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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, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number: 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 August 13, 2003, there were 9,340,328 shares of Monarch Casino &
Resort, Inc. $0.01 par value common stock outstanding.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2003 and 2002 (unaudited)..... 3
Condensed Consolidated Balance Sheets at June 30, 2003
and December 31, 2002 (unaudited)........................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (unaudited)............. 6
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 21
Item 4. Controls and Procedures...................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.......... 23
Item 5. Other Information............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Casino............................. $ 18,614,452 $ 17,817,343 $ 36,354,157 $ 34,396,657
Food and beverage.................. 8,736,201 8,373,075 16,947,609 16,376,641
Hotel.............................. 5,507,037 4,927,946 10,223,215 9,306,862
Other.............................. 989,068 906,411 1,871,813 1,738,878
------------ ------------ ------------ ------------
Gross revenues.................. 33,846,758 32,024,775 65,396,794 61,819,038
Less promotional allowances........ (4,771,688) (4,427,925) (9,156,796) (8,424,123)
------------ ------------ ------------ ------------
Net revenues.................... 29,075,070 27,596,850 56,239,998 53,394,915
------------ ------------ ------------ ------------
Operating expenses
Casino............................. 7,358,723 6,838,392 14,484,826 13,376,186
Food and beverage.................. 4,475,173 4,295,114 8,598,911 8,544,621
Hotel.............................. 1,738,320 1,578,549 3,384,299 3,096,162
Other.............................. 308,676 296,096 613,242 617,928
Selling, general and
administrative.................... 8,266,310 7,253,730 16,115,494 14,371,749
Depreciation and amortization...... 2,716,420 2,556,368 5,316,829 5,103,270
------------ ------------ ------------ ------------
Total operating expenses........ 24,863,622 22,818,249 48,513,601 45,109,916
------------ ------------ ------------ ------------
Income from operations.......... 4,211,448 4,778,601 7,726,397 8,284,999
------------ ------------ ------------ ------------
Other expenses
Interest expense................... (422,203) (708,116) (872,083) (1,474,761)
Stockholder guarantee fee expense.. (260,936) (334,033) (542,278) (685,378)
Other expense...................... - (225,000) - (225,000)
------------ ------------ ------------ ------------
Total other expenses............ (683,139) (1,267,149) (1,414,361) (2,385,139)
------------ ------------ ------------ ------------
Income before income taxes...... 3,528,309 3,511,452 6,312,036 5,899,860
Provision for income taxes........... 1,197,200 1,259,286 2,143,000 2,062,610
------------ ------------ ------------ ------------
Net income...................... $ 2,331,109 $ 2,252,166 $ 4,169,036 $ 3,837,250
============ ============ ============ ============
Earnings per share of common stock
Net income
Basic.......................... $ 0.25 $ 0.24 $ 0.44 $ 0.41
Diluted........................ $ 0.25 $ 0.24 $ 0.44 $ 0.40
Weighted average number of common
shares and potential common
shares outstanding
Basic.......................... 9,331,877 9,451,323 9,399,716 9,443,841
Diluted........................ 9,361,060 9,521,513 9,431,942 9,513,290
The accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements are an integral part of these statements.
-3-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
------------- -------------
ASSETS
Current assets
Cash............................................ $ 7,322,499 $ 9,961,484
Receivables, net................................ 3,221,768 2,724,726
Inventories..................................... 1,006,439 993,260
Prepaid expenses................................ 2,038,286 1,961,763
Prepaid federal income taxes.................... 278,278 176,321
Deferred income taxes........................... 492,457 492,457
------------- -------------
Total current assets......................... 14,359,727 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........................... 6,304,642 6,262,903
Furniture and equipment......................... 59,711,366 58,086,570
------------- -------------
158,537,989 156,835,912
Less accumulated depreciation and amortization.. (59,786,172) (55,985,653)
------------- -------------
Net property and equipment................... 98,751,817 100,850,259
------------- -------------
Other assets, net................................. 223,318 319,817
------------- -------------
Total assets................................. $ 113,334,862 $ 117,480,087
============= =============
The accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements are an integral part of these statements.
