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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 March 31, 2003
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 ___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
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 May 13, 2003, there
were 9,329,830 shares of Monarch Casino & Resort, Inc. $0.01 par value common
stock outstanding.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the
three months ended March 31, 2003 and 2002.................. 3
Condensed Consolidated Balance Sheets at
March 31, 2003 and December 31, 2002........................ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002.................. 6
Notes to Condensed Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 20
Item 4. Controls and Procedures...................................... 21
PART II - OTHER INFORMATION
Item 5. Legal Proceedings............................................ 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signatures................................................... 22
Certifications............................................... 23
Exhibit 99.01 Certification of John Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................ 25
Exhibit 99.01 Certification of Ben Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................ 26
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Revenues
Casino...................................... $ 17,739,705 $ 16,579,314
Food and beverage........................... 8,211,408 8,003,566
Hotel....................................... 4,716,178 4,378,916
Other....................................... 885,745 830,603
------------ ------------
Gross revenues........................... 31,553,036 29,792,399
Less promotional allowances................. (4,385,108) (3,996,198)
------------ ------------
Net revenues............................. 27,167,928 25,796,201
------------ ------------
Operating expenses
Casino...................................... 7,126,103 6,537,794
Food and beverage........................... 4,123,738 4,249,507
Hotel....................................... 1,645,979 1,517,613
Other....................................... 304,566 321,832
Selling, general, and administrative........ 7,852,184 7,116,155
Depreciation and amortization............... 2,600,409 2,546,902
------------ ------------
Total operating expenses................. 23,652,979 22,289,803
------------ ------------
Income from operations................... 3,514,949 3,506,398
Other expense
Interest expense............................ 731,222 1,117,990
------------ ------------
Income before income taxes............... 2,783,727 2,388,408
Provision for income taxes.................... 945,800 803,324
------------ ------------
Net income............................... $ 1,837,927 $ 1,585,084
============ ============
Earnings per share of common stock
Net income
Basic..................................... $ 0.19 $ 0.17
Diluted................................... $ 0.19 $ 0.17
Weighted average number of common
shares and potential common
shares outstanding
Basic................................... 9,468,308 9,436,275
Diluted................................. 9,503,599 9,502,697
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
March 31, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash............................................ $ 7,515,340 $ 9,961,484
Receivables, net................................ 2,670,248 2,724,726
Inventories..................................... 815,063 993,260
Prepaid expenses................................ 2,242,164 2,138,084
Deferred income taxes........................... 492,457 492,457
------------- -------------
Total current assets......................... 13,735,272 16,310,011
------------- -------------
Property and equipment
Land............................................ 10,339,530 10,339,530
Land improvements............................... 3,226,913 3,191,371
Buildings....................................... 78,955,538 78,955,538
Building improvements........................... 6,262,903 6,262,903
Furniture and equipment......................... 58,806,478 58,086,570
------------- -------------
157,591,362 156,835,912
Less accumulated depreciation and amortization.. (58,585,196) (55,985,653)
------------- -------------
Net property and equipment................... 99,006,166 100,850,259
------------- -------------
Other assets, net................................. 271,424 319,817
------------- -------------
Total assets................................. $ 113,012,862 $ 117,480,087
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-4-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt............ $ 9,955,343 $ 8,279,095
Accounts payable................................ 5,294,022 6,227,124
Accrued expenses................................ 5,672,936 6,146,440
Federal income taxes payable.................... 184,936 -
------------- -------------
Total current liabilities.................... 21,107,237 20,652,659
Long-term debt, less current maturities........... 46,000,000 52,000,000
Deferred income taxes............................. 5,002,257 4,526,744
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;
9,329,830 outstanding at 03/31/2003,
9,474,830 outstanding at 12/31/2002............ 95,363 95,363
Additional paid-in capital...................... 17,458,217 17,381,517
Treasury stock,
206,445 shares at 03/31/2003, 61,445 shares
at 12/31/2002, at cost......................... (1,514,635) (202,692)
