UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 12, 2002, there were 9,474,830 shares of Monarch Casino & Resort, Inc. $0.01 par value common stock outstanding. TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001..... 3 Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001.................... 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001............... 6 Notes to Condensed Consolidated Financial Statements......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 15 Item 4. Controls and Procedures...................................... 15 PART II - OTHER INFORMATION Item 5. Other Information............................................ 16 Item 6. Exhibits and Reports on Form 8-K............................. 16 Signatures................................................... 17 Certifications............................................... 17 Exhibit 99.01 Certification of Financial Condition and Results of Operations.................................... 21 -2- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MONARCH CASINO & RESORT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> Revenues Casino........................... $18,979,642 $16,999,809 $53,376,299 $49,366,266 Food and beverage................ 8,826,254 8,277,641 25,202,895 23,899,200 Hotel............................ 6,344,964 5,724,628 15,651,826 14,775,607 Other............................ 984,037 940,966 2,753,073 2,566,639 ------------ ------------ ------------ ------------ Gross revenues................ 35,134,897 31,943,044 96,984,093 90,607,712 Less promotional allowances...... (4,483,316) (3,721,404) (12,907,439) (10,903,906) ------------ ------------ ------------ ------------ Net revenues.................. 30,651,581 28,221,640 84,076,654 79,703,806 ------------ ------------ ------------ ------------ Operating expenses Casino........................... 6,982,318 6,554,379 20,358,504 19,315,168 Food and beverage................ 4,642,013 4,838,560 13,186,634 13,748,428 Hotel............................ 1,803,069 1,785,388 4,899,231 5,165,409 Other............................ 329,748 346,748 947,676 982,510 Selling, general and administrative.................. 8,060,423 6,925,282 22,462,330 20,261,583 Depreciation and amortization.... 2,618,077 2,548,013 7,721,347 7,538,787 ------------ ------------ ------------ ------------ Total operating expenses...... 24,435,648 22,998,370 69,575,722 67,011,885 ------------ ------------ ------------ ------------ Income from operations........ 6,215,933 5,223,270 14,500,932 12,691,921 ------------ ------------ ------------ ------------ Other expenses Interest expense................. 962,373 1,607,362 3,122,512 5,992,247 Other............................ - - 225,000 - ------------ ------------ ------------ ------------ Total other expenses.......... 962,373 1,607,362 3,347,512 5,992,247 ------------ ------------ ------------ ------------ Income before income taxes.... 5,253,560 3,615,908 11,153,420 6,699,674 Provision for income taxes......... 1,786,100 1,232,887 3,848,710 2,280,288 ------------ ------------ ------------ ------------ Net income.................... $ 3,467,460 $ 2,383,021 $ 7,304,710 $ 4,419,386 ============ ============ ============ ============ Earnings per share of common stock Net income Basic.......................... $ 0.37 $ 0.25 $ 0.77 $ 0.47 Diluted........................ $ 0.36 $ 0.25 $ 0.77 $ 0.47 Weighted average number of common shares and potential common shares outstanding Basic.......................... 9,468,880 9,436,275 9,452,279 9,436,275 Diluted........................ 9,529,212 9,480,840 9,494,602 9,477,677 </TABLE> 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 <TABLE> <CAPTION> September 30, December 31, 2002 2001 ------------ ------------ (unaudited) <S> <C> <C> ASSETS Current assets Cash................................................. $ 6,436,867 $ 8,385,743 Receivables, net..................................... 2,417,599 2,863,939 Federal income tax refund receivable................. - 770,019 Related party receivables............................ 30,311 4,759 Inventories.......................................... 871,861 976,141 Prepaid expenses..................................... 2,330,166 1,635,125 Deferred income taxes................................ 645,469 1,146,058 ------------- ------------ Total current assets.............................. 12,732,273 15,781,784 ------------- ------------ Property and equipment Land................................................. 10,339,530 10,339,530 Land improvements.................................... 3,191,371 3,173,676 Buildings............................................ 78,955,538 78,955,538 Building improvements................................ 6,411,394 4,763,904 Furniture and equipment.............................. 56,827,349 54,101,471 ------------- ------------ 155,725,182 151,334,119 Less accumulated depreciation and amortization....... (53,387,462) (47,164,026) ------------- ------------ 102,337,720 104,170,093 Construction in progress............................. - 625,048 ------------- ------------ Net property and equipment........................ 