-4-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt............ $ 53,242,336 $ 8,279,095
Accounts payable................................ 5,593,567 6,227,124
Accrued expenses................................ 6,177,789 6,146,440
------------- -------------
Total current liabilities.................... 65,013,692 20,652,659
Long-term debt, less current maturities........... - 52,000,000
Deferred income taxes............................. 5,053,586 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;
9,336,995 outstanding at 06/30/2003,
9,474,830 outstanding at 12/31/2002............ 95,363 95,363
Additional paid-in capital...................... 17,438,757 17,381,517
Treasury stock,
199,280 shares at 06/30/2003, 61,445 shares
at 12/31/2002, at cost......................... (1,462,068) (202,692)
Retained earnings............................... 27,195,532 23,026,496
------------- -------------
Total stockholders' equity................... 43,267,584 40,300,684
------------- -------------
Total liabilities and stockholders' equity... $ 113,334,862 $ 117,480,087
============= =============
The accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements are an integral part of these statements.
-5-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income....................................... $ 4,169,036 $ 3,837,250
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.................. 5,316,829 5,103,269
Amortization of deferred loan costs............ 89,714 89,714
Bad debt expense............................... (281,540) (80,010)
Gain on disposal of assets..................... (6,980) (30,158)
Deferred income taxes.......................... 526,841 303,469
(Increase) decrease in receivables, net........ (215,502) 963,743
(Increase) decrease in inventories............. (13,179) 55,788
Increase in prepaid expenses................... (178,479) (608,118)
(Increase) decrease in other assets............ 5,343 (19,278)
(Decrease) increase in accounts payable, net... (633,557) 170,072
Increase (decrease) in accrued expenses
and federal income taxes payable............. 152,851 (523,414)
------------ ------------
Net cash provided by
operating activities......................... 8,931,377 9,262,327
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets..................... 6,980 44,490
Acquisition of property and equipment............ (986,044) (3,004,464)
Changes in accounts payable construction......... - (129,329)
------------ ------------
Net cash used in investing activities......... (979,064) (3,089,303)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options.......... 103,760 99,385
Principal payments on long-term debt............. (9,267,658) (7,323,084)
Purchase of Monarch common stock................. (1,427,400) -
------------ ------------
Net cash used in
financing activities......................... (10,591,298) (7,223,699)
------------ ------------
Net decrease in cash.......................... (2,638,985) (1,050,675)
Cash at beginning of period........................ 9,961,484 8,385,743
------------ ------------
Cash at end of period.............................. $ 7,322,499 $ 7,335,068
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest........................... $ 1,112,370 $ 1,969,980
Cash paid for income taxes....................... $ 1,596,612 $ 1,205,760
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase
of property and equipment in the
following amounts................................ $ 2,230,899 $ 1,322,025
The accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements are an integral part of these statements.
-6-
MONARCH CASINO & RESORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
for the three and six month periods ended June 30, 2003 and June 30, 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 and six month periods ended June
30, 2003 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003, or for any other period.
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.
Reclassifications
Certain amounts in the 2003 second quarter unaudited condensed
consolidated financial statements have been reclassified to conform with the
2003 presentation. These reclassifications had no effect on the previously
reported net income.
Self-insurance Reserves
The Company reviews self-insurance reserves at least quarterly. The amount
of reserve is determined by reviewing the actual expenditures for the previous
twelve-month period and reviewing reports prepared by the third party plan
administrator for any significant unpaid claims. The reserve is accrued at an
amount that approximates a two-to-three month period of those costs, which
management believes are adequate.
-7-
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 June 30, 2003 and 2002, the Company recorded interest expense in the
amount of approximately $261 thousand and $334 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
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.
