-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1TQEC064nu4HxI1oF+zqz19JpOIthtFqthDvWsOtJxLyAs1b3PyeKvu1GXiFpIp wBvkgi7M9R5p5BhQl8JhyA== 0000907242-02-000003.txt : 20020415 0000907242-02-000003.hdr.sgml : 20020415 ACCESSION NUMBER: 0000907242-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONARCH CASINO & RESORT INC CENTRAL INDEX KEY: 0000907242 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880300760 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22088 FILM NUMBER: 02586679 BUSINESS ADDRESS: STREET 1: 1175 W MOANA LANE STREET 2: STE 200 CITY: RENO STATE: NV ZIP: 89509 BUSINESS PHONE: 7758253355 MAIL ADDRESS: STREET 1: 1175 W MOANA LANE STREET 2: STE 200 CITY: RENO STATE: NV ZIP: 89509 10-K 1 mcri10ke.txt FOR THE FISCAL YEAR ENDED 12/31/01 United States SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 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 ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- ------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 19, 2002, based on the closing price as reported on The Nasdaq Stock Market(SM) of $11.10 per share, was approximately $25,872,713. As of March 19, 2002, Registrant had outstanding 9,436,275 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's Annual Meeting of Stockholders for the year ended December 31, 2001, which Proxy Statement shall be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III. STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K WHICH EXPRESS THE "BELIEF", "ANTICIPATION", "INTENTION", "EXPECTATION", OR "SCHEDULES" AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT, AND STATEMENTS AS TO BUSINESS OPPORTUNITIES, MARKET CONDITIONS, COST ESTIMATIONS AND OPERATING PERFORMANCE INSOFAR AS THEY MAY APPLY PROSPECTIVELY, ARE 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 AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. -2- PART I ITEM 1. BUSINESS 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"). Unless otherwise indicated, "Monarch" or the "Company" refers to Monarch Casino & Resort, Inc. and its Golden Road subsidiary. 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. The Company's principal executive offices are located at 1175 West Moana Lane, Suite 200, Reno, Nevada 89509, telephone (775) 825-3355. THE ATLANTIS CASINO RESORT Through Golden Road, the Company owns and operates the tropically-themed Atlantis, which is located approximately three miles south of downtown Reno in the generally more affluent southwest area of Reno. The Atlantis features approximately 51,000 square feet of casino space interspersed with waterfalls and water features, giant artificial palm trees, thatched-roof huts, and other tropical features; a hotel and a motor lodge with a total guest room count of 980 available rooms; nine food outlets; a nightclub; an enclosed pool with waterfall features in addition to an outdoor pool; health club; two retail outlets featuring traditional "gift shop" merchandise as well as clothing and other merchandise; an 8,000 square-foot family entertainment center; and approximately 25,000 square feet of banquet, convention and meeting room space. The Atlantis is the closest hotel casino to the Reno Sparks Convention Center (the "Convention Center"), and the only hotel-casino located within easy walking distance of the Convention Center, which is currently under a $105 million expansion and renovation, scheduled to be completed in mid-July, 2002. Once completed, the Convention Center will offer approximately 490,000 square feet consisting of 381,000 square feet of contiguous exhibition space in addition to 79,000 square feet of meeting room space and a 30,000 square-foot ballroom. CASINO. The Atlantis' casino features 37 table games, including blackjack, craps, roulette, "Let it Ride(TM)", "Three Card Poker(TM)", "Fortune Pai Gow Poker(TM)", and "Royal Match(TM)"; approximately 1,500 slot and video poker machines; a race and sports book (which is operated by an independent third party pursuant to a lease arrangement with the Company); keno; and a poker room. During the year ended December 31, 2001, 77.3% of the Atlantis' casino revenue was from slot and video poker machines, 19.8% was from table games, and 2.9% was from keno, the poker room and sportsbook lease income. The Atlantis offers what the Company believes to be higher-than-average payout rates on slot machines relative to other Northern Nevada area casinos and has adopted liberal rules for its blackjack games which include using mostly single decks of cards at its tables and allowing the player to "double down" on the first two cards. The Company attracts high-end players through upgraded property amenities and services and aggressive extension of credit after careful credit history evaluation. -3- LODGING. The Atlantis features three contiguous high-rise hotel towers offering a total of 831 available rooms and suites, and a low-rise motor lodge offering another 149 available rooms, for a total guest room count of 980 available rooms. The first of the three hotel towers was completed in April 1991 and contains 160 rooms and suites in 13 stories, and is currently undergoing a $3 million complete interior renovation, which is scheduled to be completed in spring 2002. The second hotel tower was completed in September 1994 and contains 283 rooms and suites in 19 stories. The third tower was completed in June 1999 and contains 388 rooms and suites in 28 stories. The rooms on the top seven floors in the newest tower are larger than the standard guest rooms by nearly 20% and feature private elevator access, upscale accommodations, and a private concierge service. The Atlantis' hotel rooms feature fresh, colorful interior decorations and furnishings consistent with the Atlantis' tropical theme, as well as nine-foot ceilings (most standard hotel rooms feature eight-foot ceilings), which give the rooms an open and spacious feel. The newest hotel tower features a four story waterfall with an adjacent swimming pool in a climate controlled, five story glass enclosure, which shares an outdoor third floor pool deck with an outdoor swimming pool and whirlpool. The health club is located adjacent to the swimming areas. The hotel also features glass elevators rising the full 19 and 28 stories of the two taller hotel towers, providing panoramic views of the Reno-Sparks area and the Sierra Nevadas, a majestic mountain range separating Nevada from California. The two-story, 149-room motor lodge, which has been operated by the Company since 1973, is located on the back half of the Atlantis' 13-acre site. The motor lodge rooms, which are also decorated and furnished consistently with the Atlantis' tropical theme, contain less average square footage than the tower hotel rooms and have standard eight-foot ceilings. The Company believes the motor lodge rooms appeal to value conscious travelers who still want to enjoy the experience of, and amenities associated with, a stay at a first-class hotel casino resort. The average occupancy rate at the Atlantis for fiscal years 2001, 2000, and 1999 was 91.1%, 90.8%, and 86.8%, respectively. DINING. The Atlantis features six restaurants, one snack bar, and two gourmet coffee bars. They include the 640-seat Toucan Charlie's Buffet & Grill, which features a wide variety of standard hot food line selections, salads and seafood, and specialty substations featuring made to order items such as Mongolian Barbecue, fresh Southwest and Asian specialties, meats roasted in wood-fired rotisserie ovens, and two salad stations; the aquatic- themed 135-seat Atlantis Seafood Steakhouse gourmet restaurant; the upscale, intimate 230-seat MonteVigna Italian Ristorante, featuring a centrally located wine "cellar" and seasonal outdoor terrace; the 85-seat Oyster Bar restaurant in the Sky Terrace, featuring seafood flown in daily and soups and bisques made to order; a 178-seat twenty-four hour coffee shop; a 104-seat cafe restaurant featuring pizzas from a wood-fired, brick oven; and a snack bar and soda fountain. There are two gourmet coffee bars, one located in the Sky Terrace, and the other located adjacent to the Xanadu Lounge next to the 28-story elevator lobby, both featuring fine specialty coffee drinks and pastries and desserts made fresh daily in the Atlantis bakery. -4- THE SKY TERRACE. The Sky Terrace is a unique structure, with a diamond- shaped, blue glass body rising approximately 55 feet from street level and spanning 160 feet across South Virginia Street with no intermediate support pillars. The Sky Terrace connects the Atlantis with additional parking on a 16 acre site owned by the Company across South Virginia Street from the Atlantis. The structure is supported at each end by two 100 foot tall Grecian columns. The tropically-themed interior of the Sky Terrace contains an oyster bar, a gourmet coffee and pastry bar with adjacent table seating, a video poker bar, banks of slot machines, and a lounge area featuring oversized leather sofas and chairs. Capital expenditures at the Atlantis totaled approximately $4.5, $3.9 million, and $46.1 million in fiscal years 2001, 2000, and 1999, respectively. In 2001, capital expenditures consisted primarily of renovations of hotel room suites in the third tower, continued acquisition of and upgrades to slot machines, computer information system equipment and various other furniture, fixtures and equipment to upgrade existing facilities. Capital expenditures during 2000 included renovation of the high-limit slot area, construction of new public restrooms on the casino floor, new slot machine equipment, and various other furnishings, fixtures & equipment to maintain the existing facilities. The capital expenditures during 1999 were a combination of construction costs and the cost of furnishing the completed Atlantis expansion with fixtures and equipment. Operations at the Atlantis are conducted 24 hours a day, every day of the year. The Atlantis' business is moderately seasonal in nature, with its highest revenues typically occurring in the summer months and lower revenues generally occurring in the winter months. MARKETING The Company's revenues and operating income are largely dependent on the level of gaming activity at the Atlantis' casino; therefore, the Company's predominant marketing goal is to attract gaming customers to its casino. The Company's primary objective for its hotel, food and beverage outlets, and other amenities is to utilize those facilities to generate additional casino play, although as a secondary goal, the Company also seeks to maximize revenues from those areas. The Company's marketing efforts are directed toward three broad consumer groups: Reno area residents, non-conventioneer visitors to the Reno area, and conventioneers. The Company believes that the Atlantis' location outside the downtown area and across the street from the Convention Center makes the property appealing to all three groups. RENO AREA RESIDENTS. The Atlantis' proximity to rapidly growing, generally more affluent southwestern Reno residential areas provides a significant source of middle to upper-middle income gaming customers. The Company markets to Reno area residents ("Locals") on the basis of the Atlantis' location and accessibility, the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its food and beverage offerings, entertainment offerings, promotions, and gaming values. The Company believes that Locals as a group tend to prefer slot and video poker machines over table