising were $0 for the fiscal year ended December 31, 2003.
LGT Advertising provided advertising and design services to Casino Queen, Inc., which operates the Casino Queen riverboat casino and hotel facility in East St. Louis, Illinois. Michael Gaughan owns 15% and Frank Toti owns 5% percent of the shares of stock in Casino Queen, Inc. Mr. Gaughan also serves as a director for Casino Queen, Inc. LGT rendered its services to Casino Queen, Inc. on the same terms as would be offered to an unaffiliated third party. In 2003, after the acquisition in November 2002, we began providing advertising and design services to Casino Queen, Inc. and received $66,000 in payments from Casino Queen, Inc.
We have purchased certain of our equipment for our operations from RJ & S Inc., a Nevada corporation (“RJS”) that is owned by Michael J. Gaughan’s father, Jackie Gaughan, and Steven Delmont, our manager of food operations. Pursuant to the terms of our agreement with RJS, RJS purchases certain restaurant equipment and supplies and invoices us only for the actual amounts billed to RJS, plus applicable sales tax. Provisions of the agreement prohibit RJS employees, officers and shareholders from receiving any discounts, rebates, payments or gifts with respect to the equipment and supplies. For the fiscal year ended December 31, 2003, we made purchases from RJS totaling approximately $1.5 million.
Michael J. Gaughan is the majority partner of Nevada Wallboards, a Nevada general partnership (“Nevada Wallboards”), which prints wallboards and parlay cards for use in our race and sports books. For the fiscal year ended December 31, 2003, we incurred expenses to Nevada Wallboards of approximately $275,000.
Charles Silverman, a director of Coast Hotels and Coast Casinos, is the president of Yates-Silverman, Inc., which served as the designer of The Orleans, the Suncoast and various expansion projects at The Orleans, the Suncoast and the Gold Coast during 2001 and 2002. Yates-Silverman is currently assisting us in the design of the “South Coast” project. For the fiscal year ended December 31, 2003 we incurred expenses to Yates-Silverman of $889,000.
Coast Hotels promotes The Orleans by advertising on NASCAR vehicles operated by Orleans Motor Sports, Inc. In 2002, we entered into an agreement with Orleans Motor Sports, Inc. to place the logo of The Orleans on a truck racing in NASCAR’s Craftsman Truck Series, on transportation vehicles utilized by Orleans Motor Sports, Inc. and on any other vehicles raced by Orleans Motor Sports, Inc. in NASCAR races. Michael J. Gaughan is the sole owner of Orleans Motor Sports, Inc. Brendan Gaughan, the main driver employed by Orleans Motor Sports, Inc., is the son of Michael J. Gaughan. For the fiscal year ended December 31, 2003 we paid or provided in-kind services in the amount of $600,000 to Orleans Motor Sports, Inc. pursuant to a sponsorship agreement.
Item 13. Certain Relationships and Related Transactions (continued)
Coast Benefits, a division of Coast Hotels, operates a Group Benefits Plan in which qualified employees of Coast Hotels are entitled to participate. Eligible employees are covered under the plan and may elect coverage for their dependents, for a fee, through payroll deduction. Coast Benefits also offers participation in the Group Benefits Plan to other entities in which Michael Gaughan or his son, John Gaughan, has an interest, including Michael J. Gaughan Airport Slot Concession, Inc., Gaughan-Richardson Development LLC, G & M Interactive LLC, Las Vegas Dissemination, Inc., Nevada Wallboards, Orleans Motor Sports, Inc. and Kroyer Racing Engines, LLC. Each division of Coast and the other entities listed above is charged a monthly fee for eligible employees, which was $260 per employee as of January 2004, plus amounts withheld for dependent coverage to cover the costs of benefits and administration of the plan. For the fiscal year ended December 31, 2003, Coast Hotels collected, in the aggregate, $856,000 from the related entities and paid benefits and administrative costs, in the aggregate, of $1.0 million on behalf of the related entities. At December 31, 2003, Coast Hotels was owed approximately $500,000 by related entities for excess benefits and administrative costs paid.
Michael J. Gaughan, Jr., the son of Michael J. Gaughan and a Vice President and the general manager of the Barbary Coast, and David Ross, a Vice President and the general manager of the Suncoast, are owners of Coast Vacations, Inc., a travel agency operating under the name Las Vegas Vacations (“LVV”) that markets our hotel-casino properties to residents of Vancouver, Canada. Coast Hotels has agreed to pay LVV approximately $10,000 per month to promote its hotel-casinos subject to certain conditions designed to assure that LVV is utilizing such funds in a productive manner and for purposes that benefit the Company. During the fiscal years ended December 31, we paid $120,000 to LVV.
Michael J. Gaughan, Jr. is a Vice President and the general manager of the Barbary Coast. For the fiscal year ended December 31, 2003, Michael J. Gaughan, Jr. received a total salary and bonus in the amount of $175,000.
Coast Hotels operates a satellite sports book at the Plaza Hotel and Casino (“Plaza”), a hotel-casino in Las Vegas that is primarily owned by Jackie Gaughan, Michael J. Gaughan’s father. Coast Hotels combines the sports book wagers generated at the Plaza with wagers accepted at its other sports books. The Plaza is allocated a pro-rata share of the net sports book winnings or losses, based on the percentage of wagers placed at the Plaza compared to the combined wagers placed at all Coast Hotels’ sports books. Such winnings or losses are netted against the direct and indirect costs of operating the sports book at the Plaza including, but not limited to, labor costs, advertising costs, printing costs and state and federal taxes. For the fiscal year ended December 31, 2003, the Plaza received approximately $1.0 million and Coast Hotels retained approximately $474,000 for direct and indirect costs associated with operating the Plaza sports book.
Item 14.
Item 14.
Principal Accountant Fees and Services
Coast Casinos’ Audit Committee Charter assigns its audit committee, the following duties and responsibilities related to our external auditor:
• appoint and retain, establish compensation for, evaluate and terminate when appropriate, the external auditors, which shall report directly to the audit committee;
• pre-approve all audit and permissible non-audit services to be performed by the external auditor and establish policies and procedures for the engagement of the external auditor to provide those services; and
Item 14. Principal Accountant Fees and Services (continued)
• consider, at least annually, the independence of the external auditor, including whether the external auditor’s performance of permissible non-audit services is compatible with the external auditor’s independence.