-8-
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" 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:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Net income, as reported $2,331,109 $2,252,166 $4,169,036 $3,837,250
Stock-based employee compensation
expensed determined under the fair
value based method for all awards,
net of related income tax effects (19,099) (15,830) (37,988) (31,660)
----------- ----------- ---------- -----------
Pro forma net income $2,312,010 $2,236,336 $4,131,048 $3,805,590
=========== =========== ========== ===========
Basic earnings per share
As reported $ 0.25 $ 0.24 $ 0.44 $ 0.41
Pro forma $ 0.25 $ 0.24 $ 0.44 $ 0.40
Diluted earnings per share
As reported $ 0.25 $ 0.24 $ 0.44 $ 0.40
Pro forma $ 0.25 $ 0.24 $ 0.44 $ 0.40
-9-
Maturity of Revolving Credit Facility
The Company has a reducing revolving credit facility with a group of banks
(the "Credit Facility"). At June 30, 2003, the total balance outstanding on
the Credit Facility was $50.9 million. As discussed below, the Credit
Facility matures and becomes due and payable on June 30, 2004. The Company
intends to refinance or seek a replacement credit facility (see "The Credit
Facility") prior to the maturity date. 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 $261 thousand and
$334 thousand in the second quarters of 2003 and 2002, respectively.
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 has recently opened in the
Sacramento area, one of our primary feeder markets.
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.
NOTE 2. 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):
-10-
Three Months Ended June 30,
-----------------------------------
2003 2002
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Net Income
Basic..................... 9,332 $ 0.25 9,451 $ 0.24
Effect of dilutive
stock options............ 29 - 71 -
------ ------- ------ -------
Diluted................... 9,361 $ 0.25 9,522 $ 0.24
====== ======= ====== =======
Six Months Ended June 30,
-----------------------------------
2003 2002
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Net Income
Basic..................... 9,400 $ 0.44 9,444 $ 0.41
Effect of dilutive
stock options............ 32 - 69 (0.01)
------ ------- ------ -------
Diluted................... 9,432 $ 0.44 9,513 $ 0.40
====== ======= ====== =======
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,
-----------------------------------
2003 2002
---------------- ----------------
Options to purchase shares of
common stock (in thousands)... 19 9
Exercise prices................ $11.30 - $14.37 $14.37
Expiration dates............... 6/07 - 07/12 6/07
Six Months Ended June 30,
-----------------------------------
2003 2002
---------------- ----------------
Options to purchase shares of
common stock (in thousands)... 19 9
Exercise prices................ $11.30 - $14.37 $14.37
Expiration dates............... 6/07 - 07/12 6/07
-11-
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends SFAS
133, "Accounting for Derivative and Instruments and Hedging Activities," and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and or
hedging activities under SFAS 133. This statement is effective for contracts
entered into or modified after June 30, 2003, except as stated below and for
hedging relationships designated after June 30, 2003. The provisions of this
statement that relate to Statement 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates.
The adoption of this statement is not expected to have a material impact on
our results of operations or financial position.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Financial instruments that are within the scope of the statement,
which previously were often classified as equity, must now be classified as
liabilities. This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of this statement is not expected to have a material effect on our
results of operations or financial position.
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.
-12-
OPERATING RESULTS SUMMARY
During the second quarter of 2003, with the exception of operating margin,
we exceeded all previously reported second quarter casino revenues, hotel
revenues, net revenues, net income and earnings per share results.