102,337,720 104,795,141 ------------- ------------ Other assets, net...................................... 369,013 486,592 ------------- ------------ Total assets...................................... $115,439,006 $121,063,517 ============= ============ </TABLE> The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. -4- MONARCH CASINO & RESORT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, December 31, 2002 2001 ------------ ------------ (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt................. $ 7,118,510 $ 8,106,296 Accounts payable..................................... 4,244,777 6,449,087 Accounts payable-construction........................ 14,183 147,481 Accrued expenses..................................... 5,363,845 5,702,850 Federal income taxes payable......................... 517,514 - ------------- ------------ Total current liabilities......................... 17,258,829 20,405,714 Long-term debt, less current maturities................ 54,500,000 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.................................... 21,727,860 14,423,150 ------------- ------------ Total stockholders' equity........................ 38,956,041 31,430,426 ------------- ------------ Total liabilities and stockholders' equity........ $115,439,006 $121,063,517 ============= ============ </TABLE> The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. -5- MONARCH CASINO & RESORT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended September 30, ---------------------------- 2002 2001 ------------ ------------ (unaudited) (unaudited) <S> <C> <C> Cash flows from operating activities: Net income............................................ $ 7,304,710 $ 4,419,386 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 7,855,916 7,673,357 Gain on disposal of assets.......................... (34,647) (8,696) Deferred income taxes............................... 233,896 227,371 Decrease in receivables, net........................ 1,190,807 205,665 Decrease in inventories............................. 104,280 205,437 (Increase) decrease in prepaid expenses............. (695,041) 41,724 (Increase) decrease in other assets................. (19,587) 8,765 Decrease in accounts payable........................ (2,204,310) (2,690,574) Increase in accrued expenses, and federal income taxes payable.................. 300,029 3,121,380 ------------ ------------ Net cash provided by operating activities.......... 14,036,053 13,203,815 ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets.......................... 48,979 49,045 Acquisition of property and equipment................. (3,953,636) (2,416,129) Decrease in accounts payable construction............. (133,298) (34,650) ------------ ------------ Net cash used in investing activities.............. (4,037,955) (2,401,734) ------------ ------------ Cash flows from financing activities: Proceeds from exercise of stock options............... 99,385 - Principal payments on long-term debt.................. (12,046,359) (9,277,141) ------------ ------------ Net cash used in financing activities.............................. (11,946,974) (9,277,141) ------------ ------------ Net increase (decrease) in cash.................... (1,948,876) 1,524,940 Cash at beginning of period............................. 8,385,743 6,783,998 ------------ ------------ Cash at end of period................................... $ 6,436,867 $ 8,308,938 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest................................ $ 2,859,294 $ 5,315,115 Cash paid for income taxes............................ $ 2,805,760 $ 975,000 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 $ 1,149,117 </TABLE> The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. -6- MONARCH CASINO & RESORT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Monarch Casino & Resort, Inc. ("Monarch"), a Nevada corporation, was incorporated in 1993. Monarch's wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("Golden Road"), operates the Atlantis Casino Resort (the "Atlantis"), a hotel/casino facility in Reno, Nevada. Unless stated otherwise, the "Company" refers collectively to Monarch and its Golden Road subsidiary. The 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 of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the year. Actual results could differ from those estimates. 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 nine months ended September 30, 2002, and 2001, the Company recorded interest expense in the amounts of approximately $1 million and $1.1 million, respectively, for these guarantee fees. -7- NOTE 2. INTERIM FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2002, and September 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 nine-month periods ended September 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): <TABLE> <CAPTION> Three Months Ended September 30, ----------------------------------- 2002 2001 ---------------- ---------------- Per Share Per Share Shares Amount Shares Amount ------ --------- ------ --------- <S> <C> <C> <C> <C> Net Income Basic..................... 