games, and tend to prefer video poker machines over reel- spinning (or electronically simulated reel-spinning) slot machines. -5- Accordingly, the Atlantis provides a large, diverse selection of video poker machines. Moreover, the Company believes that Locals tend to seek out and frequent those casinos with higher-than-average payout rates on slot and video poker machines relative to other Northern Nevada area casinos and liberal rules on table games. The Company believes that the Atlantis offers higher-than- average payout rates on slot machines, and has adopted liberal rules for its blackjack games which include using single decks of cards at its tables and allowing players to "double down" on the first two cards. NON-CONVENTIONEER VISITORS. Reno is a popular gaming and vacation destination which enjoys direct freeway access to nearly all major northern California population centers, and non-stop air service from most large cities in the western United States as well as many Midwest and southern population centers such as Chicago, Dallas and Minneapolis. The principal segments of Reno's non-conventioneer visitor market are leisure travelers, package tour and travel customers, and higher-level wagerers. The Company attempts to maximize its gaming revenues and hotel occupancy through a balanced marketing approach addressing each market segment. Leisure travelers are not affiliated with groups and make their reservations directly with hotels of their choice or through independent travel agents. The Company believes that this segment is largely comprised of individuals driving, and to a lesser extent, flying to Reno from a regional market, primarily northern California and to a lesser extent, the Pacific Northwest. The Company strives to attract the middle to upper-middle income strata of this segment through advertising and direct marketing in select markets. This segment represents a significant portion of the Atlantis' customers, especially those customers visiting on weekends. The package tour and travel segment consists of visitors who utilize travel "packages" produced by wholesale operators. The Company markets to this segment through relationships with select wholesalers, primarily to generate customer visits and supplement occupancy mid-week. The Company selectively markets to higher-level wagerers through direct sales. The Company utilizes complimentary rooms, food and beverage, special events and the extension of gaming credit to attract higher-level wagerers. CONVENTIONEERS. Convention business, like package tour and travel, generates mid-week customer visits and supplements occupancy during low-demand periods. Conventioneers typically also pay higher average room rates than non- conventioneers. The Company seeks those convention and meeting groups which it believes will materially enhance the Atlantis' average occupancy rate and average daily room rates, as well as those the Company believes will be more likely to gamble. As the only hotel casino within easy walking distance of the Convention Center, the Company believes the Atlantis is uniquely positioned to capitalize on this segment. The Company believes that this market segment is presently underserved in the Reno area, and that the additional rooms and amenities accompanying the completed Atlantis expansion enhances the Company's ability to realize the potential of this market segment. The Company markets to all customer segments, including conventioneers, on the basis of the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its rooms and food and beverage offerings, entertainment offerings, promotions, and gaming values. -6- The Company offers a frequent player club, "Club Paradise," which allows the Atlantis' customers to earn rewards and special privileges based on the amount of their play, while at the same time allowing the Company to track the play of those customers utilizing a computerized player tracking system. The Company uses this information to determine appropriate levels of complimentary awards, and also in its direct marketing efforts. The Company believes that Club Paradise significantly enhances the Company's ability to build customer loyalty and generate repeat customer visits. COMPETITION Competition in the Reno area gaming market is intense. Based on information obtained from the December 31, 2001 Gaming Revenue Report published by the Nevada State Gaming Control Board and Company estimates, the Company believes that there are approximately 12 casinos in the Reno area which generate more than $12 million each in annual gaming revenues, approximately 7 of which are located in downtown Reno. The Company believes that the Atlantis' competition for Locals comes primarily from other large-scale casinos located outside of downtown Reno that offer amenities that appeal to middle to upper-middle income customers, and secondarily with those casinos located in downtown Reno which offer similar amenities. The Company competes for Locals primarily on the basis of the desirability of its location, the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its food and beverage offerings, entertainment offerings, promotions, and gaming values. The Company believes its proximity to residential areas in southwest Reno and its abundant surface parking afford it an advantage over the casinos located in downtown Reno in attracting Locals. The Company believes that the Atlantis' primary competition for non- conventioneer visitors comes from other large-scale casinos, including those located in downtown Reno and those located away from downtown Reno, that offer amenities that appeal to middle to upper-middle income customers. The Company competes for non-conventioneer visitors on the basis of the desirability of its location, the quality and ambiance of the Atlantis facility, friendly efficient service, the quality and relative value of its rooms and food and beverage offerings, entertainment offerings, promotions, and gaming values. The Company believes that its location away from downtown Reno is appealing to many customers who prefer to avoid the more congested downtown area; however, the Atlantis' location is a disadvantage in that it does not afford the Company the ability to generate walk-in traffic (except with respect to persons attending events at the Convention Center), which is a significant source of customers for some casinos located in downtown Reno. The Company believes that the Atlantis' primary competition for conventioneers comes from other large-scale hotel casinos in the Reno area that actively target the convention market segment, and secondarily from other cities on the U.S. west coast with large convention facilities and substantial hotel capacity, including Las Vegas. The Company competes for conventioneers based on the desirability of its location, the quality and ambiance of the Atlantis facility, meeting and banquet rooms designed to appeal to conventions and groups, friendly efficient service, and the quality and relative value of its rooms and food and beverage offerings. The Company believes that the Atlantis' proximity to the Convention Center affords it a distinct competitive advantage in attracting conventioneers. -7- The Atlantis also competes for gaming customers with hotel casino operations located in other parts of Nevada, especially Las Vegas and Lake Tahoe, and with hotel casinos, Indian casinos, and riverboat casinos located elsewhere throughout the United States and the world. The Company believes that the Atlantis also competes to a lesser extent with state-sponsored lotteries, off-track wagering, card parlors, and other forms of legalized gaming, particularly in northern California and the Pacific Northwest. The constitutional amendment approved by California voters allowing the expansion of Indian gaming in the form of 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 and the future potential of convention business due to its proximity to the expanding convention center due for completion in July, 2002. Other Reno area casinos may intensify their marketing efforts to Reno area residents if they suffer business losses due to increased pressure from California Indian casinos which may impact the Company's customer base and, consequently, revenues. However, the Company believes its numerous amenities such as a wide array of restaurants, a video arcade, banquet facilities and surface parking are a key factor in the Company's ability to attract Reno area residents which competitor facilities will not easily be able to match without major capital expenditures. Certain experienced Nevada gaming operators have agreements to build and manage Indian casino facilities near Sacramento, one of Reno's key feeder markets. Once these facilities receive all the required permits and are built, they could provide an alternative to Reno area casinos, especially during certain winter periods when auto travel through the Sierra Nevada is hampered. The Company believes that the legalization of unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis' key marketing areas, such as San Francisco or Sacramento, could have a material adverse impact on its business. -8- REGULATION AND LICENSING Nevada Gaming Regulation The ownership and operation of casino gaming facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and the Reno City Council (the "Reno Board"). (The Nevada Commission, the Nevada State Gaming Control Board, and the Reno Board are collectively hereinafter referred to as the "Nevada Gaming Authorities.") The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Golden Road, which operates the Atlantis, is required to be licensed by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, Golden Road without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and Golden Road have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or Golden Road in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of Golden Road must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of Golden Road may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to -9- licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or Golden Road, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or Golden Road to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and Golden Road are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by Golden Road must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by Golden Road, the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, Golden Road, the Company, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Gaming Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such -10- institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with such Company or Golden Road, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. -11- The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. Licensee fees and taxes computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and -12- taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, a manufacturer or a distributor also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. A licensee is also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. EMPLOYEES As of March 19, 2002, the Company had approximately 1,848 employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES The Company's properties consist of: (a) The approximately 13 acre site in Reno, Nevada on which the Atlantis is situated, including the hotel towers, casino, restaurant facilities and surrounding parking is, in part or in whole, held subject to trust deed encumbrances in favor of financial institutions totaling approximately $67.3 million as of March 19, 2002. (b) An approximately 16 acre site in Reno, Nevada adjacent to the Atlantis and connected to the Atlantis by the Sky Terrace, includes approximately eleven acres of paved parking used for customer, employee and valet parking. The remainder of the site is undeveloped. This site is compliant with all casino zoning requirements and is suitable and available for future expansion of the Atlantis facilities, parking, or complimentary resort and/or entertainment amenities. The Company has not determined what the ultimate use of this site will be. These 16 acres are held subject to a trust deed encumbrance in the approximate amount of $66.3 million as of March 19, 2002, which amount is also secured by the 13 acre site. This $66.3 million debt is included in the $67.3 million indicated in ITEM 2 (a) above. -13- ITEM 3. LEGAL PROCEEDINGS 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). Management believes that the substantive allegations in the Complaints are without merit and intends vigorously to defend the allegations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's common stock trades on The Nasdaq Stock Market(SM) under the symbol MCRI. The following table sets forth the high and low bid prices of the Company's common stock, as reported by The Nasdaq Stock Market(SM), during the periods indicated. 