Delegation Policy Regarding Pre-approvals for Non-Auditing Services
Pursuant to a vote of the members of the Coast Casinos Audit Committee, the Chairman of the Coast Casinos Audit Committee has been delegated authority to grant pre-approvals for non-auditing services required to be pre-approved pursuant to Securities and Exchange Commission regulations, provided that such decision to grant pre-approval is presented to the full Coast Casinos Audit Committee at its next scheduled meeting and the Chairman has concluded that any non-audit services provided are compatible with the maintenance of the accounting firm’s independence in the conduct of its auditing functions for Coast Casinos. The Chairman of the Coast Casinos Audit Committee does not have the authority to grant pre-approvals for non-audit services unless such non-audit services are, in fact, compatible with the maintenance of the accounting firm’s independence.
The following is a summary of fees and services approved by Coast Casinos’ Audit Committee and performed by our External Auditor, PricewaterhouseCoopers LLP for the years ended December 31, 2003 and 2002:
Audit Fees - The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for (i) the audit of our annual financial statements included in our Form 10-K; (ii) review of our interim financial statements included in quarterly reports of Form 10-Q for the periods ended March 31, June 30 and September 30, 2003 and 2002; (iii) services relating to comfort letters; and (iv) consents and assistance in connection with other filings and public offering documents filed with the Securities and Exchange Commission for those fiscal years were:
Audit-Related Fees - The aggregate fees billed in each of the last two fiscal years for audit-related services rendered by PricewaterhouseCoopers LLP including (i) accounting consultations concerning financial accounting and reporting standards; (ii) internal control reviews; and (iii) other non-statutory attestation services for those years were:
Tax Fees - The aggregate fees billed in each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice and tax planning were:
All Other Fees -The aggregate fees billed in each of the last two fiscal years for products and services provided by PricewaterhouseCoopers LLP (except those included under the caption “Audit Fees”) were:
PART IV
ITEM 15.
ITEM 15.
Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
PAGE
1.
Financial Statements Index
2.
Financial Statement Schedule Index:
Schedule II - Valuation and Qualifying Accounts
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (continued)
Exhibit Index
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (continued)
Exhibit Index (continued)
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (continued)
Exhibit Index (continued)
10.23
Amended and Restated Trademark Security Interest Assignment dated as of September 26, 2003 made by Coast Hotels and Casinos, Inc. and Coast Casinos, Inc., a Nevada corporation, together with each other Person who may become a party hereto, jointly and severally, in favor of Bank of America, N.A., as the Administrative Agent under the Credit Agreement for the ratable benefit of each of the Lenders which are parties to the Credit Agreement from time to time. (11)
10.24
Amended and Restated Pledge Agreement dated as of September 26, 2003, made by Coast Casinos, Inc., in favor of and for the benefit of Bank of America, N.A., as Administrative Agent under the Credit Agreement, and in favor of each of the Lenders therein named. (11)
10.25
Construction Deed of Trust with Assignment of Rents and Fixture Filing, for the Southcoast Hotel and Casino, made as of September 26, 2003, by Coast Hotels and Casinos, Inc., as trustor, Equitable Deed Company, as trustee, and Bank of America, N.A., as beneficiary, as Administrative Agent for itself and the other lenders now or hereafter a party to that certain Amended and Restated Credit Agreement. (11)
10.26
Deed of Trust with Assignment of Rents and Fixture Filing, for the Barbary Coast Hotel and Casino, made as of September 26, 2003, by Coast Hotels and Casinos, Inc., as trustor, Equitable Deed Company, as trustee, and Bank of America, N.A., as beneficiary, as Administrative Agent for itself and the other lenders now or hereafter a party to that certain Amended and Restated Credit Agreement. (11)
10.27
Amendment to Amended and Restated Construction Deed of Trust with Assignment of Rents and Fixture Filing, for the Suncoast Hotel and Casino, made as of September 26, 2003, by Coast Hotels and Casinos, Inc., as trustor, Equitable Deed Company, as trustee, and Bank of America, N.A., as beneficiary, as Administrative Agent for itself and the other lenders now or hereafter a party to that certain Amended and Restated Credit Agreement. (11)
10.28
Amendment to Amended and Restated Construction Deed of Trust with Assignment of Rents and Fixture Filing, for the Gold Coast Hotel and Casino, made as of September 26, 2003, by Coast Hotels and Casinos, Inc., as trustor, Equitable Deed Company, as trustee, and Bank of America, N.A., as beneficiary, as Administrative Agent for itself and the other lenders now or hereafter a party to that certain Amended and Restated Credit Agreement. (11)
10.29
Amendment to Amended and Restated Construction Deed of Trust with Assignment of Rents and Fixture Filing, for The Orleans Hotel and Casino, made as of September 26, 2003, by Coast Hotels and Casinos, Inc., as trustor, Equitable Deed Company, as trustee, and Bank of America, N.A., as beneficiary, as Administrative Agent for itself and the other lenders now or hereafter a party to that certain Amended and Restated Credit Agreement. (11)
10.30
Amendment No. 1 to the Amended and Restated Credit Agreement, dated as of November 13, 2003.
10.31
Amendment No.1 to the Amended and Restated Security Agreement of Coast Hotels and Casinos, Inc., dated as of November 13, 2003.
10.32
Amendment No. 2 to the Amended and Restated Security Agreement of Coast Hotels and Casinos, Inc. dated as of February 26, 2004.
10.33
Security Agreement of Coast Hotels and Casinos Indiana, LLC, dated as of February 26, 2004, by Coast Hotels and Casinos Indiana, LLC in favor of Bank of America, N.A., as Administrative Agent under the Credit Agreement and in favor of each of the lenders named therein.
10.34
Guaranty, dated as of February 26, 2004, made by Coast Hotels and Casinos Indiana, LLC, in favor of Bank of America, N.A., as Administrative Agent under the Credit Agreement and in favor of each of the lenders named therein.
