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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 September 30, 2004
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 November 12, 2004,
there were 9,406,224 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 nine months ended September 30, 2004 and 2003
(unaudited).................................................... 3
Condensed Consolidated Balance Sheets at
September 30, 2004 (unaudited) and December 31, 2003........... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (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 6. Exhibits and Reports on Form 8-K................................ 22
Signatures...................................................... 23
Certifications.................................................. 24
Exhibit 99.01 Certification of John Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................... 26
Exhibit 99.02 Certification of Ben Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................... 27
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Casino............................. $ 22,642,767 $ 19,893,383 $ 63,490,456 $ 56,247,540
Food and beverage.................. 9,689,843 9,146,124 27,956,559 26,093,733
Hotel.............................. 7,021,432 6,259,807 18,974,036 16,483,022
Other.............................. 1,066,081 1,169,165 2,874,923 3,040,978
------------ ------------ ------------ ------------
Gross revenues.................. 40,420,123 36,468,479 113,295,974 101,865,273
Less promotional allowances........ (5,359,370) (5,021,786) (15,035,242) (14,178,582)
------------ ------------ ------------ ------------
Net revenues.................... 35,060,753 31,446,693 98,260,732 87,686,691
------------ ------------ ------------ ------------
Operating expenses
Casino............................. 7,870,607 7,550,337 22,977,956 22,035,163
Food and beverage.................. 4,912,576 4,530,680 14,122,051 13,129,591
Hotel.............................. 1,949,466 1,846,802 6,006,341 5,231,101
Other.............................. 352,855 357,879 1,047,509 971,121
Selling, general and
administrative.................... 9,117,102 8,363,361 25,972,178 24,478,855
Depreciation and amortization...... 2,047,706 2,611,621 7,687,196 7,928,450
------------ ------------ ------------ ------------
Total operating expenses........ 26,250,312 25,260,680 77,813,231 73,774,281
------------ ------------ ------------ ------------
Income from operations.......... 8,810,441 6,186,013 20,447,501 13,912,410
------------ ------------ ------------ ------------
Other expenses
Interest expense................... (333,483) (372,063) (1,125,121) (1,244,145)
Stockholder guarantee fee expense.. - (250,334) (136,164) (792,613)
------------ ------------ ------------ ------------
Total other expenses............ (333,483) (622,397) (1,261,285) (2,036,758)
------------ ------------ ------------ ------------
Income before income taxes...... 8,476,958 5,563,616 19,186,216 11,875,652
Provision for income taxes........... 2,924,520 1,897,802 6,523,520 4,040,802
------------ ------------ ------------ ------------
Net income...................... $ 5,552,438 $ 3,665,814 $ 12,662,696 $ 7,834,850
============ ============ ============ ============
Earnings per share of common stock
Net income
Basic............................ $ 0.59 $ 0.39 $ 1.35 $ 0.84
Diluted.......................... $ 0.59 $ 0.39 $ 1.35 $ 0.83
Weighted average number of common
shares and potential common
shares outstanding
Basic.......................... 9,388,922 9,339,567 9,368,824 9,379,446
Diluted........................ 9,408,872 9,373,006 9,397,211 9,411,771
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
September 30, December 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash............................................ $ 6,893,209 $ 9,711,310
Receivables, net................................ 2,711,752 2,818,727
Federal income tax refund receivable............ - 756,698
Inventories..................................... 1,227,314 1,245,967
Prepaid expenses................................ 2,741,176 2,234,773
Deferred income taxes........................... 1,071,457 542,457
------------- -------------
Total current assets......................... 14,644,908 17,309,932
------------- -------------
Property and equipment
Land............................................ 10,339,530 10,339,530
Land improvements............................... 3,226,913 3,226,913
Buildings....................................... 78,955,538 78,955,538
Building improvements........................... 7,060,680 6,304,642
Furniture and equipment......................... 65,241,991 63,230,354
Leasehold improvement........................... 1,200,000 -
------------- -------------
166,024,652 162,056,977
Less accumulated depreciation and amortization.. (67,575,337) (63,618,047)
------------- -------------
Net property and equipment................... 98,449,315 98,438,930
------------- -------------
Other assets, net................................. 429,495 128,263
------------- -------------
Total assets................................. $ 113,523,718 $ 115,877,125
============= =============
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
September 30, December 31,
2004 2003
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt............ $ - $ 6,059,591
Accounts payable................................ 6,234,682 8,407,887
Accrued expenses................................ 5,810,263 6,707,257
Federal income taxes payable.................... 1,390,981 -
------------- -------------
Total current liabilities.................... 13,435,926 21,174,735
Long-term debt, less current maturities........... 32,800,000 41,125,000
Deferred income taxes............................. 5,639,426 4,854,587
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;
9,405,224 outstanding at 09/30/2004,
9,340,328 outstanding at 12/31/2003............ 95,363 95,363
Additional paid-in capital...................... 17,219,376 17,432,635
Treasury stock,
131,051 shares at 09/30/2004, 195,947 shares