Three Months Percentage
Ended June 30, Increase / (Decrease)
--------------- -----------------------
2003 2002 Second Quarter 03 vs 02
------ ------ -----------------------
(In millions, except earnings per share
and percentages)
Casino revenues......................... $ 18.6 $ 17.8 4.5%
Food and beverage revenues.............. 8.7 8.4 4.3%
Hotel revenues.......................... 5.5 4.9 11.8%
Net revenues............................ 29.1 27.6 5.4%
Income from operations.................. 4.2 4.8 (11.9)%
Net income.............................. 2.3 2.3 3.5%
Earnings per share - diluted............ 0.25 0.24 4.2%
Operating margin........................ 14.5% 17.3% (2.8) pts
Six Months Percentage
Ended June 30, Increase / (Decrease)
--------------- -----------------------
2003 2002 January - June 03 vs 02
------ ------ -----------------------
(In millions, except earnings per share
and percentages)
Casino revenues......................... $ 36.4 $ 34.4 5.7%
Food and beverage revenues.............. 16.9 16.4 3.5%
Hotel revenues.......................... 10.2 9.3 9.8%
Net revenues............................ 56.2 53.4 5.3%
Income from operations.................. 7.7 8.3 (6.7)%
Net income.............................. 4.2 3.8 8.6%
Earnings per share - diluted............ 0.44 0.40 10.0%
Operating margin........................ 13.7% 15.5% (1.8) pts
Some significant items that affected our second 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
13.8% in the 2002 second quarter to 14.1% in 2003. This increase in
promotional allowances reflects our efforts to attract and retain
-13-
high-end players and local patrons in an increasingly competitive
market. We believe these efforts were effective in reaching this goal.
- Operating expenses increased from $22.8 million in the second quarter
of 2002 to $24.9 million in the second quarter of 2003, an increase of
9.0%. The increase was due primarily to an increase in sales,
marketing and special event costs, as well as increased legal expenses.
Net revenues increased 5.4% from $27.6 million in the second quarter of
2002 to $29.1 million in the second quarter of 2003. These changes led
to an 11.9% decrease in operating income in the second quarter of 2003
over the second quarter of 2002.
- Interest and stockholder guarantee fee expenses decreased 34.4%
compared to last year's second quarter from $1.0 million to $683
thousand due to lower prevailing interest rates combined with
continuously decreasing outstanding debt.
- Selling, general and administrative (SG&A) expenses increased 14.0% in
the second quarter of 2003 over the second quarter of 2002, primarily
due to an increase in sales, marketing and special event costs.
Expenses related to the Company's litigation against the City of Reno
and other third parties also contributed to the increase in SG&A
expenses during the second quarter of 2003. Such expenses were not
incurred in the second quarter of 2002.
- We experienced unusually low hold percentages at our table games during
the second quarter of 2003, which negatively impacted our cash flow and
operating income.
CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $3.2 million
and $4.5 million during the first six months of 2003 and 2002, respectively.
This year, to date, our capital expenditures consisted primarily of the
construction and opening of our new Sushi Bar and continued acquisitions of and
upgrades to gaming equipment. During last year's first six months, 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
-14-
(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 June 30, 2003 and 2002
For the three-month period ended June 30, 2003, the Company earned net
income of $2.3 million, or $0.25 per share (diluted), on net revenues of $29.1
million, a slight increase from net income of $2.3 million, or $0.24 per share
(diluted), on net revenues of $27.6 million for the three months ended June
30, 2002. Income from operations for the three months ended June 30, 2003
totaled $4.2 million, an 11.9% decrease when compared to the $4.8 million for
the same period in 2002. This decrease resulted primarily from increases in
promotional allowances and operating expenses. Both net revenues and net
income for the second quarter of 2003 represent new second quarter records for
the Company. Net revenues increased 5.4%, and net income increased 3.5% when
compared to last year's second quarter.
Casino revenues totaled $18.6 million in the second quarter of 2003, a
4.5% increase from the $17.8 million in the second quarter of 2002, reflecting
increases in slot and poker win. Slot revenues were up 9.4% in the second
quarter of 2003 compared to the second quarter of 2002 due to an increase in
the volume of slot machine play and a higher hold percentage. Table game and
poker room revenue in the second quarter of 2003 decreased 10.7% from the
second quarter of 2002 due to a lower hold percentage caused by higher than
average winnings by our casino patrons. Keno win decreased 18.4% in the
second quarter 2003 compared to the second quarter 2002. The decrease was due
to a lower hold percentage and a slight decrease of 1.7% in keno write in the
second quarter of 2003 compared to the second quarter 2002. Casino operating
expenses amounted to 39.5% of casino revenues in the second quarter of 2003,
compared to 38.4% in the second quarter of 2002, with the difference due
primarily to lower hold percentages caused by higher than average winnings by
our casino patrons.