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (continued)
Exhibit Index (continued)
(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. 2 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 Annual Report on Form 10-K for the period ended December 31, 1995 and incorporated herein by reference.
(4) 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 incorporated herein by reference
(5) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Registration Statement on Form S-4 (File no. 333-79657) dated May 28, 1999 and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Annual Report on Form 10-K for the period ended December 31, 1999 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Registration Statement on Form S-4 (File no. 333-55170) dated February 7, 2001 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Form 8-K (File no. 333-04356) dated March 21, 2002 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2002 and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Resorts, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Form 8-K (File no. 333-04356) dated October 9, 2003 and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as an exhibit to Coast Hotels and Casinos, Inc.’s Form 8-K (File no. 333-04356) dated February 10, 2004 and incorporated herein by reference.
Item 15. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K (continued)
Exhibit Index (continued)
(b) Reports on Form 8-K
On October 9, 2003, the Company filed a form 8-K under Item 5, Other Events, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, with respect to the new credit facility entered into on September 26, 2003.
On November 17, 2003, the Company filed a Form 8-K under Item 9, Regulation FD Disclosure, with respect to a press release by Coast Casinos, Inc. announcing that its subsidiary, Coast Hotels and Casinos, Inc., had become a member of Orange County Development, LLC, a limited liability company that is an applicant for the operating agent contract that will be awarded by the Indiana Gaming Commission.
On February 2, 2004, the Company filed a Form 8-K under Item 9, Regulation FD Disclosure, with respect to the Coast Casinos Board of Directors’ January 26, 2004 approval of a $3.50 per share cash dividend, payable on February 5, 2004 to Coast Casinos stockholders of record at the close of business on January 26, 2004.
On February 10, 2004, the Company filed Form 8-K under Item 5, Other Events and Required FD Disclosure, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, with respect to the Agreement and Plan of Merger among Boyd Gaming Corp. and Coast Casinos, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Las Vegas, State of Nevada, on March 9, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Index to Consolidated Financial Statements
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
To the Directors and Stockholder of Coast Hotels and Casinos, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder’s equity and cash flows present fairly, in all material respects, the financial position of Coast Hotels and Casinos, Inc. and Subsidiaries (a wholly owned subsidiary of Coast Casinos, Inc.) (the “Company”) as of December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
January 28, 2004, except for Note 14 - “Subsequent Event” as to which the date is February 6, 2004
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(dollars in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2002 and 2003
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
For the Years Ended December 31, 2001, 2002 and 2003
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2002 and 2003
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-Background Information
Background Information
Coast Hotels and Casinos, Inc. and Subsidiaries (the “Company” or “Coast Hotels”) is a Nevada corporation and a wholly owned subsidiary of Coast Casinos, Inc. (“Coast Casinos”), which is also a Nevada corporation. Coast Casinos changed its name from Coast Resorts, Inc. on July 2, 2002. Coast Hotels was formed in September 1995 and owns and operates the following hotel-casinos in Las Vegas, Nevada:
• The Orleans Hotel and Casino opened in 1996, and is located approximately one mile west of the Las Vegas Strip on Tropicana Avenue.
• Gold Coast Hotel and Casino opened in 1986, and is located approximately one mile west of the Las Vegas Strip on Flamingo Road.
• The Suncoast Hotel and Casino opened in 2000, and is located in the western Las Vegas valley.
• Barbary Coast Hotel and Casino opened in 1979, and is located on the Las Vegas Strip.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its Subsidiaries. All intercompany balances and transactions have been eliminated for all periods presented.
NOTE 2-Summary of Significant Accounting Policies
Inventories
Inventories, which consist primarily of food and beverage, liquor store, and gift shop merchandise, are valued at the lower of cost or market value (which is determined using the first-in, first-out and the average cost methods) except for the base stocks of bar glassware and restaurant china which are stated at original cost with subsequent replacements charged to expense.
Original Issue Premium and Debt Issue Costs
Original issue premium is amortized over the life of the related indebtedness using the effective interest method. Costs associated with the issuance of debt are deferred and amortized over the life of the related indebtedness also using the effective interest method.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Accounts Receivable
Accounts receivable are due within one year and recorded net of amounts estimated to be uncollectible.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Expenditures for additions, renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in income. Depreciation is computed by the straight-line method over the estimated useful lives of property and equipment, which range from 5 to 15 years for equipment and 25 to 40 years for buildings and improvements.
During construction, Coast Hotels capitalizes interest and other direct and indirect development costs. Interest is capitalized monthly by applying the effective interest rate on certain borrowings to the average balance of expenditures. The interest that was capitalized was $1.0 million (2001), $3.0 million (2002) and $1.3 million (2003).
Pre-opening and Related Promotional Expense
There were no pre-opening costs during the years ended December 31, 2001, 2002 and 2003.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by Coast Hotels are reviewed for impairment whenever events or changes in circumstances warrant such a review. The carrying value of long-lived or intangible assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the assets. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement retains the prior requirements of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” to recognize impairments on property, plant and equipment. The adoption of SFAS 144 had no impact on the Company’s financial position, results of operations or cash flows.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Advertising Costs
Costs for advertising are expensed as incurred, except costs for direct-response advertising, which are capitalized and amortized over the period of the related program, which normally does not exceed two to three months. Direct-response advertising costs consist primarily of mailing costs associated with direct mail programs. Capitalized advertising costs were immaterial at December 31, 2001, 2002 and 2003. Advertising expense was approximately $8.3 million, $7.3 million and $7.2 million for the years ended December 31, 2001, 2002 and 2003, respectively.
Revenue Recognition
In accordance with common industry practice, the Company recognizes as casino revenue the net win from gaming activities, which is the difference between amounts wagered and amounts paid to winning patrons. Additionally, the Company recognizes revenue upon the occupancy of its hotel rooms, upon the delivery of food, beverage and other services, and upon performance for entertainment revenue.
Deferred Revenue
Wagers received on all sporting events are recorded as a liability until the final outcome of the event when the payoffs, if any, can be determined.