at 12/31/2003, at cost......................... (961,488) (1,437,614)
Retained earnings............................... 45,295,115 32,632,419
------------- -------------
Total stockholders' equity................... 61,648,366 48,722,803
------------- -------------
Total liabilities and stockholders' equity... $ 113,523,718 $ 115,877,125
============= =============
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
Nine Months Ended
September 30,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income.................................. $ 12,662,696 $ 7,834,850
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 7,687,196 7,928,450
Amortization of deferred loan costs....... 150,834 134,570
Provision for bad debt.................... 338,560 (582,823)
Loss (gain) on disposal of assets......... 191,203 (117,771)
Deferred income taxes..................... 255,840 476,842
Changes in assets and liabilities
Receivables, net.......................... 525,113 699,665
Inventories............................... 18,654 (240,365)
Prepaid expenses.......................... (506,404) (678,294)
Other assets.............................. (452,066) 8,014
Accounts payable.......................... (2,173,205) (343,175)
Accrued expenses and federal income
taxes payable........................... 493,990 1,566,552
------------ ------------
Net cash provided by
operating activities.................... 19,192,411 16,686,515
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets................ 9,929 230,844
Acquisition of property and equipment....... (7,898,717) (1,525,716)
------------ ------------
Net cash used in investing activities.... (7,888,788) (1,294,872)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options..... 262,867 122,092
Proceeds from long-term borrowings.......... 46,960,304 -
Principal payments on long-term debt........ (61,344,895) (14,172,143)
Purchase of Monarch Common Stock............ - (1,427,400)
------------ ------------
Net cash used in
financing activities.................... (14,121,724) (15,477,451)
------------ ------------
Net decrease in cash..................... (2,818,101) (85,808)
Cash at beginning of period................... 9,711,310 9,961,484
------------ ------------
Cash at end of period......................... $ 6,893,209 $ 9,875,676
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest...................... $ 1,215,110 $ 1,714,447
Cash paid for income taxes.................. $ 4,120,000 $ 1,596,612
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase
of property and equipment in the
following amounts........................... $ 560,304 $ 2,302,971
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.
Interim Financial Statements
The accompanying condensed consolidated financial statements for the
three-month and nine-month periods ended September 30, 2004 and September 30,
2003 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, 2003. The results for the three-month and nine-month periods
ended September 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004, or for any other
period.
Use of Estimates
In preparing these financial statements in conformity with U.S. generally
accepted accounting principles, 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 respective periods. Actual
results could differ from those estimates.
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 third party
plan administrators for any significant unpaid claims. The reserve is accrued
at an amount that approximates amounts needed to pay both reported and
unreported claims as of the balance sheet dates, which management believes are
adequate.
Stockholder Guarantee Fees
All of the Company's bank debt was personally guaranteed by the Company's
three largest stockholders since the inception of our original loan agreement
on December 29, 1997. Effective January 1, 2001, until February 20, 2004, the
Company compensated the guarantors at the rate of 2% per annum of the
-7-
quarterly average outstanding bank debt amount. During the three months ended
September 30, 2003, the Company recorded interest expense in the amount of
approximately $250,000 in guarantee fees. No guarantee fees were paid during
the three months ended September 30, 2004, because the individuals who
guaranteed the Original Credit Facility were not required to do so for the New
Credit Facility (see Liquidity and Capital Resources under Item 2.).
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
In accordance with SFAS No. 144, "Accounting for the Impairment and
Disposal of Long-Lived Assets," 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
-8-
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," (and as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," which
the Company adopted for the fiscal quarter ended September 30, 2004), net
income and income per share would have been changed to the pro forma amounts
indicated below:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
2004 2003 2004 2003
---------- ----------- ----------- ----------
Net income, as reported $5,552,438 $3,665,814 $12,662,696 $7,834,850
Stock-based employee compensation
expensed determined under the fair
value based method for all awards,
net of related income tax effects (19,113) (14,973) (30,189) (26,908)
----------- ----------- ----------- ----------
Pro forma net income $5,533,325 $3,650,841 $12,632,507 $7,807,942
=========== =========== =========== ==========
Basic earnings per share
As reported $ 0.59 $ 0.39 $ 1.35 $ 0.84
Pro forma $ 0.59 $ 0.39 $ 1.35 $ 0.83
Diluted earnings per share
As reported $ 0.59 $ 0.39 $ 1.35 $ 0.83
Pro forma $ 0.59 $ 0.39 $ 1.34 $ 0.83
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
-9-
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 gave 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 opened in the Sacramento
area, one of our primary feeder markets, in June of 2003. Other new Native
American casinos are under construction in the northern California market, as
well as other markets the Company currently serves, that could have an impact
on the Company's financial position and results of operations.