Food and beverage revenues totaled $8.7 million in the second quarter of
2003, a 4.3% increase from the $8.4 million in the second quarter of 2002, due
primarily to increases in the number of covers served during the quarter,
partially offset by a decrease in the average price per cover. Food and
beverage operating expenses amounted to 51.2% of food and beverage revenues
during the second quarter of 2003, relatively unchanged when compared to 51.3%
in the second quarter of 2002.
Hotel revenues were $5.5 million for the second quarter of 2003, an
increase of 11.8% from the $4.9 million in hotel revenues in the 2002 second
quarter. This increase was the result of an increase in both the average
daily room rate (ADR) and hotel occupancy. Both second quarters' 2003 and
2002 revenues also included a $3 per occupied room energy surcharge. During
the second quarter of 2003, the Atlantis experienced a 95.4% occupancy rate,
an increase from a 94.0% occupancy rate for the same period in 2002. The
Atlantis' ADR was $58.34 in the second quarter of 2003 compared to $55.62 in
the second quarter of 2002. Hotel operating expenses as a percent of hotel
revenues decreased slightly to 31.6% in the 2003 second quarter, compared to
32.0% in the 2002 second quarter, primarily due to the improved ADR.
-15-
Promotional allowances increased to $4.8 million, or 14.1% of gross
revenues, in the second quarter of 2003 compared to $4.4 million, or 13.8% of
gross revenues, in the second quarter of 2002. The increase is attributable to
expanded efforts to increase revenues. We believe these efforts were
successful in helping revenue growth.
Other revenues increased 9.1% to $989 thousand in the 2003 second quarter
compared to $906 thousand in the same period last year. The increase reflects
increased retail sales in both the gift and sundries shops as well as a slight
increase at the entertainment fun center. Other expenses in the 2003 second
quarter decreased slightly to 31.2% of other revenues, from 32.7% in the 2002
second quarter, reflecting increased efficiencies.
Depreciation and amortization expense was $2.7 million in the second
quarter of 2003, up 8.7% compared to $2.5 million in the same period last year.
Selling, general and administrative expenses amounted to $8.3 million, or
28.5% of net revenues in the second quarter of 2003, an increase from $7.3
million, or 26.5% in the second quarter of 2002 due primarily to an increase
in sales, marketing and special event costs, as well as increased legal
expenses. See "Commitments and Contingencies" below.
Interest expense for the 2003 second quarter totaled $683 thousand, a
decrease of 34.4%, from $1.0 million in the 2002 second quarter. The decrease
reflects the Company's reduction in debt outstanding and lower applicable
interest rates. Interest expense for both the quarters ended June 30, 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
$261 thousand and $334 thousand in the second quarters of 2003 and 2002,
respectively.
Comparison of Operating Results for the Six-month Periods Ended June 30,
2003 and 2002
For the six months ended June 30, 2003, the Company earned net income of
$4.2 million, or $0.44 per share (diluted), on net revenues of $56.2 million,
an increase from net income of $3.8 million, or $0.40 per share (diluted), on
net revenues of $53.4 million during the six months ended June 30, 2002.
Income from operations for the 2003 six-month period totaled $7.7 million,
compared to $8.3 million for the same period in 2002.
Casino revenues for the first six months of 2003 totaled $36.4 million, a
5.7% increase from $34.4 million for the first six months of 2002, reflecting
increases in slot, Keno and poker win. Slot revenues were up 9.4% in the
first six months of 2003 compared to the first six months of 2002 due to an
increase in the volume of slot machine play. Table game revenue for the six
months ended June 30, 2003 decreased 7.2% compared to the same period in 2002,
as a result of unusually low hold percentages. Poker room revenue increased
6.8% for the six months ended June 30, 2003, compared to the same period last
year. Keno revenue increased 7.9% in the six-month period ended June 30, 2003
when compared to the same period last year. The increase was due to a
slightly higher hold percentage combined with an approximate 3.6% increase in
Keno write. Casino operating expenses amounted to 39.8% of casino revenues
for the six months ended June 30, 2003, compared to 38.9% for the same period
in 2002, primarily due to lower hold percentages.