Retained earnings............................... 24,864,423 23,026,496
------------- -------------
Total stockholders' equity................... 40,903,368 40,300,684
------------- -------------
Total liabilities and stockholders' equity... $ 113,012,862 $ 117,480,087
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-5-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income.................................. $ 1,837,927 $ 1,585,084
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 2,600,409 2,546,902
Amortization of deferred loan costs....... 44,857 44,857
Bad debt expense.......................... 172,668 88,314
(Gain) loss on disposal of assets......... (3,000) 1,864
Deferred income taxes..................... 475,513 277,768
(Increase) decrease in receivables, net... (118,191) 1,039,908
Decrease in inventories................... 178,197 72,718
Increase in prepaid expenses.............. (104,080) (287,363)
Decrease in other assets.................. 2,671 -
Decrease in accounts payable.............. (933,102) (1,321,414)
Decrease in accrued expenses
and federal income taxes payable........ (179,535) (343,924)
------------ ------------
Net cash provided by
operating activities.................... 3,974,334 3,704,714
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets................ 3,000 2,500
Acquisition of property and equipment....... (542,997) (1,821,028)
Changes in accounts payable construction.... - 260,729
------------ ------------
Net cash used in investing activities.... (539,997) (1,557,799)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options..... 83,125 -
Principal payments on long-term debt........ (4,536,206) (2,623,476)
Purchase of Monarch Common Stock............ (1,427,400) -
------------ ------------
Net cash used in
financing activities.................... (5,880,481) (2,623,476)
------------ ------------
Net decrease in cash..................... (2,446,144) (476,561)
Cash at beginning of period................... 9,961,484 8,385,743
------------ ------------
Cash at end of period......................... $ 7,515,340 $ 7,909,183
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest...................... $ 424,878 $ 1,132,987
Cash paid for income taxes.................. $ 286,612 $ -
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase
of property and equipment in the
following amounts........................... $ 212,453 $ 250,964
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-6-
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 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 of America, 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.
Stockholder Guarantee Fees
All of the Company's bank debt is personally guaranteed by the Company's
three largest stockholders and has been guaranteed by such persons since the
inception of our original Loan Agreement on December 29, 1997. Since January
1, 2001, the Company has compensated 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. During the three months
ended March 31, 2003 and 2002, the Company recorded interest expense in the
amount of approximately $280 thousand and $350 thousand in guarantee fees,
respectively.
Inventories
Inventories, consisting primarily of food, beverages, and retail
merchandise, are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Since inception, property and equipment have been
depreciated principally on a straight line basis over the estimated service
lives as follows:
Land improvements ........... 15-40 years
Buildings ................... 30-40 years
Building improvements ....... 15-40 years
Furniture ................... 5-10 years
Equipment ................... 5-20 years
-7-
The Company evaluates the carrying value of its long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable from
related future undiscounted cash flows. Indicators which could trigger an
impairment review include legal and regulatory factors, market conditions and
operational performance. Any resulting impairment loss, measured as the
difference between the carrying amount and the fair value of the assets, could
have a material adverse impact on the Company's financial condition and
results of operations.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the
difference between wins and losses. Additionally, net win is reduced by a
provision for anticipated payouts on slot participation fees, progressive
jackpots and any pre-arranged marker discounts.
Promotional Allowances
The retail value of hotel, food and beverage services provided to
customers without charge is included in gross revenue and deducted as
promotional allowances.
Income Taxes
Income taxes are recorded in accordance with the liability method
specified by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." Under the asset and liability approach for
financial accounting and reporting for income taxes, the following basic
principles are applied in accounting for income taxes at the date of the
financial statements: (a) a current liability or asset is recognized for the
estimated taxes payable or refundable on taxes for the current year; (b) a
deferred income tax liability or asset is recognized for the estimated future
tax effects attributable to temporary differences and carryforwards; (c) the
measurement of current and deferred tax liabilities and assets is based on the
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated; and (d) the measurement of deferred income taxes is
reduced, if necessary, by the amount of any tax benefits that, based upon
available evidence, are not expected to be realized.