2001 2000 -------------- -------------- High Low High Low ------ ------ ------ ------ First quarter........... 5.625 4.125 5.563 3.063 Second quarter.......... 5.400 4.400 5.813 3.813 Third quarter........... 6.060 5.000 5.813 4.375 Fourth quarter.......... 7.980 5.300 5.875 4.125 (b) As of March 19, 2002, there were approximately 121 holders of record of the Company's common stock, and approximately 459 beneficial stockholders. -14- (c) The Company has never paid dividends. The Company presently intends to retain earnings and use free cash to finance its operating activities, for maintenance capital expenditures and to reduce debt. The Company does not anticipate declaring cash dividends in the foreseeable future. The Company's bank loan agreement also contains provisions which limit Monarch's ability to pay dividends to its stockholders. See Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5." ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31, ------------------------------------------------ (In thousands except per share amounts) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------- OPERATING RESULTS Casino revenues $64,908 $59,373 $48,345 $40,717 $37,254 Other revenues 54,461 51,713 43,227 31,802 30,365 ------- ------- ------- ------- ------- Gross revenues 119,369 111,086 91,572 72,519 67,619 Promotional allowances (14,853) (14,170) (12,707) (10,009) (8,504) ------- ------- ------- ------- ------- Net revenues 104,516 96,916 78,866 62,511 59,115 Income from operations 14,132 9,550 3,798 8,083 9,159 Income (loss) before income tax and extraordinary item 6,888 1,386 (945) 5,681 5,722 Income (loss) before extraordinary item 4,602 960 (585) 3,760 3,710 Net income (loss) $ 4,602 $ 960 $ (585) $ 3,760 $ 3,526 ======= ======= ======== ======= ======= - -------------------------------------------------------------------------------------------- INCOME (LOSS) PER SHARE OF COMMON STOCK Income (loss) before extraordinary item Basic $ 0.49 $ 0.10 $ (0.06) $ 0.40 $ 0.39 Diluted $ 0.49 $ 0.10 $ (0.06) $ 0.40 $ 0.39 Net income (loss) Basic $ 0.49 $ 0.10 $ (0.06) $ 0.40 $ 0.37 Diluted $ 0.49 $ 0.10 $ (0.06) $ 0.40 $ 0.37 Weighted average number of common shares and potential common shares outstanding Basic 9,436 9,436 9,436 9,436 9,444 Diluted 9,480 9,477 9,436 9,502 9,479 - -------------------------------------------------------------------------------------------- OTHER DATA EBITDA $24,217 $19,512 $11,720 $13,475 $13,284 Depreciation and amortization $10,085 $10,101 $ 7,738 $ 4,436 $ 4,125 Interest expense, net $ 7,243 $ 8,165 $ 4,742 $ 2,403 $ 3,437 Capital expenditures $ 4,488 $ 3,866 $46,132 $34,482 $ 2,270 - -------------------------------------------------------------------------------------------- BALANCE SHEET DATA Total assets $121,064 $126,391 $131,654 $96,732 $67,828 Current maturities of long-term debt $ 8,106 $ 7,538 $ 7,334 $ 850 $ 2,244 Long-term debt, less current maturities $ 64,237 $ 73,481 $ 82,236 $52,310 $32,908 Stockholders' equity $ 31,430 $ 26,829 $ 25,869 $26,453 $22,694 -15- 2001 includes a $25 thousand gain on disposal of fixed assets. 2000 includes a $139 thousand gain on disposal of fixed assets. 1999 includes a $184 thousand loss on disposal of fixed assets. 1998 includes a non-cash disposal of fixed assets charge of $956 thousand, primarily from demolition relating to the start of the Atlantis Expansion. 1997 includes a $185 thousand non-cash extraordinary loss on early retirement of debt, net of applicable income tax benefit. "EBITDA" consists of income from operations plus depreciation, amortization, and loss on disposal of assets less gain on disposal of assets. EBITDA should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. This item enables comparison of the Company's performance with the performance of other companies that report EBITDA, although some companies do not calculate this measure in the same manner and therefore, the measure as presented, may not be comparable to similarly titled measures presented by other companies. Includes amounts financed with debt or capitalized lease obligations. The Company paid no dividends during the five year period ended December 31, 2001.
-16- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT ON FORWARD-LOOKING INFORMATION Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relating to anticipated expenses, capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to competitive industry conditions, 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 changes in federal or state tax laws or the administration of such laws. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company prepares its Consolidated Financial Statements in conformity with principles generally accepted in the United States. Certain of the Company's policies, including the estimated lives assigned to the Company's assets, the determination of bad debt, self insurance reserves, credit risk, and the calculation of income tax liabilities, require that the Company apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company's judgments are based on historical experience, terms of existing contracts, observations of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from Company estimates. To provide an understanding of the methodologies applied, the Company's significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements. -17- RESULTS OF OPERATIONS 2001 Compared with 2000 For the year ended December 31, 2001, the Company had net income of $4.6 million, or $0.49 per share, on net revenues of $104.5 million, compared to a net income of $1.0 million, or $0.10 per share, on net revenues of $96.9 million for the year ended December 31, 2000. The Company's income from operations totaled $14.1 million for 2001 compared to $9.6 million for 2000. Net revenues for the year 2001 constitute a record high for any of the Company's comparable twelve month periods, due to more efficient operations. A 48.0% increase in net revenue flow to operating income and an 11.3% reduction in interest expense over 2000 were major factors in the increase in Net Income. The Company believes the Atlantis continued to benefit in 2001 from the rapid growth occurring in the residential and industrial communities south of the Atlantis in Reno, and from the increasing popularity of the Atlantis with visitors to the Reno area. Casino revenues totaled $64.9 million in 2001, up 9.3% from $59.4 million in 2000, driven by increases in slot, keno and poker game win. Revenue from slot and video poker machines ("slot machines") increased approximately 11.8% in 2001 compared to 2000 due to increased play as a result of the 1999 property expansion and upgrade of facilities and equipment in 2000 and 2001. Table game win increased approximately 1.0% in 2001 compared to 2000 due to an approximate 5.1% increase in table game drop which was offset by a lower win percentage in year 2001 compared to year 2000. Keno and poker room revenues combined increased approximately 6.6% in 2001 over 2000 primarily due to an approximate 24.8% increase in poker revenue as the poker room, which opened in mid 1999, continued to develop a loyal player base. Keno write increased approximately 4.9% in 2001 compared to 2000 as a result of successful efforts to increase play in restaurants and throughout the gaming floor. Casino operating expenses were 40.1% of casino revenues in 2001, compared to 43.0% in 2000. The decrease was due to continued efficiency of operations. Food and beverage revenues increased in 2001, up 6.3% to $32.0 million from $30.1 million in 2000, primarily due to an 8% increase in average revenue per cover which was partially offset by a 2.1% decrease in covers. Food and beverage operating expenses decreased to 56.9% of food and beverage revenues in 2001 compared to 61.4% in 2000, due to more efficient operations. Hotel revenues totaled $19.0 million in 2001, an increase of 4.1% from $18.3 million in 2000. The increase reflects a slight decrease in average daily occupied room rate offset by a slight increase in occupancy rate during the twelve month period of 2001 compared to the same period in 2000. Year 2001 revenues also include a $3.00 per occupied room energy surcharge that was assessed during the period April 2001 through December 2001 that was not assessed during 2000. The Atlantis' average daily room rate ("ADR") was $53.48 in 2001, compared to $53.59 in 2000. The average occupancy rate at the Atlantis was 91.1% in 2001 compared to 90.8% in 2000. Hotel operating expenses increased to 37.5% of hotel revenues in 2001, compared to 35.2% in 2000. This increase in operating expenses as a percentage of hotel revenues resulted from increased room maintenance costs and an increase in the hotel bad debt reserve. -18- Other revenues increased approximately 3.1% in 2001 to $3.5 million from $3.4 million in 2000, reflecting an increase in sales from the logo gift shop, which opened in August 1999. Other expenses were approximately 37.4% of other revenues in 2001, down from 40.1% in 2000, primarily due to continued operating efficiencies of operating the two gift shops. Selling, general and administrative ("SG&A") expenses totaled 26.5% of net revenues in 2001, compared to 26.4% in 2000. The slight increase in these expenses as a percentage of revenues reflects increased energy costs, offset to a certain extent by economies of scale from the 1999 Atlantis expansion. Depreciation and amortization expense was $10.1 million in 2001, unchanged when compared to 2000. Net interest expense for 2001 totaled $7.2 million, down 11.3% from $8.2 million in 2000, due to reduced interest rates and lower debt outstanding. Net interest expense for 2001 included guarantee fees paid to officers of the Company. Starting January 1, 2001, the Company began compensating the officers of the Company for their personal guarantee at the rate of 2.0% of average outstanding guaranteed debt. These guarantee payments totaled approximately $1.5 million in 2001. 