Progressive Jackpot Payouts
Coast Hotels has a number of progressive slot machines, progressive poker games and a progressive keno game. As coins are played on the progressive slot machines, the amount available to win increases, to be paid out when the appropriate jackpot is hit. The keno game and poker game payouts also increase with the amount of play, to be paid out when hit. In accordance with common industry practice, Coast Hotels has recorded the progressive jackpot as a liability with a corresponding charge against casino revenue.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Promotional Allowances
The retail value of hotel accommodations and food and beverage items provided to customers without charge is included in gross revenues and then deducted as promotional allowances, to arrive at net revenues. The following is a breakdown of these complimentary revenues for the years ended December 31, 2001, 2002 and 2003:
The estimated cost of providing these complimentary services is as follows for the years ended December 31, 2001, 2002 and 2003:
The cost of promotional allowances has been allocated to expense as follows for the years ended December 31, 2001, 2002 and 2003:
Slot Club Promotion
Coast Hotels has established promotional clubs to encourage repeat business from frequent and active slot machine customers. Members in the clubs earn points based on slot activity accumulated in the members’ account. Points can be redeemed for cash, food and beverage, retail items and services in our hotel-casinos. Coast Hotels accrues, as a reduction to revenue, for slot club points expected to be redeemed in the future.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Income Taxes
Coast Hotels is included in the consolidated federal income tax return filed by Coast Casinos. Coast Hotels’ tax allocation is based on the amount of tax it would incur if it filed a separate return. Coast Casinos will pay Coast Hotels an amount equal to the tax benefit arising from the utilization of net operating losses of Coast Hotels to the extent that such losses result in a reduction in the amount of tax payable by Coast Casinos.
Coast Hotels accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109 deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents
Coast Hotels considers all highly liquid investments with a remaining maturity at acquisition of three months or less to be cash equivalents. Cash in excess of daily requirements is typically invested in U.S. Government-backed repurchase agreements with maturities of 30 days or less. Such investments are generally made with major financial institutions having a high credit rating. At times, cash deposited in financial institutions may be in excess of federally insured limits. These instruments are stated at cost, which approximates fair value because of their short maturity.
Short-term Investments
Short-term investments purchased with an original maturity of over three months but less than one year are stated at cost, which approximates fair value because of their short maturity. There were no short-term investments at December 31, 2002 or 2003.
Concentration of Credit Risk
The Company extends credit to patrons after background checks and investigations of creditworthiness and does not require collateral. Coast Hotels has a concentration of credit risk in Southern Nevada. The Company records provisions for potential credit losses and such losses have been within management’s expectations. Management believes that as of December 31, 2003, no significant concentration of credit risk exists for which an allowance has not already been determined and recorded.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company’s management to 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, management evaluates 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. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Stock Options
The Financial Accounting Standards Board has issued Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). This Statement defines a fair value based method of accounting for an employee stock option in which companies account for stock options by recognizing, as compensation expense in the statement of operations, the fair value of stock options granted over the vesting period of the option. The statement also permits companies to continue accounting for stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Coast Hotels has elected to account for stock options under APB No. 25 and to disclose the pro forma impact on net income as if Coast Hotels had used the fair value method recommended by SFAS 123, as amended by Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123.” The following table illustrates the effect on net income if the Company had applied the fair value recognition principles of SFAS 123 to stock-based compensation:
The fair value for the options was estimated at the date of grant to be $20.90 using the minimum value method (which is appropriate for valuing options of companies without publicly traded stock) with the following weighted-average assumptions: risk-free rate of return of approximately 5.0%, expected life of the options of five years and a 0% dividend yield. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the respective vesting periods of the options.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
Accounting for Derivative Instruments and Hedging Activity
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 is not applied retroactively to financial statements for prior periods. The Company adopted SFAS 133 on January 1, 2001 as required.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 (“SFAS 145”) “Rescission of FASB Statements Nos. 4, 44 and 64 and Amendment of FASB Statement No. 13.” SFAS 145 addresses the presentation for losses on early retirements of debt in the statement of operations. Due to the adoption of SFAS 145, the Company has not presented losses on early retirements of debt as an extraordinary item.
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. At December 31, 2003, the Company did not have any outstanding guarantees and accordingly the adoption of FIN 45 did not have a material impact on our financial position, results of operations or cash flows.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The Company has reviewed its major relationships and its overall economic interests with other companies consisting of related parties, companies in which it has an equity position, and other suppliers to determine the extent of our variable economic interest in these parties. The adoption of FIN 46 did not have a material impact on the Company’s financial position, results of operations or cash flows.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). As the Company’s equity securities are not publicly traded, the Company is a nonpublic entity as defined by SFAS 150, and this pronouncement will be effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of SFAS 150 will not have a material impact on the Company’s financial position, results of operations or cash flows as the Company currently does not have any such financial instruments.
Reclassifications
Certain amounts in the 2001 and 2002 financial statements have been reclassified to conform to the 2003 presentation.
NOTE 3-Property and Equipment
Major classes of property and equipment consist of the following as of December 31, 2001 and 2002:
On January 17, 2003, the Company purchased approximately 2.5 acres of real property adjacent to the Barbary Coast for $18.1 million. The Company uses the land for valet parking and as an employee parking lot.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-Leases
The Barbary Coast occupies approximately 1.8 acres at the intersection of Flamingo Road and the Strip 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 expired on May 1, 2003. Coast Hotels exercised 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. Coast Hotels has 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, Coast Hotels has a right of first refusal.
The Orleans occupies a portion of an approximately 80-acre site on West Tropicana Avenue that is leased 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 both Coast Casinos and 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 the Company, 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, the Company has 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 of exercise, provided that the purchase price will not be less than 10 times, nor more than 12 times, annual rent at such time.
The Suncoast occupies an approximately 50-acre site that is leased pursuant to an 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 Coast Hotels, 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 the Company 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. Coast Hotels has a right of first refusal in the event the landlord desires to sell the property at any time during the lease term.