Stock Based Compensation
The Company maintains three stock option plans. The Company accounts for
these plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and related interpretations in accounting for its plans. No
stock-based compensation costs are reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of the grant. If the Company had
elected to recognize compensation cost on the fair market value at the grant
dates for awards under the stock option plans, consistent with the method
prescribed by Statement of Financial Accounting Standards ("SFAS No. 123"),
Accounting for Stock-Based Compensation, as amended by Statement of Financial
Accounting Standards number 148 - Accounting for Stock-based Compensation
Transition and Disclosure ("SFAS No. 148"), net income and income per share
would have been changed to the pro forma amounts indicated below:
-8-
Three Months ended March 31,
-----------------------------
2003 2002
---------- -----------
Net income, as reported $1,837,927 $1,585,084
Stock based employee compensation
expensed determined under the fair
value based method for all awards,
net of related income tax effects (18,889) (15,830)
----------- -----------
Pro forma net income $1,819,038 $1,569,254
=========== ===========
Basic earnings per share
As reported $ 0.19 $ 0.17
Pro forma $ 0.19 $ 0.17
Diluted earnings per share
As reported $ 0.19 $ 0.17
Pro forma $ 0.19 $ 0.17
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and trade
receivables. The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base. The Company believes it is not exposed to any
significant credit risk on cash and accounts receivable.
Certain Risks and Uncertainties
A significant portion of the Company's revenues and operating income are
generated from patrons who are residents of northern California. A change in
general economic conditions or the extent and nature of casino gaming in
California, Washington or Oregon could adversely affect the Company's
operating results. On September 10, 1999, California lawmakers approved a
constitutional amendment that would give Indian tribes the right to offer slot
machines and a range of house-banked card games. On March 7, 2000, California
voters approved the constitutional amendment. Several Native American casinos
have opened in Northern California since passage of the constitutional
amendment. A large Native American casino facility is scheduled to open in
one of our primary feeder markets in the Sacramento area in June or July of
2003.
The Company also relies on non-conventioneer visitors partially comprised
of individuals flying into the Reno area. The tragic events of September 11,
2001 combined with the ongoing situation in Iraq and the threat of further
terrorist attacks could have an adverse effect on the Company's revenues from
this segment as consumers may need time to restore their confidence in air and
other leisure travel.
-9-
NOTE 2. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements for the
three month periods ended March 31, 2003 and March 31, 2002 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, 2002. The
results for the three month period ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2003, 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 March 31,
-----------------------------------
2003 2002
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Net Income
Basic..................... 9,468 $ 0.19 9,436 $ 0.17
Effect of dilutive
stock options............ 36 - 67 -
------ ------- ------ -------
Diluted................... 9,504 $ 0.19 9,503 $ 0.17
====== ======= ====== =======
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 March 31,
-----------------------------------
2003 2002
---------------- ----------------
Options to purchase shares of
common stock (in thousands)... 19 -
Exercise prices................ $11.30 - $14.37 -
Expiration dates............... 6/07 - 07/12 -
-10-
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
and Disposal of Long-Lived Assets. This statement requires one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired and broadens the presentation of
discontinued operations to include additional disposal transactions. We
adopted SFAS 144 on January 1, 2002. The adoption of this statement did not
have a material impact on our results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation (FIN) 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
indirect Guarantees of Indebtedness of Others. FIN 45 expands the information
disclosures required by guarantors for obligations under certain types of
guarantees. It also requires initial recognition at fair value of a liability
for such guarantees. We adopted the disclosure requirements of FIN 45 for the
year ending December 31, 2002. We will apply the liability recognition
requirements to all guarantees issued or modified after December 31, 2002. We
believe the adoption of these requirements will not have a material impact on
our results of operations or financial position.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. We have adopted the disclosure requirements
of this statement for our fiscal year ended December 31, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Monarch Casino & Resort, Inc., through its wholly-owned subsidiary, Golden
Road Motor Inn, Inc. ("Golden Road"), owns and operates the tropically-themed
Atlantis Casino Resort, a hotel/casino facility in Reno, Nevada (the
"Atlantis"). Monarch was incorporated in 1993 under Nevada law for the purpose
of acquiring all of the stock of Golden Road. The principal asset of Monarch
is the stock of Golden Road, which holds all of the assets of the Atlantis.