-16-
Food and beverage revenues totaled $16.9 million for the six months ended
June 30, 2003, an increase of 3.5% from the $16.4 million for the six months
ended June 30, 2002, due to increases in the number of covers served and the
average revenue per cover. Food and beverage operating expenses amounted to
50.7% of food and beverage revenues during the 2003 six-month period, compared
to 52.2% for the same period in 2002, which was primarily due to overall
successful efforts to manage payroll costs as a percentage of revenues and
direct departmental expenses as a percentage of revenues. The overall
decrease was partially offset by a slight increase in food cost of sales.
Hotel revenues for the first six months of 2003 increased 9.8% to $10.2
million from $9.3 million for the first six months of 2002, primarily due to
an increase in the ADR which was partially offset by a slight decrease in
occupancy. Hotel revenues for the entire first six months of 2003 and 2002
also include a $3 per occupied room energy surcharge. The Atlantis
experienced an increase in the ADR during the 2003 six-month period to $55.92,
compared to $51.02 for the same period in 2002. The occupancy rate decreased
slightly to 92.3% for the six-month period in 2003, from 92.5% for the same
period in 2002. Hotel operating expenses in the first six months of 2003 were
33.1% of hotel revenues, relatively flat when compared to 33.3% for the same
period in 2002.
Other revenues were $1.9 million for the six months ended June 30, 2003,
an increase of 7.6% from $1.7 million in the same period in 2002, reflecting
primarily increased sales in both our retail stores and at the entertainment
fun center. Other expenses as a percentage of revenue decreased to 32.8% for
the six months ended June 30, 2003 as compared to 35.5% for the same period in
2002.
Selling, general and administrative expenses increased 11.8% to $16.1
million in the first six months of 2003, compared to $14.4 million in the
first six months of 2002, primarily as a result of increased marketing and
promotional expenditures as well as increased legal expenses (see "Commitments
and Contingencies"). As a percentage of net revenue, SG&A expenses increased
to 28.7% in the 2003 six-month period from 27.0% in the same period in 2002.
Interest expense for the first six months of 2003 totaled $1.4 million, a
decrease of 34.5%, compared to $2.2 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 ended June 30, 2003, and 2002 included guarantee fees paid to the
Company's three principal shareholders. These guarantee fee expenses totaled
approximately $542 thousand and $685 thousand in the first six months of 2003
and 2002, respectively.
Also during the second quarter of 2002, the Company 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.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with net
cash provided by operating activities.
For the six months ended June 30, 2003, net cash provided by operating
activities totaled $8.9 million, a decrease of 3.6% compared to the same period
last year. Net cash used in investing activities totaled $979 thousand and
$3.1 million in the six months ended June 30, 2003 and 2002, respectively.
During the first six months of 2003 and 2002, net cash used in
-17-
investing activities was used primarily in the purchase of property and
equipment. Net cash used in financing activities totaled $10.6 million for
the first six months of 2003, compared to $7.2 million for the same period
last year, as the Company used funds primarily to reduce long-term debt and
for the repurchase of Monarch common stock pursuant to the stock repurchase
program announced during the first quarter of 2003. As a result, at June 30,
2003, the Company had a cash balance of $7.3 million, compared to $7.3 million
at June 30, 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 June 30, 2003, the total balance
outstanding on the Credit Facility was $50.9 million. As discussed below, the
Credit Facility matures and becomes due and payable on June 30, 2004. The
Company intends to refinance or seek a replacement credit facility (see "The
Credit Facility") prior to the maturity date. 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 $261 thousand and
$334 thousand in the second quarters of 2003 and 2002, respectively.