In February 2002 Coast Hotels signed an agreement to sublease space from Green Valley Partners, Inc., a Nevada corporation doing business as Renata’s, a casino on Sunset Road in Henderson, Nevada. Coast Hotels operates a sports book at Renata’s and pays rent to Green Valley Partners equal to one half of the operating profit of the Renata’s sports book, as defined. The agreement calls for payment of rent only after Coast Hotels had recovered approximately $706,000 related to the initial construction and development of the Renata’s sports book. Such expenses were fully recovered during 2003, and rental expense of approximately $11,000 was incurred during 2003.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-Leases (continued)
Future Minimum Lease Payments
The following is an annual schedule of future minimum cash lease payments required under operating leases that have initial or remaining noncancelable terms in excess of one year as of December 31, 2003:
Operating Leases
Rent Expense
Rent expense for the years ended December 31, 2001, 2002 and 2003 is as follows:
NOTE 5-Accrued Liabilities
Major classes of accrued liabilities consist of the following as of December 31, 2002 and 2003:
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-Long-Term Debt
Long-term debt consists of the following as of December 31, 2002 and 2003:
In March 1999, the Company issued $175.0 million principal amount of 9.5% senior subordinated notes due in 2009 with interest payable on April 1 and October 1 of each year through their maturity in March 2009. On February 2, 2001, the Company issued an additional $50.0 million principal amount of senior subordinated notes. The net proceeds of approximately $49.1 million were used to reduce borrowings under the then existing credit facility. On March 19, 2002, the Company issued an additional $100.0 million principal amount of its senior subordinated notes. The notes were issued at a premium and the net proceeds of $103.2 million were used to reduce borrowings under the then existing credit facility. The notes issued in 2001 and 2002 were issued under the same indenture and have the same terms, interest rate and maturity date as the original $175.0 million principal amount of senior subordinated notes issued in 1999. Coast Casinos is a full and unconditional guarantor of this indebtedness.
In February 2003, the Company borrowed $18.0 million under a secured loan agreement, collateralized by a Company-owned aircraft. The proceeds were used to reduce borrowings under the then existing credit facility. The loan bears interest at a premium of 2.25% over the 30-day London Interbank Offered Rate (“LIBOR”), which is adjusted monthly. As of December 31, 2003, the interest rate was 3.37%, and for the year ended December 31, 2003, the weighted average interest rate was 3.45%. Payments of interest only are required during the first twelve months. Commencing on March 28, 2004, the Company will be required to make monthly principal payments of $120,000 plus interest on the unpaid balance. A balloon payment of the remaining principal balance is due in February 2009.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-Long-Term Debt (continued)
In September 2003, the Company replaced its existing credit facility with a $300.0 million senior secured credit facility due September 2008. The facility includes a $225.0 million revolving credit facility and a $75.0 million term loan. Subject to the satisfaction of certain conditions, the Company may increase the commitments under the senior secured credit facility by up to $50.0 million. Coast Casinos is a full and unconditional guarantor of the indebtedness under the senior secured credit facility. Borrowings under the senior secured credit facility bear interest, selected monthly at the Company’ option, at a premium over the base rate or the one-, two-, three- or six-month Eurodollar Rate (“Eurodollar”). The premium varies depending on a certain financial ratio and can vary, if determined by reference to the base rate, between 0.5% and 1.25% and, if determined by reference to Eurodollar, between 1.75% and 2.5%. As of December 31, 2003, using the one-month Eurodollar option, the premium over Eurodollar was 2.00% and the interest rate was 3.15%. For the year ended December 31, 2003, the weighted average interest rate for the senior secured credit facility (including the indebtedness replaced thereby) was 3.40%. The Company incurs a commitment fee, payable quarterly in arrears, on the unused portion of the senior secured credit facility. This fee varies depending on a certain financial ratio and can vary between 0.375% and 0.5% per annum. As of December 31, 2003, the fee was 0.375% per annum times the average unused portion of the facility.
In accordance with the terms of the senior secured credit facility, commencing on December 31, 2005 and each quarter thereafter, the Company is required to repay the $75.0 million term loan in an amount equal to 8.3333% of the principal amount of the term loan then outstanding. Advances under the senior secured credit facility may be used for working capital, general corporate purposes, and certain improvements to existing properties. As of December 31, 2003, all of the $75.0 million term loan was outstanding and $51.0 million was drawn on the $225.0 million revolving line of credit with $173.9 million of availability remaining (net of a $119,000 letter of credit).
The credit agreement governing the senior secured credit facility contains covenants that, among other things, limit the Company’ ability to pay dividends or make advances to Coast Casinos, to make certain capital expenditures, to repay certain existing indebtedness, to incur additional indebtedness or to sell material assets. Additionally, the credit agreement requires that the Company maintain certain financial ratios with respect to leverage and fixed charge coverage. The Company is also subject to certain covenants associated with the indenture governing its senior subordinated notes, including, in part, limitations on certain restricted payments, the incurrence of additional indebtedness and asset sales. At December 31, 2003, management believes that the Company was in compliance with all covenants and required ratios. See Note 14 - “Subsequent Event.”
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-Long-Term Debt (continued)
On April 2, 2002, the Company entered into an interest rate swap agreement with a member of the Company’s bank group wherein $100.0 million notional amount of the Company’s fixed rate debt was converted to a floating rate. The fixed rate paid to the Company was 5.77% and the floating rate paid to the bank was based on six-month LIBOR and set at 2.33% for the six months ended September 30, 2002. On July 16, 2002, the Company terminated the swap agreement and received $3.75 million, comprised of $1.0 million of accrued interest receivable and a gain of $2.7 million, which was recorded in the second quarter.