Our sole operating asset, the Atlantis, is a hotel/casino resort located
in Reno, Nevada. Our business strategy is to maximize the Atlantis' revenues,
operating income and cash flow primarily through our casino, our food and
beverage operations, our hotel operations and other revenue sources. We derive
our revenues by appealing to middle to upper-middle income Reno residents,
emphasizing slot machine play in our casino. We capitalize on the Atlantis'
location, offer exceptional service, value and an appealing theme to our
guests, focus on repeat customers, and utilize hands-on management of
operations, costs and efficiencies.
Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us"
refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
-11-
OPERATING RESULTS SUMMARY
During the first quarter of 2003, with the exception of operating margin,
we exceeded all previously reported first quarter results, including casino
revenues, hotel revenues, net revenues, net income and earnings per share.
Three Months Percentage
ended March 31, Increase / (Decrease)
--------------- ----------------------
2003 2002 First Quarter 03 vs 02
------ ------ ----------------------
(In millions, except earnings per share
and percentages)
Casino revenues......................... $ 17.7 $ 16.6 7.0%
Food and beverage revenues.............. 8.2 8.0 2.6%
Hotel revenues.......................... 4.7 4.4 7.7%
Net revenues............................ 27.2 25.8 5.3%
Income from operations.................. 3.5 3.5 0.2%
Net income.............................. 1.8 1.6 16.0%
Earnings per share - diluted............ 0.19 0.17 11.8%
Operating margin........................ 12.9% 13.6% (0.7) pts
Some significant items that affected our first quarter results in 2003 are
listed below. These items are discussed in greater detail elsewhere in our
discussion of operating results and in the Liquidity and Capital Resources
section.
- Promotional allowances as a percentage of gross revenues increased from
13.4% in the 2002 first quarter to 13.9% in 2003. This increase in
promotional allowances reflects our efforts to attract and retain
high-end players and local patrons in an increasingly competitive
market.
- Operating expenses increased from $22.3 million in the first quarter of
2002, to $23.7 million in the first quarter of 2003, an increase of
6.1%. Net revenues increased 5.3% from $25.8 million in the first
quarter of 2002 to $27.2 million in the first quarter of 2003. These
changes led to a relatively unchanged operating income quarter over
quarter.
- Interest expense decreased 34.6% compared to last year's first quarter
from $1.1 million to $731 thousand due to lower prevailing interest
rates combined with continuously decreasing outstanding debt.
Altogether, we achieved an increase in net income and earnings per
share (diluted) by 16.0% and 11.8%, respectively.
-12-
CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $755 thousand
and $1.8 million during the first quarters of 2003 and 2002, respectively.
This year, to date, our capital expenditures consisted primarily of casino re-
carpeting and continued acquisitions of and upgrades to gaming equipment.
During last year's first quarter, capital expenditures consisted primarily of
renovations of hotel room suites in the Atlantis' first tower and continued
acquisitions of and upgrades to slot machines, computer information system
equipment and various other furniture, fixtures and equipment to upgrade
existing facilities.
Future cash needed to finance capital spending is expected to be made
available from operating cash flow, the Credit Facility (see "Liquidity and
Capital Resources - THE CREDIT FACILITY" below) and, if necessary, additional
borrowings.
