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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______.
Commission File No. 0-22088
MONARCH CASINO & RESORT, INC.
(Exact name of registrant as specified in its charter)
-------------------------
NEVADA 88-0300760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1175 W. MOANA LANE, SUITE 200
RENO, NEVADA 89509
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (775) 825-3355
-------------------------
NOT APPLICABLE
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES _X_ NO ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES ___ NO ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of August 12, 2002, there were 9,468,880 shares of Monarch Casino & Resort,
Inc. $0.01 par value common stock outstanding.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues
Casino........................... $ 17,817,343 $ 17,365,786 $ 34,396,657 $ 32,366,457
Food and beverage................ 8,373,075 8,111,547 16,376,641 15,621,559
Hotel............................ 4,927,946 4,960,799 9,306,862 9,050,979
Other............................ 938,433 842,377 1,769,036 1,625,673
------------ ------------ ------------ ------------
Gross revenues................ 32,056,797 31,280,509 61,849,196 58,664,668
Less promotional allowances...... (4,427,925) (3,548,524) (8,424,123) (7,182,502)
------------ ------------ ------------ ------------
Net revenues.................. 27,628,872 27,731,985 53,425,073 51,482,166
------------ ------------ ------------ ------------
Operating expenses
Casino........................... 6,838,392 6,491,189 13,376,186 12,760,789
Food and beverage................ 4,295,114 4,720,760 8,544,621 8,909,868
Hotel............................ 1,578,549 1,761,679 3,096,162 3,380,021
Other............................ 296,096 342,074 617,928 635,762
Selling, general and
administrative.................. 7,285,752 6,753,485 14,401,907 13,336,301
Depreciation and amortization.... 2,556,368 2,518,634 5,103,270 4,990,774
------------ ------------ ------------ ------------
Total operating expenses...... 22,850,271 22,587,821 45,140,074 44,013,515
------------ ------------ ------------ ------------
Income from operations........ 4,778,601 5,144,164 8,284,999 7,468,651
------------ ------------ ------------ ------------
Other expenses
Interest expense................. 1,042,149 2,519,188 2,160,139 4,384,885
Other............................ 225,000 - 225,000 -
------------ ------------ ------------ ------------
Total other expenses.......... 1,267,149 2,519,188 2,385,139 4,384,885
------------ ------------ ------------ ------------
Income before income taxes.... 3,511,452 2,624,976 5,899,860 3,083,766
Provision for income taxes......... 1,259,286 890,922 2,062,610 1,047,401
------------ ------------ ------------ ------------
Net income.................... $ 2,252,166 $ 1,734,054 $ 3,837,250 $ 2,036,365
============ ============ ============ ============
Earnings per share of common stock
Net income
Basic.......................... $ 0.24 $ 0.18 $ 0.41 $ 0.22
Diluted........................ $ 0.24 $ 0.18 $ 0.40 $ 0.21
Weighted average number of common
shares and potential common
shares outstanding
Basic.......................... 9,451,323 9,436,275 9,443,841 9,436,275
Diluted........................ 9,521,513 9,477,006 9,513,290 9,476,348
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
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MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current assets
Cash................................................. $ 7,335,068 $ 8,385,743
Receivables, net..................................... 2,726,383 2,863,939
Federal income tax refund receivable................. - 770,019
Related party receivables............................ 28,601 4,759
Inventories.......................................... 920,353 976,141
Prepaid expenses..................................... 2,243,243 1,635,125
Deferred income taxes................................ 575,896 1,146,058
------------- ------------
Total current assets.............................. 13,829,544 15,781,784
------------- ------------
Property and equipment
Land................................................. 10,339,530 10,339,530
Land improvements.................................... 3,173,676 3,173,676
Buildings............................................ 78,955,538 78,955,538
Building improvements................................ 5,933,197 4,763,904
Furniture and equipment.............................. 56,133,381 54,101,471
------------- ------------
154,535,322 151,334,119
Less accumulated depreciation and amortization....... (50,770,251) (47,164,026)
------------- ------------
103,765,071 104,170,093
Construction in progress............................. 240,688 625,048
------------- ------------
Net property and equipment........................ 104,005,759 104,795,141
------------- ------------
Other assets, net...................................... 414,426 486,592
------------- ------------
Total assets...................................... $118,249,729 $121,063,517
============= ============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-3-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt................. $ 8,740,855 $ 8,106,296
Accounts payable..................................... 6,619,159 6,449,087
Accounts payable-construction........................ 18,152 147,481
Accrued expenses..................................... 4,796,074 5,702,850
Federal income taxes payable......................... 261,842 -
------------- ------------
Total current liabilities......................... 20,436,082 20,405,714
Long-term debt, less current maturities................ 57,600,930 64,236,548
Deferred income taxes.................................. 4,724,136 4,990,829
Commitments and contingencies..........................