In addition, the Company relies on non-conventioneer visitors partially
comprised of individuals flying into the Reno area. The "War on Terrorism,"
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. The terrorist attacks that took place in the United States on
September 11, 2001 were unprecedented events that created economic and
business uncertainties, especially for the travel and tourism industry.
The potential for future terrorist attacks, the national and international
responses, and other acts of war or hostility including the ongoing situation
in Iraq, have created economic and political uncertainties that could
materially adversely affect our business, results of operations, and financial
condition in ways we cannot predict.
NOTE 2. EARNINGS PER SHARE
The Company reports "basic" earnings per share and "diluted" earnings per
share in accordance with the provisions of 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 September 30,
-----------------------------------
2004 2003
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Weighted average common shares outstanding
Basic..................... 9,389 $ 0.59 9,340 $ 0.39
Effect of dilutive
stock options............ 20 - 33 -
------ ------- ------ -------
Diluted................... 9,409 $ 0.59 9,373 $ 0.39
====== ======= ====== =======
Nine Months Ended September 30,
-----------------------------------
2004 2003
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Weighted average common shares outstanding
Basic..................... 9,369 $ 1.35 9,379 $ 0.84
Effect of dilutive
stock options............ 28 - 33 (0.01)
------ ------- ------ -------
Diluted................... 9,397 $ 1.35 9,412 $ 0.83
====== ======= ====== =======
Excluded from the computation of diluted earnings per share are options
where the exercise prices are greater than the market price and their effects
would be anti-dilutive in the computation of diluted earnings per share.
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued interpretation No. 46R ("FIN 46R"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51." The objective of FIN 46R is to improve the financial reporting by
companies involved with variable interest entities. FIN 46R changes certain
consolidation requirements by requiring a variable interest entity to be
consolidated by a company that is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The Company has determined
that all variable interest entities it holds at September 30, 2004, do not
require consolidation under the provisions of FIN 46R as the Company is not
subject to a majority of the risk of loss or entitled to receive a majority of
the variable interest entity's residual returns.
NOTE 5. RELATED PARTY TRANSACTIONS
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"). The Shopping Center
occupies 18.7 acres and consists of approximately 213,000 square feet of
-11-
retail space. The Company currently rents various spaces totaling
approximately 8,100 square feet in the Shopping Center which it uses as office
space, and pays rent of approximately $6,100 per month plus common area
expenses.
In addition, a new driveway that is being shared between the Atlantis and
the Shopping Center was completed on September 30, 2004. As part of this
project, in January 2004, the Company leased a 37,368 square-foot corner
section of the Shopping Center for a minimum lease term of 15 years at a
monthly rent of $25,000, subject to increase every 60 months based on the
Consumer Price Index. The Company has begun paying rent to the Shopping
Center. The Company also uses part of the common area of the Shopping Center
and pays its proportional share of the common area expense of the Shopping
Center. The Company has the option to renew the lease for 3 five-year terms,
and at the end of the extension periods, the Company has the option to
purchase the leased section of the Shopping Center at a price to be determined
based on an MAI Appraisal. The leased space is being used by the Company for
pedestrian and vehicle access to the Atlantis, and the Company may use a
portion of the parking spaces at the Shopping Center. The Company is
responsible for two thirds of the construction costs of the project, up to a
maximum of $1.2 million. Due do various upgrades, the project cost exceeded
$1.8 million, by approximately $200 thousand and the Company is currently
negotiating with the Shopping Center and may potentially have to pay up to two
thirds of the incremental costs.
On September 23, 2003, the Company entered into an option agreement with
an affiliate of its controlling stockholders to purchase property in South
Reno for development of a new hotel casino. Commencement of any development
of the property will require completion of property due diligence and receipt
of numerous approvals, including master plan changes and zoning changes,
neither of which can be assured. The Company, through the current property
owner, has filed an application with the City of Reno for both master plan and
zoning changes for 13 acres of the property.
The Company is currently leasing billboard advertising space from
affiliates of its controlling stockholders for a total cost of $5,500 per
month.