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,
expansion of Indian casinos in California, Reno-area tourism
conditions, 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 the ongoing situation in Iraq, and changes
in federal or state tax laws or the administration of such laws.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Month
Periods Ended March 31, 2003 and 2002
For the three month period ended March 31, 2003, the Company earned net
income of $1.8 million, or $0.19 per share, on net revenues of $27.2 million,
an increase from net income of $1.6 million, or $0.17 per share, on net
revenues of $25.8 million for the three months ended March 31, 2002. Income
from operations for the three months ended March 31, 2003 totaled $3.5
million, relatively unchanged when compared to the $3.5 million for the same
period in 2002. Both net revenues and net income for the first quarter of
2003 represent new first quarter records for the Company. Net revenues
increased 5.3%, and net income increased 16.0% when compared to last year's
first quarter. In the Reno-area market, the January through March period
encompassing the Company's first quarter has traditionally been marked by
weather-related seasonality, with winter storms producing moderate to severe
travel delays and difficulties for visitors to the region. Due to the
relatively mild winter, management believes that the impact of the weather
-13-
this year was, once again, relatively minor as it was last year. However,
despite the milder weather, we encountered industry-wide softening in our
tourism generated business due to international factors affecting tour and
travel.
Casino revenues totaled $17.7 million in the first quarter of 2003, a
7.0% increase from the $16.6 million in the first quarter of 2002, reflecting
increases in slot and keno win. Slot revenues were up 9.4% in the first
quarter of 2003 compared to the first quarter of 2002 due to an increase in
the volume of slot machine play. Table game and poker room revenue in the
first quarter of 2003 decreased 2.7% from the first quarter of 2002 due to a
lower hold percentage. Keno win increased 51.5% in the first quarter 2003
compared to the first quarter 2002. The increase was due to higher keno write
and hold percentage in the first quarter of 2003 compared to the first quarter
2002. Casino operating expenses amounted to 40.2% of casino revenues in the
first quarter of 2003, compared to 39.4% in the first quarter of 2002, with
the difference due primarily to lower hold percentages.
Food and beverage revenues totaled $8.2 million in the first quarter of
2003, a 2.6% increase from the $8.0 million in the first quarter of 2002, due
primarily to increases in revenue per cover and the number of covers served
during the quarter. Food and beverage operating expenses amounted to 50.2% of
food and beverage revenues during the first quarter of 2003, compared to 53.1%
in the first quarter of 2002, which was primarily due to more efficient
operations achieved through reduced average cost of sales and reduced variable
operating expenses.
Hotel revenues were $4.7 million for the first quarter of 2003, an
increase of 7.7% from the $4.4 million in hotel revenues in the 2002 first
quarter. This increase was the result of an increase in the average daily
room rate (ADR), which was partially offset by a slight decrease in hotel
occupancy, which is consistent with current market trends. Both first
quarters' 2003 and 2002 revenues also included a $3 per occupied room energy
surcharge. During the first quarter of 2003, the Atlantis experienced an
89.1% occupancy rate, down from an 91.0% occupancy rate for the same period in
2002. The Atlantis' ADR was $53.31 in the first quarter of 2003 compared to
$48.71 in the first quarter of 2002. Hotel operating expenses as a percent of
hotel revenues increased slightly to 34.9% in the 2003 first quarter, compared
to 34.7% in the 2002 first quarter, primarily due to increased labor and
operating costs.
Promotional allowances increased to $4.4 million, or 13.9% of gross
revenues, in the first quarter of 2003 compared to $4.0 million, or 13.4% of
gross revenues, in the first quarter of 2002. The increase is attributable to
expanded efforts to increase revenues.
Other revenues increased 6.6% to $886 thousand in the 2003 first quarter
compared to $831 thousand in the same period last year. The increase reflects
increased retail sales in both the gift and sundries shops partially offset by
a slight decrease in the entertainment fun center. Other expenses in the 2003
first quarter decreased to 34.4% of other revenues, from 38.7% in the 2002
first quarter, reflecting increased efficiencies.