Maturities on long-term debt are as follows:
NOTE 7-Income Taxes
The components of the income tax provision for the years ended December 31, 2001, 2002 and 2003 were as follows:
The income tax provision for the years ended December 31, 2001, 2002 and 2003 differs from that computed at the federal statutory corporate tax rate as follows:
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7-Income Taxes (continued)
The tax effects of significant temporary differences representing net deferred tax assets and liabilities at December 31, 2002 and 2003 are as follows:
NOTE 8-Fair Value of Financial Instruments
The following estimated fair values of the Company’s financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying amounts and estimated fair values of the Company’s other financial instruments at December 31, 2002 and 2003 are as follows:
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-Fair Value of Financial Instruments (continued)
For the current portion of long-term debt, the carrying amount approximates fair value due to the short-term nature of such debt. The carrying amount on the senior secured credit facility is a reasonable estimate of fair value because this debt is carried with a floating interest rate. The fair value of the 9.5% senior subordinated notes was determined based upon market quotes. For all other long-term debt, the fair value is estimated using a discounted cash flow analysis, based on the incremental borrowing rates currently available to the Company for debt with similar terms and maturity.
NOTE 9-Commitments and Contingencies
Coast Hotels is involved in various legal and regulatory actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of Coast Hotels.
NOTE 10-Related Party Transactions
Current amounts due from Coast Casinos primarily represent refundable advances for the payment of income taxes. The amounts due from Coast Casinos which are presented as a reduction to stockholder’s equity represent cash advances for payments of dividends and the purchase of treasury stock by Coast Casinos.
Coast Hotels maintains numerous racetrack dissemination contracts with Las Vegas Dissemination Company, Inc. (“LVDC”). Michael J. Gaughan’s son, John Gaughan, is the president and sole stockholder of LVDC. LVDC has been granted a license by the Nevada Gaming Authorities to disseminate live racing for those events and tracks for which it enters contracts and has been granted the exclusive right to disseminate all pari-mutuel services and race wire services to Nevada casinos. Under these dissemination contracts, the Company pays to LVDC between 3% and 5% of the wagers it accepts for races held at the racetracks covered by the respective contracts. The Company also pays to LVDC a monthly fee for race wire services. The terms on which the dissemination services are provided are regulated by the Nevada Gaming Authorities. Additionally, the Company has other agreements with LVDC, which are not subject to regulation by Nevada Gaming Authorities, to provide ancillary services, equipment and support to its race and sports book operations. For the fiscal years ended December 31, 2001, 2002 and 2003, the Company incurred expenses to LVDC of approximately $1.4 million, $947,000 and $1.1 million, respectively.
J. A. Tiberti Construction Company (“Tiberti Construction”) served as the general contractor for the expansion of the Gold Coast and The Orleans, the construction of the Orleans Arena, miscellaneous construction projects at the Suncoast and pre-construction services at the South Coast. J. Tito Tiberti owns approximately 5.7% of the outstanding common stock of Coast Casinos, and is a director and Secretary of both Coast Casinos and Coast Hotels. Mr. Tiberti is the president, a director and stockholder of, and together with his immediate family members, controls Tiberti Construction.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-Related Party Transactions (continued)
For the fiscal years ended December 31, 2001, 2002 and 2003, the Company incurred expenses to Tiberti Construction of approximately $63.4 million, $120.8 million and $29.4 million, respectively. At December 31, 2002 and 2003, it owed construction accounts payable to Tiberti Construction of approximately $12.1 million and $799,000, respectively.
In 1995, Coast Hotels entered into a long-term 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 stockholder, director and Secretary of Coast Casinos, and a director and Secretary of Coast Hotels, is the managing partner of the Tiberti Company. The Company incurred rental expenses of $4.5 million for each of the years ended December 31, 2001, 2002 and 2003. The Company paid the Tiberti Company $2.4 million, $2.7 million and $2.7 million in the years ended December 31, 2001, 2002 and 2003, respectively. Deferred rent payable to the Tiberti Company was $15.4 million and $17.2 million as of December 31, 2002 and 2003, respectively.
Until October 2002, Michael J. Gaughan and Franklin Toti (along with the Leo Lewis Trust) were owners of LGT Advertising, which served as the Company’s advertising agency. Effective November 1, 2002, the Company purchased the partnership interests of LGT Advertising from Messrs. Gaughan, Toti and the Leo Lewis Trust, for the sum of $1,000. Prior to the November 2002 acquisition, LGT Advertising provided advertising design services and purchased advertising for the Company’s casinos from third parties and passed any discounts directly through to the Company. LGT Advertising received no compensation or profit for such activities, and invoiced the Company for actual costs incurred. LGT Advertising used the Company’s facilities and employees in rendering its services, but did not pay any compensation to the Company for such use. Messrs. Gaughan and Toti received no compensation from LGT Advertising. For the fiscal years ended December 31, 2001, 2002 and 2003, advertising expenses to LGT Advertising were approximately $8.3 million, $5.9 million and $0, respectively.
LGT Advertising provided advertising and design services to Casino Queen, Inc., which operates the Casino Queen riverboat casino and hotel facility in East St. Louis, Illinois. Michael Gaughan owns 15% and Frank Toti owns 5% percent of the shares of stock in Casino Queen, Inc. Mr. Gaughan also serves as a director for Casino Queen, Inc. LGT rendered its services to Casino Queen, Inc. on the same terms as would be offered to an unaffiliated third party. In 2002 and 2003, after the acquisition in November 2002, the Company began providing advertising and design services to Casino Queen, Inc. and received payments from Casino Queen, Inc. of $13,000 and $66,000, respectively.
Coast Hotels has purchased certain of the Company’s equipment for its operations from RJ & S Inc., a Nevada corporation (“RJS”) that is owned by Michael J. Gaughan’s father, Jackie Gaughan, and Steven Delmont, the Company’s manager of food operations. Pursuant to the terms of its agreement with RJS, RJS purchases certain restaurant equipment and supplies and invoices the Company only for the actual amounts billed to RJS, plus applicable sales tax. Provisions of the agreement prohibit RJS employees, officers and shareholders from receiving any discounts, rebates, payments or gifts with respect to the equipment and supplies. For the fiscal years ended December 31, 2001, 2002 and 2003, the Company made purchases from RJS totaling approximately $2.7 million, $2.2 million and $1.5 million, respectively.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-Related Party Transactions (continued)
Michael J. Gaughan is the majority partner of Nevada Wallboards, a Nevada general partnership (“Nevada Wallboards”), which prints wallboards and parlay cards for use in the Company’s race and sports books. For the fiscal years ended December 31, 2001, 2002 and 2003, Coast Hotels incurred expenses to Nevada Wallboards of approximately $252,000, $272,000 and $275,000, respectively.