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 and our hotel operations. 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 for
locals, tour and travel visitors and conventioneers by offering exceptional
service, value and an appealing theme to our guests. Our hands-on management
style focuses on customer service and cost efficiencies.
-12-
Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us"
refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING RESULTS SUMMARY
During the third quarter of 2004, we exceeded all previously reported
Company third quarter casino revenues, hotel revenues, net revenues, net
income and earnings per share.
Three Months Percentage
ended September 30, Increase / (Decrease)
------------------- ------------------------
2004 2003 Third Quarter 04 vs 03
-------- -------- ------------------------
(In millions, except earnings per share and percentages)
Casino revenues......................... $ 22.6 $ 19.9 13.8%
Food and beverage revenues.............. 9.7 9.1 5.9%
Hotel revenues.......................... 7.0 6.3 12.2%
Other revenues.......................... 1.1 1.2 (8.8)%
Net revenues............................ 35.1 31.4 11.5%
Income from operations.................. 8.8 6.2 42.4%
Net income.............................. 5.6 3.7 51.5%
Earnings per share - diluted............ 0.59 0.39 51.3%
Operating margin........................ 25.1% 19.7% 5.4 pts
Nine Months Percentage
ended September 30, Increase / (Decrease)
------------------- ----------------------------
2004 2003 January - September 04 vs 03
-------- -------- ----------------------------
(In millions, except earnings per share and percentages)
Casino revenues......................... $ 63.5 $ 56.2 12.9%
Food and beverage revenues.............. 28.0 26.1 7.1%
Hotel revenues.......................... 19.0 16.5 15.1%
Other revenues.......................... 2.9 3.0 (5.5%)
Net revenues............................ 98.3 87.7 12.1%
Income from operations.................. 20.4 13.9 47.0%
Net income.............................. 12.7 7.8 61.6%
Earnings per share - diluted............ 1.35 0.83 62.7%
Operating margin........................ 20.8% 15.9% 4.9 pts
Some significant items that affected our third quarter results in 2004
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.
- Gross revenues increased 10.8% in the third quarter of 2004 over the
third quarter of 2003 driven by significant increases in casino
(13.8%), food and beverage (5.9%) and hotel (12.2%) revenue centers,
-13-
while promotional allowances increased only 6.7%. This resulted in an
11.5% increase in net revenues. Operating expenses increased only
3.9%, due mainly to a 21.6% decrease in depreciation and amortization,
resulting in a 42.4% increase in and an approximate 72.6% flow-through
to income from operations.
- Our interest and stockholder guarantee fee expenses during the third
quarter of 2004 decreased approximately $289,000, or 46.4%, as
compared to the third quarter of 2003. The decrease was mainly
due to the elimination of our stockholder guarantee fee expense in late
February 2004. Under our New Credit Facility (as defined in "The Credit
Facility" below), our controlling stockholders no longer provide
personal guarantees as required under the Original Credit Facility (as
defined). The Company, therefore, no longer pays the corresponding
stockholder guarantee fee.
CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $8.5 million
and $3.8 million during the first nine months of 2004 and 2003, respectively.
During the nine months ended September 30, 2004, our capital expenditures
consisted primarily of renovations to our second tower hotel rooms and suites,
the installation of a new slot player tracking system, $1.2 million in leased
driveway improvements and continued acquisitions of and upgrades to gaming
equipment. During last year's first nine months, capital expenditures
consisted primarily of the construction and opening of our Sushi Bar and
continued acquisitions of and upgrades to gaming equipment.
Future cash needed to finance ongoing maintenance 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.
-14-
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month
Periods Ended September 30, 2004 and 2003
For the three-month period ended September 30, 2004, the Company's net
income was $5.6 million, or $0.59 per diluted share, on net revenues of $35.1
million, an increase from net income of $3.7 million, or $0.39 per diluted
share, on net revenues of $31.4 million for the three months ended September
30, 2003. Income from operations for the three months ended
September 30, 2004 totaled $8.8 million, a 42.4% increase when compared to the
$6.2 million for the same period in 2003. Both net revenues and net income
for the third quarter of 2004 represent new third quarter and all-time records
for the Company. Net revenues increased 11.5%, and net income increased 51.5%
when compared to last year's third quarter.
Casino revenues totaled $22.6 million in the third quarter of 2004, a
13.8% increase from the $19.9 million in the third quarter of 2003, reflecting
increases in both the volume of play and in combined hold percentages at the
Atlantis. Casino operating expenses amounted to 34.8% of casino revenues in
the third quarter of 2004, compared to 38.0% in the third quarter of 2003,
with the difference due primarily to reduced payroll and benefit expenses,
reduced complimentaries and more efficient operations.