Depreciation and amortization expense was $2.6 million in the first
quarter of 2003, up 2.1% compared to $2.5 million in the same period last year.
-14-
Selling, general and administrative expenses amounted to $7.9 million, or
28.9% of net revenues in the first quarter of 2003, an increase from $7.1
million, or 27.6% in the first quarter of 2002 due primarily to an increase in
sales, marketing and special event costs.
Interest expense for the 2003 first quarter totaled $731 thousand, a
decrease of 34.6%, from $1.1 million in the 2002 first quarter. The decrease
reflects the Company's reduction in debt outstanding and lower applicable
interest rates. Interest expense for both the quarters ended March 31, 2003
and 2002, included guarantee fees paid to the three principal stockholders of
the Company. Starting January 2001, the Company began compensating the three
principal stockholders of the Company for their personal guarantees of the
Company's outstanding bank debt at the rate of 2% per annum of the quarterly
average outstanding bank debt. These guarantee expenses totaled approximately
$280 thousand and $350 thousand in the first quarters of 2003 and 2002,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with net
cash provided by operating activities.
For the three months ended March 31, 2003, net cash provided by operating
activities totaled $4.0 million, an increase of 7.3% compared to the same
period last year. Net cash used in investing activities totaled $540 thousand
and $1.6 million in the first quarters ended March 31, 2003 and 2002,
respectively. During the first quarters of 2003 and 2002, net cash used in
investing activities was used primarily in the purchase of property and
equipment. Net cash used in financing activities totaled $5.9 million for the
first quarter of 2003, compared to $2.6 million for the same period last year,
as the Company used funds for the repurchase of Monarch common stock pursuant
to the stock repurchase program announced during the first quarter of 2003,
and to reduce long-term debt. As a result, at March 31, 2003, the Company had
a cash balance of $7.5 million, compared to $7.9 million at March 31, 2002 and
$10.0 million at December 31, 2002.
The Company has a reducing revolving credit facility with a group of
banks (the "Credit Facility"). At March 31, 2003, the total balance
outstanding on the Credit Facility was $55.3 million. 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. The Company incurred guarantee expenses of approximately
$280 thousand and $350 thousand in the first quarters of 2003 and 2002.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be
found in Item 7 of our 2002 Form 10-K. For a more extensive discussion of our
accounting policies, see Note 1, Summary of Significant Accounting Policies, in
the Notes to the Consolidated Financial Statements in our 2002 Form 10-K filed
on March 28, 2003.
-15-
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 on
Reno-area residents as a significant base of its business. 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 a material adverse
effect on its business.
If the transfer of non-restricted gaming license described under
"Commitments and Contingencies" below is allowed to proceed as proposed and a
new casino property is built, the Company's results of operations may be
negatively impacted.
COMMITMENTS AND CONTINGENCIES
Contractual cash obligations for the Company as of March 31, 2003 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 $55,955,343 $ 9,955,343 $46,000,000 $ -
Operating Leases 362,837 161,261 201,576 -
----------- ----------- ----------- ---------
Total Contractual Cash $56,318,180 $10,116,604 $46,201,576 $ -
Obligations
On March 10, 2003, we announced a plan to repurchase up to 250,000 shares,
or 2.6%, of our common stock in open market transactions. The repurchases may
be made from time to time depending on market conditions and availability of
funds. The repurchases are to be made with our cash (see our Current Report
filed on Form 8-K dated March 10, 2003). During the first quarter of 2003, we
purchased 180,000 shares of our common stock pursuant to this stock repurchase
program.