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000
shares authorized; none issued...................... - -
Common stock, $.01 par value, 30,000,000
shares authorized; 9,536,275 issued;
9,468,880 outstanding............................... 95,363 95,363
Additional paid-in capital........................... 17,355,137 17,241,788
Treasury stock, at cost.............................. (222,319) (329,875)
Retained earnings.................................... 18,260,400 14,423,150
------------- ------------
Total stockholders' equity........................ 35,488,581 31,430,426
------------- ------------
Total liabilities and stockholders' equity........ $118,249,729 $121,063,517
============= ============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-4-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------------
2002 2001
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income............................................ $ 3,837,250 $ 2,036,365
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................... 5,192,983 5,080,486
Gain on disposal of assets.......................... (30,158) (2,979)
Deferred income taxes............................... 303,469 649,978
Decrease in receivables, net........................ 883,733 413,408
Decrease in inventories............................. 55,788 54,026
Increase in prepaid expenses........................ (608,118) (123,898)
Decrease (increase) in other assets................. (19,278) 8,766
Increase (decrease) in accounts payable............. 170,072 (4,414,801)
Increase (decrease) in accrued expenses,
and federal income taxes payable.................. (523,414) 2,428,254
------------ ------------
Net cash provided by operating activities.......... 9,262,327 6,129,605
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets.......................... 44,490 42,100
Acquisition of property and equipment................. (3,004,464) (1,146,837)
Decrease in accounts payable construction............. (129,329) (30,076)
------------ ------------
Net cash used in investing activities.............. (3,089,303) (1,134,813)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options............... 99,385 -
Principal payments on long-term debt.................. (7,323,084) (4,450,325)
------------ ------------
Net cash used in
financing activities.............................. (7,223,699) (4,450,325)
------------ ------------
Net increase (decrease) in cash.................... (1,050,675) 544,467
Cash at beginning of period............................. 8,385,743 6,783,998
------------ ------------
Cash at end of period................................... $ 7,335,068 $ 7,328,465
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 1,969,980 $ 2,857,778
Cash paid for income taxes............................ $ 1,205,760 $ 175,000
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase of property
and equipment in the following amounts............... $ 1,322,025 $ 925,307
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-5-
MONARCH CASINO & RESORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Monarch Casino & Resort, Inc. ("Monarch"), a Nevada corporation, was
incorporated in 1993. Monarch's wholly-owned subsidiary, Golden Road Motor
Inn, Inc. ("Golden Road"), operates the Atlantis Casino Resort (the
"Atlantis"), a hotel/casino facility in Reno, Nevada. Unless stated
otherwise, the "Company" refers collectively to Monarch and its Golden Road
subsidiary.
The condensed consolidated financial statements include the accounts of
Monarch and Golden Road. Intercompany balances and transactions are
eliminated.
Use of Estimates
In preparing these financial statements in conformity with accounting
principles generally accepted in the United States, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the year.
Actual results could differ from those estimates.