Food and beverage revenues totaled $9.7 million in the third quarter of
2004, a 5.9% increase from the $9.1 million in the third quarter of 2003, due
primarily to a 5.2% increase in the average revenue per food cover combined
with an approximate 0.5% increase in the number of food covers served during
the quarter. Food and beverage operating expenses amounted to 50.7% of food
and beverage revenues during the third quarter of 2004, an increase when
compared to 49.5% in the third quarter of 2003. The increase is primarily due
to increased cost of sales partially offset by decreased payroll and benefit
costs relative to revenue.
Hotel revenues were $7.0 million for the third quarter of 2004, an
increase of 12.2% from the $6.3 million reported in the 2003 third quarter.
This increase was the result of an increase in the average daily room rate
(ADR). The third quarter 2004 increase is also moderately affected by the
Beauty Salon which opened in October 2003. Both third quarters' 2004 and 2003
revenues also included a $3 per occupied room energy surcharge. During the
third quarter of 2004, the Atlantis experienced a 98.2% occupancy rate,
unchanged relative to the same period in 2003. The Atlantis' ADR was $71.22
in the third quarter of 2004 compared to $64.48 in the third quarter of 2003.
Hotel operating expenses as a percent of hotel revenues decreased to 27.8% in
the 2004 third quarter, compared to 29.5% in the 2003 third quarter. The
improved margin is primarily due to the increased ADR and more efficient
operations.
Promotional allowances increased to $5.4 million in the third quarter of
2004 compared to $5.0 million in the third quarter of 2003. The increase is
attributable to continued efforts to generate additional revenues. Although
dollar amounts increased, promotional allowances as a percentage of gross
revenues declined to 13.3% of gross revenues during the third quarter of 2004,
from 13.8% in the third quarter of 2003.
-15-
Other revenues decreased 8.8% to $1.1 million in the 2004 third quarter
compared to $1.2 million in the same period last year. The decrease reflects
an approximate 6.0% increase in gift and sundries retail shops, which is
offset by an approximate $100 thousand gain on disposal of assets recorded in
the third quarter of 2003. The entertainment fun center revenue decreased
11.8% in the third quarter of 2004 compared to the third quarter of 2003.
Other expenses in the 2004 third quarter increased to 33.1% of other revenues,
from 30.6% in the 2003 third quarter, which is directly the result of the
approximate $100 thousand gain on disposal of assets recorded in the third
quarter of 2003.
Depreciation and amortization expense was $2.0 million in the third
quarter of 2004, down 21.6% compared to $2.6 million in the same period last
year. The decrease in depreciation expense was mainly due to the fact that
some of the assets from the Company's previous major expansion had been fully
depreciated.
Selling, general and administrative (SG&A) expenses amounted to $9.1
million in the third quarter of 2004, a 9.0% increase from $8.4 million in the
third quarter of 2003 primarily as a result of increased payroll and benefit
costs and marketing and promotional expenditures. As a percentage of net
revenues, SG&A expenses declined to 26.0% in the third quarter of 2004 as
compared to 26.6 % in the third quarter of 2003.
Interest expense for the 2004 third quarter totaled $333 thousand, a
decrease of 46.4%, from $622 thousand in the 2003 third quarter. The decrease
reflects the Company's reduction in debt outstanding. Additionally, interest
expense for the quarter ended September 30, 2003 included guarantee fees paid
to the three principal stockholders of the Company. Effective January 2001,
until February 2004, the Company compensated 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. There were no guarantee expenses in the third quarter of 2004. The
individuals who guaranteed the Company's Original Credit Facility (defined in
"The Credit Facility" below) were not required to provide such guarantees for
the New Credit Facility (also defined in "The Credit Facility" below) and,
therefore, the Company will no longer be required to pay such fees in the
future.
Comparison of Operating Results for the Nine-month Periods Ended September 30,
2004 and 2003
For the nine months ended September 30, 2004, the Company's net income
was $12.6 million, or $1.35 per diluted share, on net revenues of $98.3
million, an increase from net income of $7.8 million, or $0.83 per diluted
share, on net revenues of $87.7 million during the nine months ended September
30, 2003. Income from operations for the 2004 nine-month period totaled $20.4
million, compared to $13.9 million for the same period in 2003. Net revenues
increased 12.1%, and net income increased 61.6% when compared to last year's
nine-month period ended September 30, 2003.
Casino revenues for the first nine months of 2004 totaled $63.5 million,
a 12.9% increase from $56.2 million for the first nine months of 2003,
reflecting increases in all gaming departments. Casino operating expenses
amounted to 36.2% of casino revenues for the nine months ended September 30,
2004, compared to 39.2% for the same period in 2003, primarily due to improved
combined hold percentages, reduced payroll and benefit expenses and more
efficient operations.