2000 Compared with 1999 For the year ended December 31, 2000, the Company had net income of $1.0 million, or $0.10 per share, on net revenues of $97.0 million, compared to a loss of $0.6 million, or $0.06 per share, on net revenues of $78.9 million for the year ended December 31, 1999. The Company's income from operations totaled $9.6 million for 2000 compared to $3.8 million for 1999. Net revenues for the year 2000 constituted a then-record high for any of the Company's comparable twelve month periods; however, net income was impacted by a 30.5% increase in depreciation and amortization and a 72.2% increase in net interest expense, when compared to 1999, which can be attributed directly to the Atlantis expansion. The Company believes the Atlantis continued to benefit in 2000 from the rapid growth occurring in the residential and industrial communities south of the Atlantis in Reno, and from the increasing popularity of the Atlantis with visitors to the Reno area. Casino revenues totaled $59.4 million in 2000, up 22.8% from $48.3 million in 1999, driven by increases in both slot and table game win. Revenue from slot and video poker machines ("slot machines") increased approximately 22.1% in 2000 compared to 1999 due to an almost 15.4% increase in the number of slot machines on average for the year. Table game win increased approximately 24.7% in 2000 compared to 1999 due to an increase in table game drop and an 8.2% increase in the number of table games on average for the year. Also, a new poker room was added as a part of the Atlantis expansion in the third quarter of 1999 generating revenue for twelve months in 2000 compared to a little over five months in 1999. Casino operating expenses were 42.9% of casino revenues in 2000, compared to 44.8% in 1999, primarily due to more efficient operations. -19- Food and beverage revenues increased in 2000, up 19.3% to $30.1 million from $25.2 million in 1999, due primarily to the operation of two new restaurants, an additional beverage lounge, expansion of the buffet restaurant, and an increase in the number of guest checks due principally to the newly expanded hotel. Food and beverage operating expenses decreased to 61.4% of food and beverage revenues in 2000 compared to 64.1% in 1999, due to more efficient operations. Hotel revenues totaled $18.3 million in 2000, an increase of 23.5% from $14.8 million in 1999, driven by an approximately 25.1% increase in the number of rooms available. The Atlantis' average daily room rate ("ADR") was $53.59 in 2000, compared to $55.16 in 1999. The average occupancy rate at the Atlantis was 90.8% in 2000 compared to 86.8% in 1999. Hotel operating expenses increased to 35.2% of hotel revenues in 2000, compared to 33.0% in 1999. This increase in operating expenses as a percentage of hotel revenues resulted from increased payroll and operating costs for the expanded hotel and additional amenities. Other revenues increased approximately 4.4% in 2000 to $3.4 million from $3.2 million in 1999, reflecting the opening of a logo gift shop in August 1999. Other expenses were approximately 40.1% of other revenues in 2000, up from 35.1% in 1999, primarily due to opening a second gift shop. Selling, general and administrative ("SG&A") expenses totaled 26.4% of net revenues in 2000, compared to 29.8% in 1999. The decrease in these expenses as a percentage of revenues reflects the fact that certain payroll and operating costs have not increased to the same extent as revenues have increased because of certain economies of scale from the Atlantis expansion. Depreciation and amortization expense was $10.1 million in 2000, up 30.5% when compared to 1999, reflecting a full year of depreciation in 2000 compared to approximately nine months of depreciation on the new Sky Terrace, which was completed in late March 1999 and approximately 6 months of depreciation on the new hotel tower, which was completed in June 1999. Net interest expense for 2000 totaled $8.2 million, up 72.2% from $4.7 million in 1999, reflecting an increase in average outstanding debt primarily from the Atlantis expansion and an increase in interest rates. Because the Atlantis expansion was in operation for the full year 2000, the Company did not capitalize any interest costs; however, during the year 1999, while construction was still in progress, $1.6 million in interest costs were capitalized. OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS The constitutional amendment approved by California voters 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. -20- 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. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its daily hotel and casino activities with net cash provided by operating activities. For the years 2001, 2000, and 1999, net cash provided by operating activities totaled $14.7 million, $12.4 million, and $11.1 million, respectively. During each of the three years, net cash provided by operating activities was sufficient to fund the day to day operating expenses of the Company. Net cash used in investing activities, which consisted of acquisitions of property and equipment and the completion of the Atlantis expansion, totaled $3.2 million, $2.8 million, and $38.3 million in 2001, 2000, and 1999, respectively. Total capital expenditures, including amounts financed, were $4.5 million, $3.9 million, and $46.1 million in 2001, 2000, and 1999, respectively. Capital expenditures during 1999 primarily reflect construction costs, fixtures, and equipment associated with the Atlantis expansion. The Company funded the majority of these costs with borrowings available under its $80 million construction credit facility and $4.5 million equipment credit facility (the principal terms of which are summarized in Note 5 in the Notes to Consolidated Financial Statements, see Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements") (collectively, the "Credit Facilities"), together with cash flow from operations. At December 31, 2001, the outstanding balance of the two Credit Facilities was $68.0 million and $2.3 million, respectively. Net cash used in financing activities totaled $9.9 million in 2001, with the funds being used primarily to reduce long-term debt. Net cash used in financing activities totaled $9.2 million in 2000 and net cash provided by financing activities were $28.6 million in 1999, as a result of the Company borrowing funds under its bank credit facilities to finance the construction of the Atlantis expansion. Contractual cash obligations for the Company as of December 31, 2001 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 $72,342,844 $ 8,106,296 $64,215,190 $ 21,358 Capital Lease Obligations 178,334 52,179 104,358 21,797 Operating Leases 564,414 161,261 322,522 80,631 ----------- ----------- ----------- --------- Total Contractual Cash $73,085,592 $ 8,319,736 $64,642,070 $ 123,786 Obligations
-21- The Company believes that its existing cash balances, cash flow from operations, and borrowings available under the Credit Facilities, will provide the Company with sufficient resources to fund its operations, meet its debt repayment obligations, and fund its other 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. ITEM 7A. 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. The Company does not have any cash or cash equivalents as of December 31, 2001 that are subject to market risks. -22- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MONARCH CASINO & RESORT, INC.: We have audited the accompanying consolidated balance sheets of Monarch Casino & Resort, Inc., (a Nevada corporation) and subsidiary (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Monarch Casino & Resort, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/Arthur Andersen LLP Las Vegas, Nevada February 15, 2002 -23- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Revenues Casino................................ $ 64,907,920 $ 59,372,374 $ 48,344,843 Food and beverage..................... 31,960,713 30,060,672 25,189,207 Hotel................................. 19,022,188 18,280,209 14,807,903 Other................................. 3,478,171 3,372,732 3,230,489 ------------ ------------ ------------ Gross revenues..................... 119,368,992 111,085,987 91,572,442 Less promotional allowances........... (14,853,399) (14,170,422) (12,706,786) ------------ ------------ ------------ Net revenues....................... 104,515,593 96,915,565 78,865,656 ------------ ------------ ------------ Operating expenses Casino................................ 26,036,133 25,488,435 21,659,138 Food and beverage..................... 18,171,412 18,453,229 16,135,529 Hotel................................. 7,133,937 6,429,915 4,889,968 Other................................. 1,300,419 1,350,947 1,132,640 Selling, general and administrative... 27,656,572 25,541,559 23,512,414 Depreciation and amortization......... 10,085,331 10,101,268 7,738,029 ------------ ------------ ------------ Total operating expenses........... 90,383,804 87,365,353 75,067,718 ------------ ------------ ------------ Income from operations............. 14,131,789 9,550,212 3,797,938 ------------ ------------ ------------ Other expense Interest expense, net................. (7,243,330) (8,164,697) (4,742,475) ------------ ------------ ------------ Total other........................ (7,243,330) (8,164,697) (4,742,475) ------------ ------------ ------------ Income (loss) before income taxes.. 6,888,459 1,385,515 (944,537) Provision (benefit) for income taxes.... 2,286,695 425,434 (359,672) ------------ ------------ ------------ Net income (loss).................. $ 4,601,764 $ 960,081 $ (584,865) ============ ============ ============ INCOME (LOSS) PER SHARE OF COMMON STOCK Net income (loss) Basic.............................. $ 0.49 $ 0.10 $ (0.06) Diluted............................ $ 0.49 $ 0.10 $ (0.06) Weighted average number of common shares and potential common shares outstanding Basic.............................. 9,436,275 9,436,275 9,436,275 Diluted............................ 9,479,830 9,476,732 9,436,275