Related Party Transactions
Receivables from officers, employees, or affiliated companies are
primarily for banquet related services.
During the second quarter of 2002, the Company incurred non-recurring
expenses of approximately $225 thousand for legal, accounting, printing and
road show costs associated with a secondary stock offering by principal
stockholders.
Stockholder Guarantee Fees
All of the Company's bank debt is personally guaranteed by the Company's
three largest stockholders and has been since December 29, 1997. Effective
January 1, 2001, the Company is compensating the guarantors at the rate of 2%
per annum of the quarterly average outstanding bank debt amount until the
guarantees are cancelled or the notes are paid off. For the six months ended
June 30, 2002, and 2001, the Company recorded interest expense in the amounts
of approximately $685 thousand and $782 thousand in guarantee fees,
respectively.
-6-
NOTE 2. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements for the
three and six-month periods ended June 30, 2002, and June 30, 2001, are
unaudited. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary for a fair presentation of the
Company's financial position and results of operations for such periods, have
been included. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited financial
statements included in its Annual Report on Form 10-K for the year ended
December 31, 2001. The results for the three and six-month periods ended June
30, 2002, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002, or for any other period.
NOTE 3. EARNINGS PER SHARE
The Company reports "basic" earnings per share and "diluted" earnings per
share in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings per share is
computed by dividing reported net earnings by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
reflect the additional dilution for all potentially dilutive securities such
as stock options. The following is a reconciliation of the number of shares
(denominator) used in the basic and diluted earnings per share computations
(shares in thousands):
Three Months Ended June 30,
-----------------------------------
2002 2001
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Net Income
Basic..................... 9,451 $0.24 9,436 $0.18
Effect of dilutive
stock options............ 71 - 41 -
------ ------- ------ -------
Diluted................... 9,522 $0.24 9,477 $0.18
====== ======= ====== =======
Six Months Ended June 30,
-----------------------------------
2002 2001
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Net Income
Basic..................... 9,444 $0.41 9,436 $0.22
Effect of dilutive
stock options............ 69 (0.01) 40 (0.01)
------ ------ ------ ------
Diluted................... 9,513 $0.40 9,476 $0.21
====== ====== ====== ======
-7-
The following options were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and their inclusion would be
antidilutive:
Three Months Ended June 30,
----------------------------
2002 2001
----------- -----------
Options to purchase shares of
common stock (in thousands)..... 9 17
Exercise prices.................. $14.37 $5.50-$5.94
Expiration dates................. 6/07 9/03-2/10
Six Months Ended June 30,
----------------------------
2002 2001
----------- -----------
Options to purchase shares of
common stock (in thousands)..... 9 20
Exercise prices.................. $14.37 $5.25-$5.94
Expiration dates................. 6/07 9/03-2/10
NOTE 4. STOCK OPTION EXERCISES
During the second quarter of 2002, several employees and a director
exercised a total of 32,605 options at an exercise prices of between $13.75
and $14.01 per share. These exercises were satisfied by issuing shares held
by the Company in treasury at an average cost of $3.30 per share.
NOTE 5. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted this statement on January 1, 2002 and the
adoption did not have a material effect on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No.4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires that gains and losses from extinguishment
of debt be classified as extraordinary items only if they meet the criteria
in Accounting Principles Board Opinion No. 30 ("Opinion No.