-16-
Food and beverage revenues totaled $28.0 million for the nine months
ended September 30, 2004, an increase of 7.1% from the $26.1 million for the
nine months ended September 30, 2003, due to an approximate 3.7% increase in
the number of covers served and a 4.2% increase in the average revenue per
cover. Food and beverage operating expenses amounted to 50.5% of food and
beverage revenues during the 2004 nine-month period, relatively flat when
compared to 50.3% for the same period in 2003.
Hotel revenues for the first nine months of 2004 increased 15.1% to $19.0
million from $16.5 million for the first nine months of 2003, primarily due to
increases in both the ADR and occupancy. The nine-month period increase is
also moderately affected by the Beauty Salon which opened in October 2003.
Hotel revenues for the entire first nine months of 2004 and 2003 also include
a $3 per occupied room energy surcharge. The Atlantis experienced an increase
in the ADR during the 2004 nine-month period to $65.53, compared to $58.93 for
the same period in 2003. The occupancy rate increased to 95.9% for the nine-
month period in 2004, from 94.3% for the same period in 2003. Hotel operating
expenses in the first nine months of 2004 were 31.7% of hotel revenues,
unchanged when compared to 31.7% for the same period in 2003.
Promotional allowances increased to $15.0 million in the first nine
months of 2004 compared to $14.2 million in the same period of 2003. The
increase is attributable to continued efforts to generate additional revenues.
Although dollar amounts increased, promotional allowances as a percentage of
gross revenues declined to 13.3% of gross revenues during the first nine
months of 2004, from 13.9% in the first nine months of 2003.
Other revenues were $2.9 million for the nine months ended September 30,
2004, a decrease of 5.5% from $3.0 million in the same period in 2003, which
is directly the result of the approximately $191 thousand loss on disposal of
assets. The 5.5% decrease includes a 9.6% decrease in entertainment fun
center revenue which is partially offset by an 8.6% increase in gift and
sundries retail shops. Other expenses as a percentage of revenue increased to
36.4% for the nine months ended September 30, 2004 as compared to 31.9% for
the same period in 2003.
Depreciation and amortization expense was $7.7 million in the first nine
months of 2004, down 3.0% compared to $7.9 million in the same period last
year. The decrease in depreciation expense was mainly due to the fact that
some of the assets from the Company's previous major expansion had been fully
depreciated.
Selling, general and administrative expenses increased 6.1% to $26.0
million in the first nine months of 2004, compared to $24.5 million in the
first nine months of 2003, primarily as a result of increased payroll and
benefit costs and marketing and promotional expenditures. As a percentage of
net revenue, SG&A expenses decreased to 26.4% in the 2004 nine-month period
from 27.9% in the same period in 2003.
Interest expense for the first nine months of 2004 totaled $1.3 million,
a decrease of 38.1%, compared to $2.0 million for the same period one year
earlier. The decrease reflects the Company's reduction in debt outstanding
and reduced stockholder guarantee fee expense. Interest expense for the nine-
month periods ended September 30, 2004, and 2003 included guarantee fees paid
to the Company's three principal shareholders. These guarantee fee expenses
totaled approximately $136 thousand and $793 thousand in the first nine months
of 2004 and 2003, respectively. Effective January 2001, until February 2004,
the Company compensated 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. The
individuals who guaranteed the Company's Original Credit Facility (defined in
"The Credit Facility" below) were not required to provide such guarantees for
the New Credit Facility (also defined in "The Credit Facility" below) and,
-17-
therefore, the Company will no longer be required to pay such fees in the
future.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with
net cash provided by operating activities.
For the nine months ended September 30, 2004, net cash provided by
operating activities totaled $19.2 million, an increase of 15.0% compared to
the same period last year. Net cash used in investing activities totaled $7.9
million and $1.3 million in the nine months ended September 30, 2004 and 2003,
respectively. During the first nine months of 2004 and 2003, net cash used in
investing activities was used primarily in the purchase of property and
equipment. Net cash used in financing activities totaled $14.1 million for
the first nine months of 2004, compared to $15.5 million for the same period
last year, as the Company refinanced its credit facility during the first nine
months of 2004, simultaneously paying off old debt and acquiring new debt.
During the first nine months of 2003, the Company used funds in the amount of
approximately $1.4 million to repurchase Monarch common stock. As a result,
at September 30, 2004, the Company had a cash balance of $6.9 million,
compared to $9.9 million at September 30, 2003 and $9.7 million at December
31, 2003.