9,469 $0.37 9,436 $0.25 Effect of dilutive stock options............ 60 (0.01) 45 - ------ --------- ------ --------- Diluted................... 9,529 $0.36 9,481 $0.25 ====== ========= ====== ========= </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, ----------------------------------- 2002 2001 ---------------- ---------------- Per Share Per Share Shares Amount Shares Amount ------ --------- ------ --------- <S> <C> <C> <C> <C> Net Income Basic..................... 9,452 $0.77 9,436 $0.47 Effect of dilutive stock options............ 43 - 42 - ------ --------- ------ --------- Diluted................... 9,495 $0.77 9,478 $0.47 ====== ========= ====== ========= </TABLE> -8- 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: <TABLE> <CAPTION> Three Months Ended September 30, -------------------------------- 2002 2001 ----------- ----------- <S> <C> <C> Options to purchase shares of common stock (in thousands)..... 9 8 Exercise prices.................. $14.37 $5.68-$5.94 Expiration dates................. 6/07 9/03-2/10 </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2002 2001 ----------- ----------- <S> <C> <C> Options to purchase shares of common stock (in thousands)..... 19 20 Exercise prices.................. $11.86-$14.37 $5.50-$5.94 Expiration dates................. 6/07-8/12 9/03-2/10 </TABLE> 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. No Company stock options were exercised during the third quarter of 2002. 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. -9- 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 and 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 of 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 -10- 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, 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 September 30, 2002, and 2001 For the three-month period ended September 30, 2002, the Company earned net income of $3.5 million, or $0.36 per share (diluted), on net revenues of $30.7 million, an increase from net income of $2.4 million, or $0.25 per share (diluted), on net revenues of $28.2 million for the three months ended September 30, 2001. Income from operations for the three months ended September 30, 2002 totaled $6.2 million, compared to $5.2 million for the 2001 third quarter. Casino revenues totaled $19.0 million in the third quarter of 2002, an increase of 11.6% from $17.0 million in the 2001 third quarter, reflecting increases in table game and slot win. Slot revenues were up 4.0% in the third quarter of 2002 compared to the third quarter of 2001 due to an increase in the volume of slot machine play. Table game revenue for the three months ended September 30, 2002 increased 45.9% compared to the same period in 2001, due to increases in table game drop and hold percentage. Poker room revenue decreased 1.9% for the three months ended September 30, 2002, compared to the same period last year. Keno revenue for the third quarter ended September 30, 2002 was relatively unchanged when compared to the third quarter of 2001. Casino operating expenses amounted to 36.8% of casino revenues in the 2002 third quarter, compared to 38.6% in the 2001 third quarter, primarily due to overall successful efforts to manage payroll and variable operating costs. Food and beverage revenues for the 2002 third quarter totaled $8.8 million, an increase of 6.6% from $8.3 million in the 2001 third 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 52.6% of food and beverage revenue in the 2002 third quarter, compared to 58.5% in the third quarter of 2001. Reduction in average food cost of sales and overall successful efforts to manage payroll and other departmental operating expenses resulted in the improved margins. Hotel revenues were $6.3 million in the 2002 third quarter, an increase of 10.8% from the $5.7 million in hotel revenues in the third quarter 2001. The Atlantis' average daily room rate ("ADR") was $66.52 for the 2002 third quarter compared to $60.55 in the third quarter of 2001. The occupancy rate was 97.4% during the 2002 third quarter, up from an occupancy rate of 96.1% during the same period last year. Hotel operating expenses in the 2002 third -11- quarter were 28.4% of hotel revenues, compared to 31.2% in the 2001 third 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. Other revenues totaled $984 thousand in the third quarter of 2002, up 4.6% from $941 thousand in the third quarter of 2001, due to recovery of previously written-off bad debts and slight increases in retail sales. Other operating expenses in the 2002 third quarter were 33.5% of other revenues, compared to 36.9% in the 2001 third quarter. Selling, general and administrative ("SG&A") expenses were $8.1 million in the 2002 third quarter, compared to $6.9 