30"). Applying the provisions of Opinion No. 30 will distinguish transactions
that are part of an entity's recurring operations from those that are unusual
-8-
and infrequent that meet the criteria for classification as an extraordinary
item. SFAS No. 145 is effective for the Company beginning January 1, 2003,
but early adoption is permitted. The Company has not yet evaluated the impact
from SFAS No. 145 on its financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146. "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 943, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company has
not yet determined the impact of SFAS No. 146 on its financial position and
results of operations, if any.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that may be
considered forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as statements relating to anticipated expenses, capital spending and
financing sources. Such forward-looking information involves important risks
and uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made herein. These risks and uncertainties
include, but are not limited to, those relating to competitive industry
conditions and expansion of Indian casinos in California, Reno-area tourism
conditions, economic conditions in Northern California, dependence on existing
management, leverage and debt service (including sensitivity to fluctuations
in interest rates), the regulation of the gaming industry (including actions
affecting licensing), outcome of litigation, domestic or global economic
conditions including those affected by the events of September 11, 2001, and
changes in federal or state tax laws or the administration of such laws.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its condensed consolidated financial statements in
conformity with principles generally accepted in the United States. Certain
of the Company's accounting policies, including the estimated lives assigned
to the Company's assets, the determination of bad debt, self insurance
reserves, credit risk, and the calculation of income tax liabilities, require
that the Company apply significant judgment in defining the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. The Company's
judgments are based on historical experience, terms of existing contracts,
observations of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. There can
-9-
be no assurance that actual results will not differ from Company estimates.
To provide an understanding of the methodologies applied, the Company's
significant accounting policies are discussed where appropriate in this
discussion and analysis, in the Notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, and in the Notes to condensed consolidated financial
statements of this Form 10-Q.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month Periods Ended June 30,
2002, and 2001
For the three-month period ended June 30, 2002, the Company earned net
income of $2.3 million, or $0.24 per share (diluted), on net revenues of $27.6
million, an increase from net income of $1.7 million, or $0.18 per share
(diluted), on net revenues of $27.7 million for the three months ended June
30, 2001. Income from operations for the three months ended June 30, 2002,
totaled $4.8 million, compared to $5.1 million for the 2001 second quarter.
Casino revenues totaled $17.8 million in the second quarter of 2002, an
increase of 2.6% from $17.4 million in the 2001 second quarter, reflecting
increases in table game and slot win. Slot revenues were up 1.4% in the
second quarter of 2002 compared to the second quarter of 2001 due to an
increase in the volume of slot machine play. Table game revenue for the three
months ended June 30, 2002, increased 7.1% compared to the same period in
2001, due to increases in table game drop and hold percentage. Poker room
revenue decreased 2.6% for the three months ended June 30, 2002, compared to
the same period last year. Keno revenue for the second quarter ended June 30,
2002, increased 9.8% when compared to the second quarter of 2001. The
increase was primarily due to increases in both keno write and win percentage.
Casino operating expenses amounted to 38.4% of casino revenues in the 2002
second quarter, compared to 37.4% in the 2001 second quarter, primarily due to
increased complimentaries and promotional costs.
Food and beverage revenues for the 2002 second quarter totaled $8.4
million, an increase of 3.2% from $8.1 million in the 2001 second quarter.
Increases in both the number of covers served and the average revenue per
cover contributed to the improved levels. Food and beverage operating
expenses represented 51.3% of food and beverage revenue in the 2002 second
quarter, compared to 58.2% in the second quarter of 2001. Reduction in
average food cost of sales and overall successful efforts to manage payroll
costs as a percentage of revenue and departmental operating expenses as a
percentage of revenue resulted in the improved margins.
Hotel revenues were $4.9 million in the 2002 second quarter, relatively
unchanged from the $5.0 million hotel revenues in the second quarter 2001.
The Atlantis' average daily room rate ("ADR") was $55.62 for the 2002 second
quarter compared to $55.25 in the second quarter of 2001. The occupancy rate
was 94.0% during the 2002 second quarter, up from an occupancy rate of 92.7%
during the same period last year. Hotel operating expenses in the 2002 second
quarter were 32.0% of hotel revenues, compared to 35.5% in the 2001 second
quarter. This decrease in operating expenses as a percentage of hotel
revenues resulted primarily from a decrease in bad debt expense and overall
successful efforts to manage payroll costs as a percentage of revenues.