Charles Silverman, a director of Coast Hotels and Coast Casinos, is the president of Yates-Silverman, Inc., which served as the designer of The Orleans, the Suncoast and various expansion projects at The Orleans, the Suncoast and the Gold Coast during 2001 and 2002. Yates-Silverman is currently assisting us in the design of the “South Coast” project. For the fiscal years ended December 31, 2001, 2002 and 2003, the Company incurred expenses to Yates-Silverman of $947,000, $440,000 and $889,000, respectively.
Coast Hotels promotes The Orleans by advertising on NASCAR vehicles operated by Orleans Motorsports, Inc. In 2003, the Company entered into an agreement with Orleans Motorsports, Inc. to place the logo of The Orleans on a truck racing in NASCAR’s Craftsman Truck Series, on transportation vehicles utilized by Orleans Motorsports, Inc. and on any other vehicles raced by Orleans Motorsports, Inc. in NASCAR races. Michael J. Gaughan is the sole owner of Orleans Motorsports, Inc. Brendan Gaughan, the main driver employed by Orleans Motorsports, is the son of Michael J. Gaughan. For the fiscal years ended December 31, 2001, 2002 and 2003, the Company paid or provided in-kind services in the amount of $332,000, $480,000 and $600,000, respectively, to Orleans Motorsports, Inc.
Coast Benefits, a division of Coast Hotels, operates a Group Benefits Plan in which qualified employees of Coast Hotels are entitled to participate. Eligible employees are covered under the plan and may elect coverage for their dependents, for a fee, through payroll deduction. Coast Benefits also offers participation in the Group Benefits Plan to other entities in which Michael Gaughan or his son, John Gaughan, has an interest, including Michael J. Gaughan Airport Slot Concession, Inc., Gaughan-Richardson Development LLC, G & M Interactive LLC, Las Vegas Dissemination, Inc., Nevada Wallboards, Orleans Motorsports, Inc. and Kroyer Racing Engines, LLC. Each division of Coast and the other entities listed above is charged a monthly fee for eligible employees ($260 per employee as of January 2004) plus amounts withheld for dependent coverage to cover the costs of benefits and administration of the plan. For the fiscal years ended December 31, 2001, 2002 and 2003, Coast Hotels collected, in the aggregate, $565,000, $673,000 and $856,000, respectively, from the related entities. For the fiscal years ended December 31, 2001, 2002 and 2003, Coast Hotels paid benefits and administrative costs, in the aggregate, of $760,000, $808,000 and $1.0 million, respectively on behalf of the related entities. At December 31, 2002 and 2003, Coast Hotels was owed $0 and $500,000, respectively, by the related entities for excess benefits and costs paid.
Michael J. Gaughan, Jr., the son of Michael J. Gaughan, and David Ross, the general manager of the Suncoast, are owners of Coast Vacations, Inc., a travel agency operating under the name Las Vegas Vacations (“LVV”) that markets the Company’s hotel-casino properties to residents of Vancouver, Canada. Coast Hotels has agreed to pay LVV approximately $10,000 per month to promote its hotel-casinos subject to certain conditions designed to assure that LVV is utilizing such funds in a productive manner and for purposes that benefit the Company. During the fiscal years ended December 31, 2001, 2002 and 2003, the Company paid $91,000, $120,000 and $120,000, respectively, to LVV.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-Related Party Transactions (continued)
Michael J. Gaughan, Jr. is the general manager of the Barbary Coast. For the fiscal years ended December 31, 2001, 2002 and 2003, Michael J. Gaughan, Jr. received total salaries and bonuses in the amounts of $135,000, $162,000 and $175,000, respectively.
Coast Hotels operates a satellite sports book at the Plaza Hotel and Casino (“Plaza”), a hotel-casino in Las Vegas that is primarily owned by Jackie Gaughan, Michael J. Gaughan’s father. Coast Hotels combines the sports book wagers generated at the Plaza with wagers accepted at its other sports books. The Plaza is allocated a pro-rata share of the net sports book winnings or losses, based on the percentage of wagers placed at the Plaza compared to the combined wagers placed at all Coast Hotels’ sports books. Such winnings or losses are netted against the direct and indirect costs of operating the sports book at the Plaza including, but not limited to, labor costs, advertising costs, printing costs and state and federal taxes. For the fiscal years ended December 31, 2001, 2002 and 2003, the Plaza received approximately $742,000, $584,000 and $1.0 million, respectively and Coast Hotels retained approximately $399,000, $411,000 and $474,000 for direct and indirect costs associated with operating the Plaza sports book.
NOTE 11-Benefit Plans
401(k) Plans
The Company offers separate defined contribution 401(k) plans for eligible employees. All employees of the Gold Coast, The Orleans and the Suncoast, and all employees of the Barbary Coast not covered by a collective bargaining agreement, are eligible to participate. The employees may elect to defer up to 15% of their yearly compensation, subject to statutory limits. The Company makes matching contributions of varying levels based on the employees’ levels of contributions. Contribution expense was $1.7 million, $3.2 million and $3.5 million for the years ended December 31, 2001, 2002 and 2003, respectively.
Defined Benefit Plan
Certain employees at the Barbary Coast are covered by a union-sponsored, collectively bargained, multi-employer defined benefit pension plan. The Barbary Coast contributed $303,000, $317,000 and $330,000 during the years ended December 31, 2001, 2002 and 2003, respectively, to the plan. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-Benefit Plans (continued)
Stock Incentive Plan
In December 1996, the Board of Directors of Coast Casinos adopted the 1996 Stock Incentive Plan (the “Plan”) which authorizes the issuance of (i) shares of Coast Casinos Common Stock or any other class of security of Coast Casinos which is convertible into shares of Coast Casinos Common Stock or (ii) a right or interest with an exercise or conversion privilege at a price related to Coast Casinos Common Stock or with a value derived from the value of such common stock. Awards under the Plan are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares. Officers, key employees, directors (whether employee directors or non-employee directors) and consultants of Coast Casinos and its subsidiary are eligible to participate in the Plan.