The Company has a reducing revolving credit facility with a group of
banks (see "THE CREDIT FACILITY" below). At September 30, 2004, the total
balance outstanding on the Credit Facility was $32.8 million.
OFF BALANCE SHEET ARRANGEMENTS
A new driveway was completed and opened on September 30, 2004 that is
being shared between the Atlantis and a shopping center directly adjacent to
the Atlantis, and which is controlled by our controlling stockholders (the
"Shopping Center"). As part of this project, in January 2004, the Company
leased a 37,368 square-foot corner section of the Shopping Center for a
minimum lease term of 15 years at a monthly rent of $25,000, subject to
increase every 60 months based on the Consumer Price Index. The Company also
uses part of the common area of the Shopping Center and pays its proportional
share of the common area expense of the Shopping Center. The Company has the
option to renew the lease for 3 five-year terms, and at the end of the
extension periods, the Company has the option to purchase the leased section
of the Shopping Center at a price to be determined based on an MAI Appraisal.
The leased space is being used by the Company for pedestrian and vehicle
access to the Atlantis, and the Company may use a portion of the parking
spaces at the Shopping Center. The Company is responsible for two thirds of
the construction costs of the project, up to a maximum of $1.2 million. Due to
various upgrades, the project cost exceeded $1.8 million, by approximately
$200 thousand, and the Company is currently negotiating with the Shopping
Center and may potentially have to pay up to two thirds of the incremental
costs.
On September 23, 2003, the Company entered into an option agreement with
an affiliate of its controlling stockholders to purchase property in South
Reno for development of a new hotel casino. Commencement of any development
of the property will require completion of property due diligence and receipt
of numerous approvals, including master plan changes and zoning changes,
-18-
neither of which can be assured. The Company, through the current property
owner, has filed application with the City of Reno for master plan and zoning
changes for 13 acres of the property.
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, 2003 ("2003
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 2003 Form 10-K filed on March 12,
2004.
OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS
The constitutional amendment approved by California voters in 1999
allowing the expansion of Indian casinos in California has had an impact on
casino revenues in Nevada in general, and many analysts have continued to
predict the impact will be more significant on the Reno-Lake Tahoe market.
The extent of this continued impact is difficult to predict, but the Company
believes that the impact on the Company will continue to be mitigated to some
extent due to the Atlantis' emphasis on Reno-area residents as a significant
base of its business, as well as its proximity to the Reno-Sparks Convention
Center. However, if other Reno-area casinos continue to 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.
In June 2004, five California Indian tribes signed compacts with the
state that allows the tribes to increase the number of slot machines beyond
the previous 2,000-per-tribe limit in exchange for higher fees from each of
the five tribes. The State of California hopes to sign similar compacts with
more Indian tribes.
COMMITMENTS AND CONTINGENCIES
Contractual cash obligations for the Company as of September 30, 2004
over the next five years are as follows:
Payments Due by Period
---------------------------------------------------------------
Contractual Cash Less than 1 to 3 4 to 5 More than
Obligations Total 1 year years years 5 years
---------------------------------------------------------------
Long-Term debt $32,800,000 $ - $ 9,150,000 $23,650,000 $ -
Operating Leases (1) 5,670,946 490,946 740,000 740,000 3,700,000
Purchase Obligations (2) 2,350,000 2,350,000 - - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash $40,820,946 $ 2,840,946 $ 9,890,000 $24,390,000 $3,700,000
Obligations
-19-
(1) Operating leases include $370,000 per year in lease and common expense
payments to the shopping center adjacent to the Atlantis (see Capital Spending
and Development).
(2) Our open purchase order commitments total approximately $2.4 million. Of
the total purchase order commitments, approximately $1.6 million are
cancelable by the Company upon providing a 30-day notice.
The Company believes that its existing cash balances, cash flow from
operations, reducing revolving credit facility 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 Until February 20, 2004, we had a reducing revolving term
loan credit facility with a consortium of banks that was to expire on June 30,
2004, and in the original amount of $80 million but that had been reduced to
$46 million at payoff (the "Original Credit Facility").
On February 20, 2004, the Original Credit Facility was refinanced (the
"New Credit Facility") for $50 million, which included the $46 million payoff
of the unpaid balance of the Original Credit Facility. The amount of the New
Credit Facility, which is also a reducing revolving facility, may be increased
by up to $30 million on a one-time basis and, if requested by us, before the
second anniversary of the closing date, as defined. At our option, borrowings
under the New Credit Facility will accrue interest at a rate designated by the
agent bank at 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 0.25
percent and 1.25 percent above the Base Rate, and between 1.50 percent and
2.50 percent above LIBOR (under the Original Credit Facility, this margin
varied between 0.00 percent and 2.00 percent above the Base Rate, and between
1.50 percent and 3.50 percent above LIBOR). At September 30, 2004, the
applicable margin was the Base Rate plus 0.50%, and the applicable LIBOR
margin was LIBOR plus 1.75%. At September 30, 2004, the Base Rate was 4.75%
and the LIBOR rate was 1.84%. At September 30, 2004, the Company had no Base
Rate loans outstanding and had one LIBOR loan outstanding totaling $32.8
million, for a total obligation of $32.8 million.