-10-
Other revenues totaled $938 thousand in the second quarter of 2002, up
11.4% from $842 thousand in the second quarter of 2001, primarily reflecting
certain non-recurring revenue in the second quarter of 2002 consisting
primarily of recovery of previously written-off bad debts. Other operating
expenses in the 2002 second quarter were 31.6% of other revenues, compared to
40.6% in the 2001 second quarter.
Selling, general and administrative ("SG&A") expenses were $7.3 million
in the 2002 second quarter, compared to $6.8 million in the second quarter of
2001. As a percentage of net revenue, SG&A expenses increased to 26.4% in the
second quarter of 2002 compared to 24.4% in the 2001 second quarter, primarily
due to increased marketing and promotional costs.
Interest expense for the 2002 second quarter totaled $1.0 million, a
decrease of 58.6% from $2.5 million in the second quarter of 2001. The
decrease reflects the Company's reduction in debt outstanding and lower
applicable interest rates. Interest expense for the quarters ending June 30,
2002, and 2001, included guarantee fees paid to the Company's three principal
stockholders. These guarantee fee expenses totaled approximately $335
thousand and $390 thousand in the second quarters of 2002 and 2001,
respectively.
The Company also incurred approximately $225 thousand in non-recurring
expenses associated with a secondary stock offering by certain principal
stockholders. These expenses included legal, accounting, printing and road
show charges.
Comparison of Operating Results for the Six-Month Periods Ended June 30,
2002 and 2001
For the six months ended June 30, 2002, the Company earned net income of
$3.8 million, or $0.40 per share (diluted), on net revenues of $53.4 million,
an increase from net income of $2.0 million, or $0.21 per share (diluted), on
net revenues of $51.5 million during the six months ended June 30, 2001.
Income from operations for the 2002 six-month period totaled $8.3 million,
compared to $7.5 million for the same period in 2001.
Casino revenues for the first six months of 2002 totaled $34.4 million, a
6.3% increase from $32.4 million for the first six months of 2001, reflecting
increases in both slot and table games win. Slot revenues were up 4.1% in the
first six months of 2002 compared to the first six months of 2001 due to an
increase in the volume of slot machine play. Table game revenue for the six
months ended June 30, 2002, increased 16.5% compared to the same period in
2001, primarily due to an increase in table game drop and hold percentage.
Poker room revenue increased 1.6% for the six months ended June 30, 2002,
compared to the same period last year. Keno revenue decreased 6.5% in the
six-month period ended June 30, 2002, when compared to the same period last
year. The decrease was due to a lower hold percentage that was partially
offset by a 2.3% increase in keno write. Casino operating expenses amounted
to 38.9% of casino revenues for the six months ended June 30, 2002, compared
to 39.4% for the same period in 2001, primarily due to successful efforts to
manage payroll costs as a percentage of revenues and direct departmental
expenses as a percentage of revenues.
Food and beverage revenues totaled $16.4 million for the six months ended
June 30, 2002, an increase of 4.8% from the $15.6 million for the six months
ended June 30, 2001, due to increases in the number of covers served and the
average revenue per cover. Food and beverage operating expenses
-11-
amounted to 52.2% of food and beverage revenues during the 2002 six-month
period, compared to 57.0% for the same period in 2001, which was primarily due
to a reduction in average food cost of sales and overall successful efforts to
manage payroll costs as a percentage of revenues and direct departmental
expenses as a percentage of revenues.
Hotel revenues for the first six months of 2002 increased 2.8% to $9.3
million from $9.1 million for the first six months of 2001, primarily due to
an increase in the average occupancy rate which was partially offset by a
lower ADR. 2002 revenues also include a $3 per occupied room energy surcharge
for the entire six months, and was not imposed until April 2001. While the
Atlantis experienced a slight decrease in the ADR during the 2002 six-month
period to $51.02, compared to $51.69 for the same period in 2001, the
occupancy rate increased to 92.5% for the six-month period in 2002, from
90.9% for the same period in 2001. Hotel operating expenses in the first six
months of 2002 were 33.3% of hotel revenues, compared to 37.3% for the same
period in 2001. This decrease in operating expenses as a percentage of hotel
revenues resulted primarily from a decrease in bad debt expense and overall
successful efforts to manage payroll costs as a percentage of revenues and
direct departmental expenses as a percentage of revenues.