-16-
On April 16, 2003, our Golden Road subsidiary filed a complaint against
the City of Reno and other interested parties petitioning the Second Judicial
District Court of Nevada to review the City of Reno's decision to enter into an
agreement for the acquisition and relocation of the Old Reno Casino in downtown
Reno, to condemn the real property occupied by the Old Reno Casino, to declare
the agreement null and void and to preclude the City of Reno from condemning
the real property. We believe that there is no basis under Nevada law for the
City's decision to condemn the property at issue, which will allow a private
group to transfer a non-restricted gaming license to a new location and, in the
process, bypass the legal requirements generally associated with acquiring a
non-restricted gaming license.
The Company believes that its existing cash balances, cash flow from
operations, and availability of equipment financing, if necessary, 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.
THE CREDIT FACILITY
At origination in 1997, we had an $80 million reducing revolving term loan
credit facility (the "Credit Facility") with a consortium of banks. As of
March 31, 2003, maximum borrowing capacity was $55,300,000 all of which was
outstanding. The Credit Facility is a direct obligation of Golden Road, and is
guaranteed by Monarch. The Credit Facility is also guaranteed individually by
John Farahi, Co-Chairman of the Board, Chief Executive Officer and Chief
Operating Officer of Monarch and Golden Road and General Manager of the
Atlantis; Bahram (Bob) Farahi, Co-Chairman of the Board and President of
Monarch and Golden Road; and Behrouz Ben Farahi, Co-Chairman of the Board,
Chief Financial Officer, Secretary and Treasurer of Monarch and Golden Road.
We were able to utilize proceeds from the Credit Facility for working
capital needs and general corporate purposes relating to the Atlantis and for
ongoing capital expenditure requirements at the Atlantis.
At our option, borrowings under the Credit Facility can accrue interest at
a rate designated by the agent bank as its base rate (the "Base Rate") or at
the London Interbank Offered Rate ("LIBOR") for one, two, three or six month
periods. The rate of interest paid by us will include a margin added to either
the Base Rate or to LIBOR that is tied to our ratio of funded debt to EBITDA
(the "Leverage Ratio"). Depending on our Leverage Ratio, this margin
can vary between 0.00 percent and 2.00 percent above the Base Rate, and between
1.50 percent and 3.50 percent above LIBOR. At March 31, 2003, the applicable
margin was the Base Rate plus 0.0%, and the applicable LIBOR margin was LIBOR
plus 1.5%. At March 31, 2003, we had no Base Rate loans outstanding and had one
LIBOR loan outstanding totaling $55.3 million, for a total obligation of $55.3
million. The LIBOR rate at March 31, 2003, was 1.30%.
-17-
The maturity date of the Credit Facility is June 30, 2004. Beginning July
1, 2000, the maximum principal available under the Credit Facility is reduced
quarterly from $80.0 million by an aggregate of $40.0 million in increasing
increments ranging from $1.5 million to $6.0 million per quarter. We may
prepay borrowings under the Credit Facility without penalty (subject to certain
charges applicable to the prepayment of LIBOR borrowings prior to the
end of the applicable interest period) so long as the amount repaid is at
least $200 thousand and a multiple of $10 thousand. Amounts prepaid under the
Credit Facility may be reborrowed so long as the total borrowings outstanding
do not exceed the maximum principal available. We may also permanently reduce
the maximum principal available under the Credit Facility at any time so long
as the amount of such reduction is at least $500 thousand and a multiple of $50
thousand.
The Credit Facility is secured by liens on substantially all of the real
and personal property of Golden Road, as well as by the aforementioned parent
and personal guarantees. The Credit Facility contains covenants customary and
typical for a facility of this nature, including, but not limited to, covenants
requiring the preservation and maintenance of our assets (including provisions
requiring that a minimum amount equal to two percent of our gaming revenues
each year must be expended on capital expenditures at the Atlantis), and
covenants restricting our ability to merge, transfer ownership of Golden
Road, incur additional indebtedness, encumber assets, and make certain
investments. The Credit Facility also contains covenants requiring us to
maintain certain financial ratios, and provisions restricting transfers
between Golden Road and Monarch and between Golden Road and other specified
persons. The Credit Facility also contains provisions requiring the
achievement of certain financial ratios before we can repurchase our common
stock or pay or declare dividends. We are in compliance with all required
covenants as of March 31, 2003.