We may utilize proceeds from the New Credit Facility for working capital
needs and general corporate purposes relating to the Atlantis and for ongoing
capital expenditure requirements at the Atlantis.
The New Credit Facility is secured by liens on substantially all of the
real and personal property of the Atlantis, and is guaranteed by Monarch. The
Original Credit Facility was guaranteed individually by certain controlling
stockholders of the Company. These individuals were not required to provide
any personal guarantees for the New Credit Facility and, therefore, going
forward, we will no longer incur guarantee fee expenses.
-20-
The New 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 and covenants restricting our
ability to merge, transfer ownership of Monarch, incur additional
indebtedness, encumber assets, and make certain investments. The New Credit
Facility also contains covenants requiring us to maintain certain financial
ratios and provisions restricting transfers between Monarch and its
affiliates. The New Credit Facility also contains provisions requiring the
achievement of certain financial ratios before we can repurchase our common
stock. We currently meet such ratio requirements.
The maturity date of the New Credit Facility is February 23, 2009.
Beginning June 30, 2004, the maximum principal available under the Credit
Facility will be reduced over five years by an aggregate of $30.875 million in
equal increments of $1.625 million per quarter with the remaining balance due
at the maturity date. We may prepay borrowings under the New Credit Facility
without penalty (subject to certain charges applicable to the prepayment of
LIBOR borrowings prior to the end of the applicable interest period). Amounts
prepaid under the New Credit Facility may be re-borrowed 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 New Credit
Facility at any time so long as the amount of such reduction is at least $500
thousand and a multiple of $50 thousand. We also benefited from a reduced
loan amortization schedule, from $3 million per quarter under the Original
Credit Facility to $1.625 million per quarter under the New Credit Facility.
We paid various one-time fees and other loan costs upon the closing of
the refinancing of the New Credit Facility that will be amortized over the
term of the New Credit Facility using the straight-line method.
SHORT-TERM DEBT. At September 30, 2004, we had no short-term debt.
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 September
30, 2004 that are subject to market risks.
We have substantial variable interest rate debt in the amount of
approximately $32.8 million as of September 30, 2004, and $48.0 million as of
September 30, 2003, which is subject to market risks.
A one-point increase in interest rates would have resulted in an increase
in interest expense of approximately $92 thousand in the third quarter of 2004
and $127 thousand in the third quarter of 2003.
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.
Our management does not expect that our disclosure controls and
procedures or our internal controls over financial reporting will prevent all
error and all fraud. In designing and evaluating disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
a control. The design of a control system is also based upon certain
assumptions about the likelihood of future events, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and
may not be detected.
(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 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 October 26, 2004, we filed a Current Report on Form 8-K reporting that
we had issued a press release announcing the results for the fiscal quarter
ended September 30, 2004.
-22-
On August 17, 2004, we filed a Form 8-K/A dated July 26, 2004 filing a
correction to our July 26, 2004 press release.
On July 26, 2004, we filed a Form 8-K dated July 26, 2004 attaching our
press release reporting earnings for the second quarter ended June 30, 2004.
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: November 12, 2004 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer, and Chief
Financial Officer(Principal Financial
Officer and Duly Authorized Officer)
-23-
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., a Nevada Corporation;
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 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
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-15(e) and 15d-15(e)) 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) 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
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
second fiscal quarter 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 and I have disclosed, based on
our most recent evaluation of internal control and reporting, to the
registrant's auditors and the audit committee of 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: November 12, 2004
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
-24-
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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., a Nevada Corporation;
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 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
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-15(e) and 15d-15(e)) 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) 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
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
second fiscal quarter 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 and I have disclosed, based on
our most recent evaluation of internal control and reporting, to the
registrant's auditors and the audit committee of 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: November 12, 2004
By: /s/ Ben Farahi
---------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
-25-
EXHIBIT 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 September 30,
2004, 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: November 12, 2004
By: /s/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
-26-
EXHIBIT 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 September 30,
2004, 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: November 12, 2004
By: /s/ BEN FARAHI
---------------
Ben Farahi
Chief Financial Officer
-27-