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