Critical Accounting Policies
A description of our critical accounting policies and estimates can be
found in Item 7 of our Form 10-K for the year ended December 31, 2002. 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.
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. We expect the legal complaint against the City of Reno
and other third parties described in "Commitments and Contingencies" to
continue into future quarters and our Selling, General and Administrative
expenses to continue to be adversely impacted as a result.
-18-
COMMITMENTS AND CONTINGENCIES
Contractual cash obligations for the Company as of June 30, 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 $53,242,336 $53,242,336 $ - $ -
Operating Leases 322,522 161,261 161,261 -
----------- ----------- ----------- ---------
Total Contractual Cash $53,564,858 $53,403,597 $ 161,261 $ -
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 second quarter of 2003,
we did not purchase any shares of our common stock pursuant to this stock
repurchase program. During the first quarter of 2003 we purchased 180,000
shares under the repurchase program.
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. See Part II - Item 1. Legal Proceedings.
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 routine debt obligations (with the exception of the maturing Credit
Facility which comes due on June 30, 2004), 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. The Company will need to refinance or seek other
credit facilities to replace the Credit Facility maturing June 30, 2004. See
"The Credit Facility" below. 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.
-19-
THE CREDIT FACILITY
At origination in 1997, we had an $80.0 million reducing revolving term
loan credit facility (the "Credit Facility") with a consortium of banks. As of
June 30, 2003, maximum borrowing capacity was $51,750,000, of which $50,900,000
was outstanding. We voluntarily paid down more than was required by the loan
agreement as, according to the loan agreement, the maximum outstanding balance
required at April 1, 2003 was $57.0 million and $54.5 million at July 1, 2003.
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 June 30, 2003, the applicable
margin was the Base Rate plus 0.0%, and the applicable LIBOR margin was LIBOR
plus 1.5%. At June 30, 2003, we had no Base Rate loans outstanding and had one
LIBOR loan outstanding totaling $50.9 million, for a total obligation of $50.9
million. The LIBOR rate at June 30, 2003, was 1.06%.
Beginning July 1, 2000, the maximum principal available under the Credit
Facility has 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
-20-
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 June 30, 2003.
The maturity date of the Credit Facility is June 30, 2004. Prior to
maturity, we expect to seek refinancing of the remaining amount but no
assurance can be given that such refinancing will be successful. Given our
financial condition and relatively low debt to cash flow and equity, we fully
expect the refinancing to be successful. Should the refinancing effort be
unsuccessful, the Company would be faced with substantial liquidity problems.
The current loan guarantors are not legally required to provide further
guarantees in connection with a potential refinancing of the Credit Facility.
Substantially all of the real and personal property of Golden Road Motor Inn,
Inc., the Company's wholly-owned subsidiary, secures the existing Credit
Facility.
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 June 30, 2003, we had approximately $2.3 million 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 June 30,
2003 that are subject to market risks.
We have substantial variable interest rate debt (the Credit Facility) in
the amount of approximately $50.9 million as of June 30, 2003, and $64.0
million as of June 30, 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 $132 thousand in the second quarter of
2003 and $162 thousand in the second quarter of 2002.
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.
-21-
PART II. OTHER INFORMATION
ITEM 1. - 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.
On April 26, 1994, and May 10, 1994, complaints in purported class action
lawsuits (William Poulos v. Caesars World, Inc. et al., Case No.