We paid various fees and other loan costs upon the closing of the Credit
Facility that are being amortized over the term of the Credit Facility using
the straight-line method, which approximates the effective interest rate
method.
SHORT-TERM DEBT. At March 31, 2003, we had approximately $655 thousand
outstanding in slot purchase contracts outstanding. These contracts have
original terms of 12 months or less and do not bear any interest.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
risks and prices, such as interest rates, foreign currency exchange rates and
commodity prices. We do not have any cash or cash equivalents as of March 31,
2003 that are subject to market risks.
We have substantial variable interest rate debt in the amount of
approximately $55.3 million as of March 31, 2003, and $66.3 million as of
March 31, 2002, which is subject to market risks.
A one-point increase in interest rates would have resulted in an increase
in interest expense of approximately $143 thousand in the first quarter of
2003 and $169 thousand in the first quarter of 2002.
-18-
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in alerting them on
a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
PART II. OTHER INFORMATION
ITEM 5. - LEGAL PROCEEDINGS
As reported on our Form 8-K dated April 17, 2003, on April 16, 2003, our
Golden Road subsidiary filed a complaint against the City of Reno and other
interested parties petitioning the Second Judicial District Court of Nevada to
review the City of Reno's decision to enter into an agreement for the
acquisition and relocation of the Old Reno Casino in downtown Reno, to condemn
the real property occupied by the Old Reno Casino, to declare the agreement
null and void and to preclude the City of Reno from condemning the real
property. We believe that there is no basis under Nevada law for the City's
decision to condemn the property at issue, which will allow a private group to
transfer a non-restricted gaming license to a new location and, in the process,
bypass the legal requirements generally associated with acquiring a non-
restricted gaming license.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
99.01 Certification of John Farahi, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.02 Certification of Ben Farahi, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On February 21, 2003, we filed a Current Report on Form 8-K reporting
that we had issued a press release announcing results for our Fiscal Year
ended December 31, 2002.
On March 10, 2003, we filed a Current Report on Form 8-K reporting that
we had issued a press release announcing our Board of Directors' approval to
purchase 250,000 shares of our common stock.
-19-
On April 11, 2003, we filed a Current Report on Form 8-K reporting that a
conference call to discuss first quarter 2003 results was going to be held on
April 30, 2003.
On April 13, 2003, we filed a Current Report on Form 8-K announcing the
filing of a petition by our operating subsidiary, Golden Road Motor Inn, Inc.,
with the Second District Court of Nevada against the City of Reno and a private
group.
On April 30, 2003, we filed a Current Report on Form 8-K reporting that
we had issued a press release announcing results for our first quarter ended
March 31, 2002.
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: May 14, 2003 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer, and Chief
Financial Officer(Principal Financial
Officer and Duly Authorized Officer)
-20-
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Farahi, Chief Executive Officer of Monarch Casino & Resort, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino
& Resort, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
-21-
I, Ben Farahi, Chief Financial Officer of Monarch Casino & Resort, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino
& Resort, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
By: /s/ Ben Farahi
---------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
-22-
EXIBIT 99.01
MONARCH CASINO & RESORT, INC.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc.
(the "Company") on Form 10-Q for the quarterly period ended March 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John Farahi, Chief Executive Officer of the Company certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 14, 2003
By: /s/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
-23-
EXIBIT 99.02
MONARCH CASINO & RESORT, INC.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc.
(the "Company") on Form 10-Q for the quarterly period ended March 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Ben Farahi, Chief Financial Officer of the Company certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 14, 2003
By: /s/ BEN FARAHI
---------------
Ben Farahi
Chief Financial Officer
-24-