Other revenues were $1.8 million for the six months ended June 30, 2002,
an increase of 8.8% from $1.6 million in the same period in 2001, reflecting
non-recurring revenue consisting primarily of recovery of previously written-
off bad debts, and increased sales in both our retail stores and the
entertainment fun center. Other expenses as a percentage of revenue fell to
34.9% for the six months ended June 30, 2002, as compared to 39.1% for the
same period in 2001.
Selling, general and administrative expenses increased 8.0% to $14.4
million in the first six months of 2002, compared to $13.3 million in the
first six months of 2001, primarily as a result of increased marketing and
promotional expenditures. As a percentage of net revenue, SG&A expenses
increased slightly to 27.0% in the 2002 six-month period from 25.9% in the
same period in 2001.
Interest expense for the first six months of 2002 totaled $2.2 million, a
decrease of 50.7%, compared to $4.4 million for the same period one year
earlier. The decrease reflects the Company's reduction in debt outstanding
and lower applicable interest rates. Interest expense for the six-month
periods ending June 30, 2002, and 2001, included guarantee fees paid to the
Company's three principal shareholders. These guarantee fee expenses totaled
approximately $685 thousand and $782 thousand in the first six months of 2002
and 2001, respectively.
The Company also incurred approximately $225 thousand in non-recurring
expenses associated with a secondary stock offering by certain principal
stockholders. These expenses included legal, accounting, printing and road
show charges.
OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS
The constitutional amendment approved by California voters in 1999
allowing the expansion of Indian casinos in California will have an impact on
casino revenues in Nevada in general, and many analysts have predicted the
impact will be more significant on the Reno-Lake Tahoe market. The extent of
this impact is difficult to predict, but the Company believes that the impact
on the Company will be mitigated to an extent due to the Atlantis' emphasis
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on Reno area residents as a significant base of its business, as well as to
its proximity to the newly-renovated and expanded Reno-Sparks Convention
Center. However, if other Reno area casinos suffer business losses due to
increased pressure from California Indian casinos, they may intensify their
marketing efforts to Reno area residents as well.
The Company also believes that unlimited land based casino gaming in or
near any major metropolitan area in the Atlantis' key non-Reno marketing
areas, such as San Francisco or Sacramento, could have an adverse effect on
its business.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2002, net cash provided by operating
activities totaled $9.3 million, an increase of 51.1% compared to the same
period last year. Net cash used in investing activities for the same period
totaled $3.1 million, and was used primarily in remodeling of the property and
the acquisition of furniture and equipment at the Atlantis. Net cash used in
financing activities totaled $7.2 million as the Company used cash to reduce
long-term debt. As a result, at June 30, 2002, the Company had cash of $7.3
million, compared to $8.4 million at December 31, 2001.