94-478-Civ-Orl-22, and William H. Ahern v. Caesars World, Inc. et al., Case
No. 94-532-Civ-Orl-22, respectively) were filed in the United States
District Court for the Middle District of Florida (the "Florida Complaints")
and were subsequently transferred to the United States District Court for
the District of Nevada, Southern Division (the "Nevada District Court"). On
September 26, 1995, a complaint in a purported class action lawsuit (Larry
Schrier v. Caesars World, Inc. et al., Case No. 95-923-LDG (RJJ)) was filed
in Nevada District Court (along with the Florida Complaints, the
"Complaints"). The Complaints allege that manufacturers, distributors and
casino operators of video poker and electronic slot machines, including the
Company, have engaged in a course of conduct intended to induce persons to
play such games based on a false belief concerning how the gaming machines
operate, as well as the extent to which there is an opportunity to win on a
given play. The Complaints charge Defendants with violations of the
Racketeer Influenced and Corrupt Organizations Act, as well as claims of
common law fraud, unjust enrichment and negligent misrepresentation, and
seek damages in excess of $1 billion without any substantiation of that
amount. The Nevada District Court consolidated the actions (and one other
action styled William Poulos v. American Family Cruise Line, NV et al., Case
No. CV -S-95-936-LDG (RLH), in which the Company is not a named defendant).
The Plaintiffs moved to certify two classes of plaintiffs, essentially
encompassing all persons in the U.S. who have played one or more of the
defendants' video poker or electronic slot machines in the prior ten years.
That motion was opposed by the defendants and subsequently, the court ruled in
favor of the defendants and denied the class certification motion. The
plaintiffs have appealed from that ruling. The appeal has been fully briefed
and is presently pending before the Ninth Circuit Court of Appeals. Management
believes that denial of class certification will be upheld upon appeal, and
further that the substantive allegations in the Complaints are
without merit. Management intends to defend vigorously against the
allegations. In the event the plaintiffs' ability to proceed as a class was
revived on appeal, the Company could have potential liability. Under such
circumstances, if plaintiffs were successful in establishing all elements of
their case, then liability, including exposure for a treble damages, would lie
with the Company. A determination would need to be made as to what percentage
of the potential judgment would be attributed to the Company. At this time,
there are so many variables that meaningful calculation of potential financial
-22-
exposure to the Company cannot be accomplished. However, there could result a
material adverse impact on the Company's financial condition and operating
results. Management believes that this outcome is highly unlikely. The
maximum exposure to the Company in the event the lawsuit survives by way of the
appeal is not estimable.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2003, the Company conducted its annual meeting of stockholders
in Reno, Nevada, in which the only actions taken were the re-election of three
directors whose terms expired in 2003 and the amendment of the Company's
existing three stock compensation plans. The proposed amendment included
increasing the life of each of the three plans, increasing the number of common
stock available for grant under each plan, modifying the eligibility of the
Incentive Plan, extending the life of stock options granted under the
Directors' Plan, granting extention powers to the Directors' Plan Committee and
redefining conditions for determining the purchase price of stock options for
certain recipients (more details are available in the Company's Proxy Statement
filed with the Securities and exchange Commission on April 30, 2003). The
voting results were as follows:
Votes Cast
---------------------------------------
Against or
Name of Director Elected For Withheld Abstentions
------------------------ --------- ----------- -----------
Bob Farahi 7,512,662 436,414 1,380,754
Ben Farahi 7,512,662 436,414 1,380,754
Ronald R. Zideck 7,831,333 117,743 1,380,754
Amendment to Existing Stock
Option Plans 6,086,713 1,862,363 1,380,754
ITEM 5. - OTHER INFORMATION
The three principal stockholders of the Company, through their
affiliates, 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 5,100 square feet in the shopping center which it uses as office
space.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
31.01 Certifications of John Farahi and Ben Farahi,
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
32.01 Certifications of John Farahi and Ben Farahi,
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
(b) Reports on Form 8-K
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.
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On April 18, 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.
On July 31. 2003, we filed a Current Report on Form 8-K reporting that we
had issued a press release announcing record results for our second quarter
ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
MONARCH CASINO & RESORT, INC.
(Registrant)
Date: August 13, 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)
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EXHIBIT 31.01
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) [Omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
-25-
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) [Omitted]
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003
By: /s/ Ben Farahi
--------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
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EXIBIT 32.01
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 June 30, 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: August 13, 2003
By: /s/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
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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 June 30, 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: : August 13, 2003
By: /s/ BEN FARAHI
--------------
Ben Farahi
Chief Financial Officer
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