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -24- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 2001 2000 ------------ ------------ ASSETS Current assets Cash........................................$ 8,385,743 $ 6,783,998 Receivables, net............................ 2,863,939 2,963,648 Federal income tax refund receivable........ 770,019 417,135 Related party receivables................... 4,759 62,920 Inventories................................. 976,141 1,099,285 Prepaid expenses............................ 1,635,125 1,875,909 Prepaid federal income tax.................. - 154,281 Deferred income taxes....................... 1,146,058 2,045,651 ------------ ------------ Total current assets..................... 15,781,784 15,402,827 ------------ ------------ Property and equipment Land........................................ 10,339,530 10,339,530 Land improvements........................... 3,173,676 3,173,926 Buildings................................... 78,955,538 78,955,538 Building improvements....................... 4,763,904 4,733,595 Furniture and equipment..................... 54,101,471 50,924,021 ------------ ------------ 151,334,119 148,126,610 Less accumulated depreciation and amortization.............. (47,164,026) (37,816,876) ------------ ------------ 104,170,093 110,309,734 Construction in progress 625,048 - ------------ ------------ Net property and equipment............... 104,795,141 110,309,734 Other assets, net............................. 486,592 678,247 ------------ ------------ $121,063,517 $126,390,808 ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -25- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 2001 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt........ $ 8,106,296 $ 7,537,893 Accounts payable............................ 6,449,087 8,234,219 Accounts payable construction............... 147,481 34,650 Accrued expenses............................ 5,702,850 5,690,888 ------------ ------------ Total current liabilities................ 20,405,714 21,497,650 Long-term debt, less current maturities....... 64,236,548 73,480,788 Deferred income taxes......................... 4,990,829 4,583,708 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; 9,436,275 outstanding...................... 95,363 95,363 Additional paid-in capital.................. 17,241,788 17,241,788 Treasury stock, at cost.................... (329,875) (329,875) Retained earnings........................... 14,423,150 9,821,386 ------------ ------------ Total stockholders' equity............... 31,430,426 26,828,662 ------------ ------------ $121,063,517 $126,390,808 ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -26- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock -------------------- Additional Retained Shares Paid-in Earnings Treasury Outstanding Amount Capital (Deficit) Stock Total ----------- -------- ------------ ----------- -------- ------------ Balance, January 1, 1999 9,436,275 $ 95,363 $ 17,241,788 $ 9,446,170 $(329,875) $ 26,453,446 Net loss - - - (584,865) - (584,865) ----------- -------- ------------ ----------- --------- ------------ Balance, December 31, 1999 9,436,275 95,363 17,241,788 8,861,305 (329,875) 25,868,581 Net income - - - 960,081 - 960,081 ----------- -------- ------------ ----------- --------- ------------ Balance, December 31, 2000 9,436,275 95,363 17,241,788 9,821,386 (329,875) 26,828,662 Net income - - - 4,601,764 - 4,601,764 ----------- -------- ------------ ----------- --------- ------------ Balance, December 31, 2001 9,436,275 $ 95,363 $ 17,241,788 $14,423,150 $(329,875) $ 31,430,426 =========== ======== ============ =========== ========= ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -27- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)............................ $ 4,601,764 $ 960,081 $ (584,865) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.............. 10,264,757 10,275,198 7,919,120 (Gain) loss on disposal of assets.......... (24,848) (138,690) 184,206 Deferred income taxes...................... 1,306,714 1,046,666 (324,283) Increase in receivables, net............... (195,014) (1,406,051) (732,208) Decrease (increase) in inventories......... 123,144 357,317 (709,238) Decrease in prepaid expenses............... 395,065 13,929 322,536 Decrease in other assets................... 8,766 21,742 41,599 Increase (decrease) in accounts payable.... (1,785,132) 996,135 3,796,255 Increase in accrued expenses and federal income taxes payable........... 11,962 320,839 1,217,812 ------------ ------------ ------------ Net cash provided by operating activities..................... 14,707,178 12,447,166 11,130,934 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets................. 59,117 386,558 39,993 Acquisition of property and equipment........ (3,383,643) (2,264,401) (31,964,910) Changes in accounts payable construction..... 112,831 (907,614) (6,333,353) ------------ ------------ ------------ Net cash used in investing activities..... (3,211,695) (2,785,457) (38,258,270) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from long-term borrowings........... 1,500,000 - 30,671,549 Principal payments on long-term debt......... (11,393,738) (9,245,218) (2,095,849) ------------ ------------ ------------ Net cash provided by (used in) financing activities............ (9,893,738) (9,245,218) 28,575,700 ------------ ------------ ------------ Net increase in cash...................... 1,601,745 416,491 1,448,364 Cash at beginning of period.................... 6,783,998 6,367,507 4,919,143 ------------ ------------ ------------ Cash at end of period.......................... 8,385,743 $ 6,783,998 $ 6,367,507 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest, net of capitalized interest....................... $ 7,799,686 $ 7,401,698 $ 4,880,664 Cash paid for income taxes................... $ 1,750,000 $ - $ - Supplemental schedule of non-cash investing and financing activities: The Company financed the purchase of property and equipment in the following amounts...... $ 1,217,901 $ 694,469 $ 7,833,446
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -28- MONARCH CASINO & RESORT, INC. AND SUBSIDIARY NOTES TO 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 to Monarch and its wholly-owned subsidiary Golden Road. Until December 1999, Monarch Casino & Resort, Inc. owned two other subsidiaries, Dunes Marina Resort & Casino, Inc.("Dunes Marina"), and Sea World Processors, Inc. ("Sea World"). Dunes Marina and Sea World had been inactive for several years and had virtually no assets or liabilities. In December 1999, both corporations were dissolved. The consolidated financial statements include the accounts of Monarch and Golden Road. Intercompany balances and transactions are eliminated. Use of Estimates In preparing these financial statements in conformity with generally accepted accounting principles in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the year. Actual results could differ from those estimates. Reclassifications Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform with the 2001 presentation. These reclassifications had no effect on the previously reported net income (loss). Capitalized Interest The Company capitalizes interest costs associated with debt incurred in connection with major construction projects. When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company's average cost of borrowed money. Interest capitalization is ceased when the project is substantially complete. The amounts capitalized during the years ended December 31, 2001, 2000, and 1999 were $0, $0, and $1,550,916, respectively. Related Party Receivables Receivables from officers, employees, or affiliated companies are primarily for banquet related services and are priced at the retail value of the goods or services provided. -29- 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 Expenditures for maintenance and repairs are expensed as incurred; expenditures for renewals and improvements are generally capitalized. 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 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. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses as follows:
Years ended December 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Food and beverage....... $ 8,151,675 $ 7,914,891 $ 6,769,700 Hotel................... 1,298,431 1,502,527 1,424,700 Other................... 154,451 123,835 105,400 ----------- ----------- ----------- $ 9,604,557 $ 9,541,253 $ 8,299,800 =========== =========== ===========
Advertising Costs All advertising costs are expensed as incurred. Advertising expense, which is included in selling, general & administrative expense, was $3,137,197, $3,018,170, and $3,314,101 for 2001, 2000, and 1999, respectively. -30- Disposal of Fixed Assets In the year 2001, there was a gain on disposal of fixed assets of approximately $25 thousand, primarily from the sale of used slot and television equipment. In 2000, there was a gain on disposal of fixed assets of approximately $139 thousand, primarily from the sale of used slot equipment. In 1999, there was a loss on disposal of fixed assets of approximately $184 thousand, primarily related to the disposal of obsolete assets. The above mentioned gains are included in other income while losses are included in selling, general & administrative expenses in the Statements of Operations. 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 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 taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized. Pre-Opening Costs During April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5 "Reporting of the Costs of Start-up Activities" effective for fiscal years beginning after December 15, 1998. The new standard requires that all companies expense costs of "start-up" activities as the costs are incurred. The term "start-up" includes pre-opening, pre- operating, and organization activities. Accordingly, the Company has no capitalized "start-up" costs as of December 31, 2001 or 2000 and all "start-up" costs related to projects were expensed as incurred in 1999. The impact of the adoption of SOP 98-5 on the 1999 consolidated financial statements was not material. Earnings Per Share In 1997, the Company adopted the provisions of SFAS No. 128 "Earnings Per Share." SFAS No. 128 replaces previously reported earnings per share with "basic" earnings per share and "diluted" 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 reflects the additional dilution for all potentially dilutive securities such as stock options. In accordance with SFAS No. 128, when an entity has a loss from continuing operations, no potential common shares shall be included in the computation of any diluted per share amount. As such, potential dilution has not been considered in the calculations for 1999. -31- The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (Shares in thousands):
Years ended December 31, ------------------------------------------------------ 2001 2000 1999 ---------------- ---------------- ---------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ------ --------- ------ --------- ------ --------- Net income (loss) Basic..................... 9,436 $ 0.49 9,436 $ 0.10 9,436 $(0.06) Effect of dilutive stock options........... 44 - 41 - - - ------ -------- ------ ------- ------ ------- Diluted................... 9,480 $ 0.49 9,477 $ 0.10 9,436 $(0.06) ====== ======== ====== ======= ====== =======
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:
2001 2000 1999 ----------- ----------- ----------- Options to purchase shares of common stock (in thousands).... 3 19 - Exercise prices.................. $5.94 $5.25-$6.00 - Expiration dates................. 9/03 6/03-2/10 -