The Company has a reducing revolving credit facility with a group of
banks (the "Credit Facility"). At June 30, 2002, the outstanding balance of
the Credit Facility was $64.0 million, down from $72.1 million at June 30,
2001. This facility is guaranteed by the Company's three principal
stockholders who, beginning in 2001, earn a fee equal to 2% per annum of the
quarterly average outstanding bank debt amount. These guarantee expenses
totaled approximately $685 thousand in the first six months of 2002. The
principal terms of the Credit Facility are summarized in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Contractual cash obligations for the Company as of June 30, 2002, over
the next five years are as follows:
Payments Due by Period
------------------------------------------------
Contractual Cash Less than 1 to 3 4 to 5
Obligations Total 1 year years years
- ------------------------- ------------------------------------------------
Long term debt $66,203,574 $ 8,698,541 $57,505,033 $ -
Capital lease obligations 156,537 52,179 104,358 -
Operating leases 483,783 161,261 322,522 -
----------- ----------- ----------- ---------
Total contractual cash
obligations $66,843,894 $ 8,911,981 $57,931,913 $ -
=========== =========== =========== =========
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The Company believes that its existing cash balances, cash flow from
operations, equipment financing, and refinancing sources for our debt
obligations will provide the Company with sufficient resources to fund its
operations, meet its existing debt obligations, and fulfill its capital
expenditure requirements; however, the Company's operations are subject to
financial, economic, competitive, regulatory, and other factors, many of which
are beyond its control. If the Company is unable to generate sufficient cash
flow, it could be required to adopt one or more alternatives, such as
reducing, delaying, or eliminating planned capital expenditures, selling
assets, restructuring debt, or obtaining additional equity capital.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted this statement on January 1, 2002 and the
adoption did not have a material effect on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No.4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires that gains and losses from extinguishment
of debt be classified as extraordinary items only if they meet the criteria
in Accounting Principles Board Opinion No. 30 ("Opinion No.
30"). Applying the provisions of Opinion No. 30 will distinguish transactions
that are part of an entity's recurring operations from those that are unusual
and infrequent that meet the criteria for classification as an extraordinary
item. SFAS No. 145 is effective for the Company beginning January 1, 2003,
but early adoption is permitted. The Company has not yet evaluated the impact
from SFAS No. 145 on its financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146. "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 943, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company has
not yet determined the impact of SFAS No. 146 on its financial position and
results of operations, if any.
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PART II. OTHER INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize derivative transactions to hedge the
Company's exposure to interest rate changes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2002, the Company conducted its annual meeting of
stockholders in Reno, Nevada, in which the only action taken was the election
of one new director, and the re-election of two directors whose terms expired
in 2002. The results were as follows:
Votes Cast
-----------------------
Against or
Name of Director Elected For Withheld
------------------------ -----------------------
John Farahi 9,395,013 41,262
Craig F. Sullivan 9,395,013 41,262
Charles W. Scharer 9,395,013 41,262
ITEM 5. OTHER INFORMATION
The three principal stockholders of the Company, through their
affiliates, directly or indirectly control the ownership and management of a
shopping center directly adjacent to the Atlantis. The shopping center
occupies 18.7 acres and consists of 233,000 square feet of retail space. The
Company currently rents approximately 3,400 square feet in the shopping center
and pays rent of approximately $3,400 per month.
During the second quarter of 2002, four of the Company's principal
stockholders sold a combined 2 million shares through a secondary public
offering. The Company did not receive any proceeds from the sale of the
shares of common stock by the selling stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
99.01 Certification of Financial
Condition and Results of Operations
(b) Reports on Form 8-K
Date Items Reported
---- --------------
May 28, 2002 The Company announced the dismissal of Arthur
Andersen and the engagement of Deloitte &
Touche LLP as the Company's independent public
accountants.
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June 11, 2002 The Company announced its earnings estimate for
the second quarter ending June 30, 2002, to be
between 22 and 23 cents per diluted share.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONARCH CASINO & RESORT, INC.
(Registrant)
Date: August 13, 2002 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer and Chief
Financial Officer (Principal Financial
Officer and Duly Authorized Officer)
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
99.01 Certification of Financial Condition and Results
of Operations 17
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EXHIBIT 99.01
CERTIFICATION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In connection with the report of Monarch Casino & Resort, Inc. (the
"Company") on Form 10-Q for the quarter ended June 30, 2002 (the "Report") and
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned certify that:
(1) They are, respectively, the Chief Executive Officer and Chief
Financial Officer of the Company.
(2) To the best of their knowledge the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934.
(3) To the best of their knowledge the information contained in the
Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated this 13th day of August 2002.
/s/ John Farahi /s/ Ben Farahi
- --------------- --------------
John Farahi Ben Farahi
Chief Executive Officer Chief Financial Officer
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