Under the terms of the Plan, the aggregate number of shares issued and issuable pursuant to all awards (including all incentive stock options) granted under the Plan shall not exceed 220,000 at any time. In addition, the aggregate number of shares subject to awards granted during any calendar year to any one eligible person (including the number of shares involved in awards having a value derived from the value of shares) shall not exceed 40,000.
No awards may be made under the Plan after the tenth anniversary of the adoption of the Plan. Although shares may be issued after the tenth anniversary of the adoption of the Plan pursuant to awards made prior to such date, no shares may be issued under the Plan after the twentieth anniversary of adoption of the Plan.
Effective January 1, 1999, Coast Casinos issued options to purchase 30,415 shares of its common stock to its chief operating officer, who is also the chief operating officer of the Company. The options were fully vested at December 31, 2001 and expire on December 31, 2008. Effective June 14, 1999, Coast Casinos issued options to purchase 5,000 shares of its common stock to its chief financial officer, who is also the chief financial officer of the Company. The options were fully vested on June 14, 2001 and expire on June 13, 2009. The exercise price on the options is at $100 per share, which was equivalent to the estimated fair value of Coast Casinos’ common stock at the grant date, as estimated by Coast Casinos from recent sales of common stock between shareholders.
As previously described in Note 2, the Company accounts for the Plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-Supplemental Cash Flows Information
For the years ended December 31, 2001, 2002 and 2003 supplemental cash flows information amounts are as follows:
NOTE 13-Regulation of Gaming Operations
The gaming operations of the Company are subject to the licensing and regulatory control of the Nevada Gaming Commission (the Nevada Commission), the Nevada State Gaming Control Board (the Nevada Control Board) and the Clark County Liquor and Gaming Board (the Clark County Board) (collectively, the “Nevada Gaming Authorities”). These agencies issue gaming licenses based upon, among other considerations, evidence that the character and reputation of principal owners, officers, directors, and certain other key employees are consistent with regulatory goals. The Company has secured the necessary licenses. The licenses are not transferable and must be renewed periodically upon the payment of appropriate taxes and license fees. The Nevada Gaming Authorities have broad discretion with regard to the renewal of the licenses and may at any time revoke, suspend, condition, limit or restrict a license for any cause deemed reasonable by the issuing agency. Officers, directors, and key employees of the Company must be approved by the Nevada Control Board and licensed by the Nevada Commission and Clark County Board.
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-Subsequent Event
Merger Agreement.
On February 6, 2004, Coast Casinos entered into a definitive merger agreement with Boyd Gaming Corporation (“Boyd”). Under the agreement, Coast Casinos will merge into a subsidiary of Boyd and become a wholly owned subsidiary of Boyd. Coast will be positioned in Boyd as a separate operating unit managed by the current Coast Casinos management. In the merger, each issued and outstanding share of Coast Casinos common stock held by each Coast Casinos stockholder (other than Michael J. Gaughan, the Chairman and Chief Executive Officer of Coast Casinos, Jerry Herbst, a director and the Treasurer of Coast Casinos, and Franklin Toti, a director and the Vice President of Casino Operations of Coast Casinos) will be converted into the right to receive $550 in cash, unless an election is made by such Coast Casinos stockholder to receive 32.8025 shares of Boyd Gaming common stock for such share of Coast Casinos common stock. The maximum aggregate number of shares of Boyd Gaming common stock issuable in the merger to Coast Casinos stockholders, other than Messrs. Gaughan and Toti, will be 1,009,194 shares, unless an adjustment is required in order to qualify the merger as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The amount of stock consideration and cash consideration that each Coast Casinos stockholder, other than Messrs. Gaughan and Toti, will be entitled to receive at the effective time of the merger will have an aggregate value of at least $550 per share of Coast Casinos common stock exchanged in the merger. Because the aggregate number of shares of Boyd Gaming common stock that may be issued in the merger is limited to 1,009,194 shares, it is possible that a substantial portion of the merger consideration received by each such Coast Casinos stockholder will be in the form of cash consideration, regardless of the election made by such stockholder.
At the effective time of the merger, each issued and outstanding share of Coast Casinos common stock held by Messrs. Gaughan and Toti will be converted into the right to receive 32.8025 shares of Boyd Gaming common stock. In addition, each issued and outstanding share of Coast Casinos common stock held by Mr. Herbst will be converted into the right to receive $550 in cash. The merger is subject to receipt of approvals of the stockholders of both Coast Casinos and Boyd, gaming and other government and regulatory approvals and other customary closing conditions. Stockholders of the Company, representing approximately 56% of the voting power of Coast Casinos shares, have agreed for a period of two years to vote their shares in favor of the Boyd merger and against any other combination. Should, however, the merger agreement be terminated as a result of certain matters set forth therein and, within 30 months after the date of the merger agreement, Coast Casinos enters into a takeover transaction with another entity, a $30.0 million termination fee will be payable to Boyd Gaming on the date of consummation of such takeover transaction. The merger is expected to be completed immediately upon receipt of necessary third party approvals.
If the merger with Boyd is consummated, holders of the senior subordinated notes will have the right to require the surviving corporation in the merger to purchase the outstanding senior subordinated notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, the consummation of the merger will result in a change of control that will result in a default under the credit agreement. Boyd has advised the Company that it intends to refinance the Company’s bank indebtedness upon consummation of the merger and will purchase any senior subordinated notes tendered for purchase by the holders thereof in accordance with the terms of the indenture governing the senior subordinated notes. However, no assurance can be given that all conditions to the consummation of the merger will be satisfied or that the merger will be consummated.
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Directors of Coast Hotels and Casinos, Inc. and Subsidiaries:
Our audits of the consolidated financial statements referred to in our opinion dated January 28, 2004, except for Note 14 - “Subsequent Event” as to which the date is February 6, 2004, appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
January 28, 2004
SCHEDULE II
COAST HOTELS AND CASINOS, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Coast Casinos, Inc.)
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 2001 and 2002
(dollars in thousands)