In accordance with SFAS No. 128, no options were included in the computation of diluted earnings per share in 1999 because the Company reported a loss and the effect of the options would be anti-dilutive. Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107 "Disclosures About Fair Value of Financial Instruments." The estimated fair value of the Company's financial instruments has been determined by the Company, using available market information and valuation methodologies. However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amounts of cash, receivables, accounts payable and accrued expenses, and current installments of long-term debt approximate fair value because of the short-term nature of these instruments. The fair value of long-term debt is estimated based on the current borrowing rates offered to the Company for debt of the same remaining maturities. -32- It is estimated that the carrying amounts of all of the Company's financial instruments approximate fair value at December 31, 2001 and 2000. 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. Guarantee Fees The officers of the Company earn a guarantee fee of two percent of the average outstanding guaranteed debt as compensation for their personal guarantees. For the year ended December 31, 2001, the Company paid approximately $1.5 million in guarantee fees to its officers and recorded these amounts as interest expense. Certain Risk 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. The Company also relies on non-conventioneer visitors partially comprised of individuals flying into the Reno area. The tragic events of September 11, 2001 could have an adverse effect on the Company's revenues from this segment as consumers may need time to restore their confidence in air travel. Impact of Recently Issued Accounting Standards In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF 00-14, "Accounting for Certain Sales Incentives." EITF 00-14 requires that discounts which result in a reduction in or refund of the selling price of a product or service in a single exchange transaction be recorded as a reduction of revenues. The Company currently accounts for sales incentives in accordance with EITF 00-14. In February 2001, the EITF reached a partial consensus on EITF 00-22, "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." The consensus requires that vendors recognize the cash rebate or refund obligation associated with time- or volume-based cash rebates as a reduction of revenue based on a "systematic and rational allocation of the cost of honoring rebates or refunds earned and claimed to each of the underlying revenue transactions that result in progress by the customer toward -33- earning the rebate or refund." The liability for such obligations should be based on the estimated amount of rebates or refunds to be ultimately earned, including an estimation of "breakage" if it can be reasonably estimated. The consensus is applicable beginning in the first quarter of 2001. The Company's adoption of EITF 00-22 in the first quarter of 2001 did not have any effect on previously reported operating income or net income. NOTE 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
December 31, ------------------------- 2001 2000 ----------- ----------- Casino....................... $ 2,771,654 $ 2,892,043 Hotel........................ 895,366 1,238,919 Other........................ 122,002 146,944 ----------- ----------- 3,789,022 4,277,906 Less allowance for doubtful accounts.......... (925,083) (1,314,258) ----------- ----------- $ 2,863,939 $ 2,963,648 =========== ===========
The Company recorded bad debt expense of $1,239,368, $665,177, and $548,464, in 2001, 2000, and 1999, respectively. NOTE 3. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, ------------------------- 2001 2000 ----------- ----------- -34- NOTE 4. LEASE COMMITMENTS The Company leases certain furniture and equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance, and certain other operating costs of the leased property. The leases on most of the properties contain renewal provisions. Following is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2001:
Capitalized Operating Leases Leases ------------- ------------- Year ending December 31, 2002 .............................. $ 52,179 $ 161,261 2003 .............................. 52,179 161,261 2004 .............................. 52,179 161,261 2005 .............................. 21,797 80,631 ------------ ------------ Total minimum lease payments .......... $ 178,334 $ 564,414 Less: amount representing interest ... (23,457) ============ ------------ Present value of minimum capitalized lease payments .......... 154,877 Less: current portion ................ (40,893) ------------ Long-term capitalized lease obligations $ 113,984 ============
Capital lease obligations are included with long-term and short-term debt on the balance sheet. Assets recorded under capital leases are included in Property and Equipment as follows:
December 31, ------------------------- 2001 2000 ----------- ----------- Furniture and equipment .......... $ 221,061 $ 221,061 Accumulated amortization ......... (66,111) (22,106) ----------- ----------- $154,950 $ 198,955 =========== ===========
Rental expense for operating leases amounted to $184,656, $104,397, and $20,028, in 2001, 2000, and 1999, respectively as reported in selling, general and administrative expenses in the statement of operations. -35- NOTE 5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ---------------------------- 2001 2000 ------------- ------------- Amounts outstanding under bank reducing revolving credit facility, collateralized by substantially all property and equipment of Golden Road and guaranteed by Monarch and its three largest stockholders, with floating interest rates tied to a base rate approximately equal to the prime rate or LIBOR (at the Company's option) plus a margin which fluctuates according to the Company's ratio of funded debt to EBITDA. The weighted average interest rate was approximately 4.14% at December 31, 2001, and 9.13% at December 31, 2000. The loan matures in June 2004, with all unpaid interest and principal due and payable at that time.................................................. $ 68,000,000 $ 74,600,000 Note payable to bank in the amount of $1,897,597, collateralized by real property and guaranteed by Monarch and its three largest stockholders, with floating interest rates equal to the three month LIBOR rate plus a margin which fluctuates according to the Company's ratio of funded debt to EBITDA. At December 31, 2001, the interest rate was approximately 5.1% and was approximately 9.304% at December 31, 2000. Interest and scheduled principal payments are payable quarterly until June 2004, with all unpaid interest and principal due and payable at that time...................................... 1,111,071 1,414,091 Amount outstanding under bank promissory note for $1,000,000, unsecured and guaranteed by Monarch's three largest stockholders, with a variable initial interest rate of 9.00% and adjusted based on an independent index plus 0.5 percentage points over the index. Interest was paid monthly and the note matured on April 5, 2001. At April 5, 2001, the interest rate was 8.0%........................................................ - 750,000 Amounts outstanding under bank credit facility for up to $4,500,000, collateralized by furniture, fixtures and equipment and guaranteed in full by Monarch and in part by Monarch's three largest stockholders, with interest rates on advances fixed at a margin over five year U.S. Treasury notes. At December 31, 2001 and 2000, the Company's weighted average interest rate was 7.44%. Each advance under the credit facility is repaid in 60 monthly installments of principal and interest. The balances mature at various dates between 2003 and 2004......................................... 2,339,932 3,185,761 Slot purchase contracts, collateralized by equipment. Contracts are non-interest bearing............................ 736,964 875,303 Amounts outstanding under a capital lease, collateralized by equipment..................................................... 154,877 192,531 Notes payable, collateralized by equipment, with principal and interest paid monthly through January 2001...... - 995 ------------ ------------ $ 72,342,844 $81,018,681 Less current maturities........................................ (8,106,296) (7,537,893) ------------ ------------ $ 64,236,548 $ 73,480,788 ============ ============
-36- THE CREDIT FACILITY. At origination in 1997, the Company had an $80 million reducing revolving term loan credit facility (the "Credit Facility") with a consortium of banks. As of December 31, 2001, maximum borrowing capacity was $68,000,000 of which $68,000,000 was outstanding. The Credit Facility is a direct obligation of Golden Road, and is guaranteed by Monarch. The Credit Facility is also guaranteed individually by John Farahi, Co-Chairman of the Board, Chief Executive Officer and Chief Operating Officer of Monarch and Golden Road and General Manager of the Atlantis; Bahram (Bob) Farahi, Co- Chairman of the Board and President of Monarch and Golden Road; and Behrouz Ben Farahi, Co-Chairman of the Board, Chief Financial Officer, Secretary and Treasurer of Monarch and Golden Road. The Company was 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 the Company's 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 the Company will include a margin added to either the Base Rate or to LIBOR that is tied to the Company's ratio of funded debt to EBITDA (the "Leverage Ratio"). Depending on the Company's 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 December 31, 2001, the applicable margin was the Base Rate plus 0.5%, and the applicable LIBOR margin was LIBOR plus 2.0%. The Base Rate at December 31, 2001 was 5.25%, and the LIBOR rate at December 31, 2001 was 4.11%. At December 31, 2001, the Company had $1.5 million in Base Rate loans outstanding and had one LIBOR loan outstanding totaling $66.5 million, for a total obligation of $68.0 million. The maturity date of the Credit Facility is June 30, 2004. Beginning July 1, 2000, the maximum principal available under the Credit Facility is reduced quarterly from $80 million by an aggregate of $40 million in increasing increments ranging from $1.5 million to $6 million per quarter. The Company 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. The Company 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 the Company's assets (including provisions requiring that a minimum amount equal to two percent of the Company's gaming revenues each year must be expended on capital expenditures at the Atlantis), and covenants restricting the Company's ability to merge, transfer ownership of Golden Road, incur additional indebtedness, encumber assets, and make certain investments. The Credit Facility also -37- contains covenants requiring the Company to maintain certain financial ratios, and provisions restricting transfers between Golden Road and Monarch and between Golden Road and other specified persons. The Credit Facility also contains provisions requiring the achievement of certain financial ratios before the Company can repurchase its common stock or pay or declare dividends. The Company is in compliance with all required covenants as of December 31, 2001, and 2000. The Company 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. As of January 2000, the Company is required to pay a fee equal to three eighths of one percent per annum on the average unused portion of the Credit Facility. Annual maturities of long-term debt as of December 31, 2001, are as follows:
Year ending December 31, 2002 ......................... $ 8,106,296 2003 ......................... 11,462,282 2004 ......................... 52,752,909 2005 ......................... 21,357 ------------ $ 72,342,844 ============
NOTE 6. INCOME TAX Income tax provision (benefit) consists of the following:
Years ended December 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Current provision (benefit)........... $ 1,904,759 $ (422,302) $ (655,843) Deferred provision.................... 381,936 847,736 296,171 ----------- ----------- ----------- $ 2,286,695 $ 425,434 $ (359,672) =========== =========== ===========
-38- The difference between the Company's provision (benefit) for federal income taxes as presented in the accompanying Consolidated Statements of Operations, and the provision (benefit) for income taxes computed at the statutory rate is comprised of the items shown in the following table as a percentage of pre-tax earnings.
Years ended December 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Income tax at the statutory rate...... 34.0% 34.0% (34.0)% Non-deductible expenses............... 0.5% 2.5% 3.5% Tax credits........................... (1.3)% (5.8)% (7.6)% ----------- ----------- ----------- 33.2% 30.7% (38.1)% =========== =========== ===========
The components of the deferred income tax assets and liabilities at December 31, 2001 and 2000, as presented in the Consolidated Balance Sheets, are as follows:
2001 2000 ----------- ----------- CURRENT ASSETS Compensation and benefits............ $ 292,880 $ 207,719 Bad debt reserves.................... 314,395 446,981 Accrued gaming liabilities........... 100,103 115,850 Accrued other liabilities............ 22,100 27,200 Alternative minimum tax credit....... 416,580 1,058,204 Other tax credit and other........... - 189,697 ----------- ----------- 1,146,058 2,045,651 NONCURRENT ASSETS Net operating loss carryforward...... - 422,302 ----------- ----------- Deferred income tax asset 1,146,058 $2,467,953 =========== =========== NONCURRENT LIABILITIES Impairment of assets................. $ (70,196) $ (70,196) Depreciation......................... (4,643,090) (4,658,271) Land basis........................... (277,543) (277,543) ----------- ----------- Deferred income tax liability $(4,990,829) (5,006,010) =========== ===========
-39- SFAS No. 109 requires recognition of the future tax benefit of deferred tax assets to the extent realization of such benefits is "more likely than not," otherwise a valuation allowance is applied. Based on the operating history of the Company, management determined that the assets meet the "more likely than not" criteria and therefore no valuation allowance has been recognized as of December 31, 2001. As of December 31, 2001, the Company had an alternative minimum tax credit of $416,580 which can be carried forward indefinitely. NOTE 7. BENEFIT PLANS Savings Plan - Effective November 1, 1995, the Company adopted a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may defer up to 15% of their pre-tax compensation, but not more than statutory limits. The Company contributes twenty five cents for each dollar contributed by a participant, with a maximum contribution of 4% of a participant's compensation. The Company's matching contributions were approximately $31,916, $24,097, and $21,770 in 2001, 2000, and 1999, respectively. Stock Option Plans - The Company maintains three stock option plans, consisting of the Directors' Stock Option Plan, the Executive Long-term Incentive Plan, and the Employee Stock Option Plan, which collectively provide for the granting of options to purchase up to 425,000 common shares. The exercise price of stock options granted under the plans is established by the respective plan committees, but the exercise price may not be less than the market price of the Company's common stock on the date the option is granted. Options expire five to ten years from the grant date. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. 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 SFAS No. 123, net income and income per share would have been changed to the pro forma amounts indicated below:
Years ended December 31, ---------------------------------------- 2001 2000 1999 ----------- ----------- ------------ Net income (loss) As reported $ 4,601,764 $ 960,081 $ (584,865) Pro forma $ 4,483,804 $ 881,597 $ (803,022) Basic earnings (loss) per share As reported $ 0.49 $ 0.10 $ (0.06) Pro forma $ 0.48 $ 0.09 $ (0.09) Diluted earnings (loss) per share As reported $ 0.49 $ 0.10 $ (0.06) Pro forma $ 0.47 $ 0.09 $ (0.09)
-40- The fair value of the Company's stock options was estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000, and 1999: dividend yield of 0.0% for all periods; expected volatility of 70.4%, 107.8%, and 128.0%, respectively; a weighted average risk free interest rate of 4.36%, 6.0%, and 5.0%, respectively; and expected holding periods of three to nine years. Presented below is a summary of the status of the Company's stock options and the related transactions.
Weighted Average Shares Exercise Price -------- ---------------- Outstanding at December 31, 1998.... 252,200 $ 3.47 Granted............................ 4,800 5.50 Exercised.......................... - - Forfeited/expired.................. (60,100) (5.93) ------- ----- Outstanding at December 31, 1999.... 196,900 3.04 Granted............................ 19,800 5.07 Exercised.......................... - - Forfeited/expired.................. (63,150) (4.92) ------- ----- Outstanding at December 31, 2000.... 153,550 3.19 Granted............................ 28,200 5.14 Exercised.......................... - - Forfeited/expired.................. (21,850) (4.95) ------- ----- Outstanding at December 31, 2001.... 159,900 3.38 ======= ===== Weighted average fair value of options granted during 2001......... $ 5.14 ======= 2000......... $ 5.07 ======= 1999......... $ 5.50 =======
Stock Options Stock Options Outstanding Exercisable ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price ---------------- --------- ----------- ---------- -------- ---------- $2.25 to $2.88 115,500 4.00 $ 2.66 50,000 $ 2.38 $4.38 to $5.50 33,300 4.00 $ 5.12 18,300 $ 5.23 $5.68 to $6.00 11,100 4.00 $ 5.73 3,050 $ 5.94 -------- ------- Total 159,900 71,350 ======== =======
-41- NOTE 8. COMMITMENTS AND CONTINGENCIES Self Insurance - The Company is self-insured for health care claims for eligible active employees. Benefit plan administrators assist the Company in determining its liability for self-insured claims, and such claims are not discounted. The Company is also self-insured for workman's compensation. Both plans limit the Company's maximum liability under stop-loss agreements with insurance companies. The maximum liability for health care claims under the stop-loss agreement is $50,000 as of November 1, 1999, and was $40,000 prior to that date. The maximum liability for workman's compensation under the stop- loss agreement is $300,000 per claim. The Company is a defendant in various pending legal proceedings. In the opinion of management, all pending claims in such litigation will not, in the aggregate, have a material adverse effect on the Company's financial position or results of operations. NOTE 9. SELECTED QUARTERLY FINANCIAL DATA
2001 --------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- ------------- Net revenues ............. $ 23,750,181 $ 27,731,985 $ 28,221,640 $ 24,811,787 $104,515,593 Operating expenses ....... $ 21,425,694 $ 22,587,821 $ 22,998,370 $ 23,371,919 $ 90,383,804 Income from operations ... $ 2,324,487 $ 5,144,164 $ 5,223,270 $ 1,439,868 $ 14,131,789 Net income ............... $ 302,311 $ 1,734,054 $ 2,383,021 $ 182,378 $ 4,601,764 Income per share of common stock Basic ................ $ 0.03 $ 0.18 $ 0.25 $ 0.03 $ 0.49 Diluted .............. $ 0.03 $ 0.18 $ 0.25 $ 0.03 $ 0.49
2000 --------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- ------------- Net revenues ............. $ 22,649,726 $ 24,978,492 $ 26,578,187 $ 22,709,160 $ 96,915,565 Operating expenses ....... $ 20,466,905 $ 21,524,468 $ 23,567,411 $ 21,806,569 $ 87,365,353 Income from operations ... $ 2,182,821 $ 3,454,024 $ 3,010,776 $ 902,591 $ 9,550,212 Net income (loss) ........ $ 93,204 $ 829,820 $ 582,274 $ (545,217) $ 960,081 Income (loss) per share of common stock Basic ................ $ 0.01 $ 0.09 $ 0.06 $(0.06) $ 0.10 Diluted .............. $ 0.01 $ 0.09 $ 0.06 $(0.06) $ 0.10
-42- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included in Part II of this report: Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999. Consolidated Balance Sheets at December 31, 2001, and 2000. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999. Notes to Consolidated Financial Statements. -43- 2. Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the financial statements or notes thereto. (b) Reports on Form 8-K None. (c) Exhibits Number Exhibit Description ------ ------------------- 3.01 Articles of Incorporation of Monarch Casino & Resort, Inc., filed June 11, 1993 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.01. 3.02 Bylaws of Monarch Casino & Resort, Inc., adopted June 14, 1993 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.02. 3.03 Articles of Incorporation of Golden Road Motor Inn, Inc. filed March 6, 1973; Certificate Amending Articles of Incorporation of Golden Road Motor Inn, Inc. filed August 29, 1973; and Certificate of Amendment of Articles of Incorporation filed April 5, 1984 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.03. 3.04 Bylaws of Golden Road Motor Inn, Inc., adopted March 9, 1973 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.04. 4.01 Specimen Common Stock Certificate for the Common Stock of Monarch Casino & Resort, Inc. is incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33- 64556), Part II, Item 16, Exhibit 4.01. 4.02 Amended and Restated Monarch Casino & Resort, Inc. 1993 Directors' Stock Option Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-022088) for the fiscal year ended December 31,1998, Item 14(c), Exhibit 4.02. 4.03 Amended and Restated Monarch Casino & Resort, Inc. 1993 Executive Long Term Incentive Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 4.03. -44- 4.04 Amended and Restated Monarch Casino & Resort, Inc. 1993 Employee Stock Option Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 4.04. 10.01 Construction and Reducing Revolving Credit Agreement, dated as of December 29, 1997, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders and Swingline Lender is incorporated herein by reference to the Company's Form 8-K report (SEC File 0-22088) dated January 14, 1998, Exhibit 10.01. 10.02 First Amendment to Construction and Reducing Revolving Credit Agreement, dated as of January 9, 1998, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders, Swingline Lender and L/C Issuer is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 10.02. 10.03 Second Amendment to Construction and Reducing Revolving Credit Agreement, dated as of June 12, 1998, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders, Swingline Lender and L/C Issuer is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended June 30, 1998, Item 6(a), Exhibit 10.01. 10.04 Term Loan Agreement, entered as of the 23rd day of July, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank National Association as Term Lender is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for fiscal quarter ended September 30, 1998, Item 6(a), Exhibit 10.01. 10.05 Schedule to Master Loan Agreement, dated as of December 16, 1998; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1998, Item 14(c), Exhibit 10.05. -45- 10.06 Nonstandardized 401(k) Plan Adoption Agreement between Monarch Casino & Resort, Inc. and Smith Barney Shearson dated November 7, 1995 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.21. 10.07 Recordkeeping Service Agreement between Monarch Casino & Resort, Inc. and Travelers Recordkeeping dated June 29, 1995 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.22. 10.08 Trademark Agreement between Golden Road Motor Inn, Inc. and Atlantis Lodge, Inc., dated February 3, 1996 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.23. 10.09 Business Loan Agreement between Golden Road Motor Inn, Inc. and Colonial Bank, dated November 17, 1999; Promissory Note by Golden Road Motor Inn, Inc. in favor of Colonial Bank, dated November 17, 1999; Commercial Guaranty issued by John Farahi in favor of Colonial Bank, dated November 17, 1999; Commercial Guaranty issued by Bahram Farahi in favor of Colonial Bank, dated November 17, 1999; and Commercial Guaranty issued by Ben Farahi, dated November 17, 1999 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.14. 10.10 Schedule to Master Loan Agreement, dated as of April 1, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.15. 10.11 Schedule to Master Loan Agreement, dated as of April 19, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.16. -46- 10.12 Schedule to Master Loan Agreement, dated as of May 5, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.17. 10.13 Schedule to Master Loan Agreement, dated as of May 24, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.18. 10.14 Schedule to Master Loan Agreement, dated as of June 23, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.19. 10.15 Agreement dated November 3, 1999 between Golden Road Motor Inn, Inc. and First Security Leasing Company of Nevada is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended September 30, 2000, Item 6(a), Exhibit 10.01. 10.16 Agreement dated November 3, 1999 between Golden Road Motor Inn, Inc. and First Security Leasing Company of Nevada is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended September 30, 2000, Item 6(a), Exhibit 10.02. 21.01 Amended and Restated List of Subsidiaries of Monarch Casino & Resort, Inc. is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 21.01. 99.01 Acknowledgement of receipt of Letter of Representation from Arthur Andersen, LLP, independent public accountants pursuant to temporary Note 3T to Article 3 of Regulation S-X. -47- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 22, 2002 By: /s/ BEN FARAHI ------------------------------------ Ben Farahi, Co-Chairman of the Board, Secretary, Treasurer and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date ------------------ ----------------------------------- ---- /S/ JOHN FARAHI Co-Chairman of the Board of Directors, March 25, 2002 ------------------ Chief Executive Officer (Principal John Farahi Executive Officer) and Director /S/ BOB FARAHI Co-Chairman of the Board of Directors, March 22, 2002 ------------------ President, and Director Bob Farahi /S/ BEN FARAHI Co-Chairman of the Board of Directors, March 25, 2002 ------------------ Secretary, Treasurer, Chief Financial Ben Farahi Officer (Principal Financial Officer and Principal Accounting Officer) and Director /S/ CRAIG. F. SULLIVAN Director March 25, 2002 ------------------ Craig F. Sullivan /S/ RONALD R. ZIDECK Director March 25, 2002 ------------------ Ronald R. Zideck /S/ CHARLES W. SCHARER Director March 25, 2002 ------------------ Charles S. Scharer
-48- EXHIBIT INDEX
Exhibit Page Number Description Number - ----------- ------------------------------------------------------------------ -------- 3.01 Articles of Incorporation of Monarch Casino & Resort, Inc., filed June 11, 1993 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.01. 3.02 Bylaws of Monarch Casino & Resort, Inc., adopted June 14, 1993 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.02. 3.03 Articles of Incorporation of Golden Road Motor Inn, Inc. filed March 6, 1973; Certificate Amending Articles of Incorporation of Golden Road Motor Inn, Inc. filed August 29, 1973; and Certificate of Amendment of Articles of Incorporation filed April 5, 1984 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.03. 3.04 Bylaws of Golden Road Motor Inn, Inc., adopted March 9, 1973 are incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.04. 4.01 Specimen Common Stock Certificate for the Common Stock of Monarch Casino & Resort, Inc. is incorporated herein by reference from the Company's Form S-1 registration statement (SEC File 33- 64556), Part II, Item 16, Exhibit 4.01. 4.02 Amended and Restated Monarch Casino & Resort, Inc. 1993 Directors' Stock Option Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-022088) for the fiscal year ended December 31,1998, Item 14(c), Exhibit 4.02. 4.03 Amended and Restated Monarch Casino & Resort, Inc. 1993 Executive Long Term Incentive Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 4.03. 4.04 Amended and Restated Monarch Casino & Resort, Inc. 1993 Employee Stock Option Plan is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 4.04. 10.01 Construction and Reducing Revolving Credit Agreement, dated as of December 29, 1997, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders and Swingline Lender is incorporated herein by reference to the Company's Form 8-K report (SEC File 0-22088) dated January 14, 1998, Exhibit 10.01. 10.02 First Amendment to Construction and Reducing Revolving Credit Agreement, dated as of January 9, 1998, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders, Swingline Lender and L/C Issuer is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1997, Item 14(c), Exhibit 10.02. -49- 10.03 Second Amendment to Construction and Reducing Revolving Credit Agreement, dated as of June 12, 1998, among Golden Road Motor Inn, Inc. as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi, and Behrouz Farahi as guarantors, the Lenders as defined therein, and Wells Fargo Bank as administrative and collateral Agent for the Lenders, Swingline Lender and L/C Issuer is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended June 30, 1998, Item 6(a), Exhibit 10.01. 10.04 Term Loan Agreement, entered into as of the 23rd day of July, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank National Association as Term Lender is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended September 30, 1998, Item 6(a), Exhibit 10.01. 10.05 Schedule to Master Loan Agreement, dated as of December 16, 1998; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1998, Item 14(c), Exhibit 10.05. 10.06 Nonstandardized 401(k) Plan Adoption Agreement between Monarch Casino & Resort, Inc. and Smith Barney Shearson dated November 7, 1995 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.21. 10.07 Recordkeeping Service Agreement between Monarch Casino & Resort, Inc. and Travelers Recordkeeping dated June 29, 1995 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.22. 10.08 Trademark Agreement between Golden Road Motor Inn, Inc. and Atlantis Lodge, Inc., dated February 3, 1996 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.23. 10.09 Business Loan Agreement between Golden Road Motor Inn, Inc. and Colonial Bank, dated November 17, 1999; Promissory Note by Golden Road Motor Inn, Inc. in favor of Colonial Bank, dated November 17, 1999; Commercial Guaranty issued by John Farahi in favor of Colonial Bank, dated November 17, 1999; Commercial Guaranty issued by Bahram Farahi in favor of Colonial Bank, dated November 17, 1999; and Commercial Guaranty issued by Ben Farahi, dated November 17, 1999 is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.14. 10.10 Schedule to Master Loan Agreement, dated as of April 1, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.15. -50- 10.11 Schedule to Master Loan Agreement, dated as of April 19, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.16. 10.12 Schedule to Master Loan Agreement, dated as of May 5, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.17. 10.13 Schedule to Master Loan Agreement, dated as of May 24, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.18. 10.14 Schedule to Master Loan Agreement, dated as of June 23, 1999; Master Loan Agreement, dated as of October 3, 1998; and Guaranties, dated as of September 9, 1998, by and among Golden Road Motor Inn, Inc., as Borrower, Monarch Casino & Resort, Inc., John Farahi, Bahram Farahi and Behrouz Farahi as guarantors, and U.S. Bank Leasing and Financial as Lender is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 10.19. 10.15 Agreement dated November 3, 1999 between Golden Road Motor Inn, Inc. and First Security Leasing Company of Nevada is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended September 30, 2000, Item 6(a), Exhibit 10.01. 10.16 Agreement dated November 3, 1999 between Golden Road Motor Inn, Inc. and First Security Leasing Company of Nevada is incorporated herein by reference to the Company's Form 10-Q report (SEC File 0-22088) for the fiscal quarter ended September 30, 2000, Item 6(a), Exhibit 10.02. 21.01 Amended and Restated List of Subsidiaries of Monarch Casino & Resort, Inc. is incorporated herein by reference to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended December 31, 1999, Item 14(c), Exhibit 21.01. 99.01 Acknowledgement of receipt of Letter of Representation from Arthur 52 Andersen, LLP, independent public accountants pursuant to temporary Note 3T to Article 3 of Regulation S-X.
-51- EX-99 3 mcriexh9e.txt REPRESENTATION OF ARTHUR ANDERSEN EXHIBIT 99 REPRESENTATION OF ARTHUR ANDERSEN LLP March 26, 2002 Securities and Exchange Commission 450 Fifth Street, NW Judiciary Plaza Washington, DC 20549 Re: CONFIRMATION OF ARTHUR ANDERSEN REPRESENTATIONS This letter confirms that Arthur Andersen LLP, our independent public accountants, have represented to us in writing that their audit was subject to their quality control system for the United States accounting and auditing practice to provide reasonable assurance that their engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation, and that availability of personnel at foreign affiliates of Arthur Andersen is not relevant to this audit. Very truly yours, /s/ Ben Farahi Chief Financial Officer -54- -----END PRIVACY-ENHANCED MESSAGE-----