million in the third quarter of 2001. As a percentage of net revenue, SG&A expenses increased to 26.3% in the third quarter of 2002 compared to 24.5% in the 2001 third quarter, primarily due to increased marketing and promotional costs. Interest expense for the 2002 third quarter totaled $962 thousand, a decrease of 40.1% from $1.6 million in the third quarter of 2001. The decrease reflects the Company's reduction in debt outstanding and lower applicable interest rates. Interest expense for the quarters ended September 30, 2002, and 2001, included guarantee fees paid to the Company's three principal stockholders. These guarantee fee expenses totaled approximately $316 thousand and $365 thousand in the third quarters of 2002 and 2001, respectively. Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2002 and 2001 For the nine months ended September 30, 2002, the Company earned net income of $7.3 million, or $0.77 per share (diluted), on net revenues of $84.1 million, an increase from net income of $4.4 million, or $0.47 per share (diluted), on net revenues of $79.7 million during the nine months ended September 30, 2001. Income from operations for the 2002 nine-month period totaled $14.5 million, compared to $12.7 million for the same period in 2001. Casino revenues for the first nine months of 2002 totaled $53.4 million, an 8.1% increase from $49.4 million for the first nine months of 2001, reflecting increases in both slot and table games win. Slot revenues were up 4.0% in the first nine months of 2002 compared to the first nine months of 2001 due to an increase in the volume of slot machine play. Table game revenue for the nine months ended September 30, 2002 increased 26.1% compared to the same period in 2001, primarily due to an increase in table game drop and hold percentage. Poker room revenue was relatively unchanged for the nine months ended September 30, 2002, compared to the same period last year. Keno revenue decreased 4.4% in the nine-month period ended September 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 4.3% increase in keno write. Casino operating expenses amounted to 38.1% of casino revenues for the nine months ended September 30, 2002, compared to 39.1% for the same period in 2001, primarily due to successful efforts to manage payroll costs and other direct departmental expenses. Food and beverage revenues totaled $25.2 million for the nine months ended September 30, 2002, an increase of 5.5% from the $23.9 million for the nine months ended September 30, 2001, due to increases in the number of covers served and the average revenue per cover. Food and beverage operating expenses amounted to 52.3% of food and beverage revenues during the 2002 -12- nine-month period, compared to 57.5% 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 and other direct departmental expenses. Hotel revenues for the first nine months of 2002 increased 5.9% to $15.7 million from $14.8 million for the first nine months of 2001, primarily due to an increase in the average occupancy rate and higher ADR. 2002 revenues also include a $3 per occupied room energy surcharge for the entire nine months, which was not imposed until April 2001. The ADR at the Atlantis increased during the 2002 nine-month period to $56.42, compared to $54.72 for the same period in 2001, while the occupancy rate increased to 94.1% for the nine-month period in 2002 from 92.7% for the same period in 2001. Hotel operating expenses in the first nine months of 2002 were 31.3% of hotel revenues, compared to 35.0% 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 and other direct departmental expenses. Other revenues were $2.8 million for the nine months ended September 30, 2002, an increase of 7.3% from $2.6 million in the same period in 2001, due primarily to 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 34.4% for the nine months ended September 30, 2002, as compared to 38.3% for the same period in 2001. Selling, general and administrative expenses increased 10.9% to $22.5 million in the first nine months of 2002, compared to $20.3 million in the first nine 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 26.7% in the 2002 nine-month period from 25.4% in the same period in 2001. Interest expense for the first nine months of 2002 totaled $3.1 million, a decrease of 47.9%, compared to $6.0 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 nine-month periods ended September 30, 2002, and 2001, included guarantee fees paid to the Company's three principal shareholders. These guarantee fee expenses totaled approximately $1.0 million and $1.1 million in the first nine 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 during the second quarter of 2002. 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 on Reno area residents as a significant base of its business, as well as 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. -13- 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 nine months ended September 30, 2002, net cash provided by operating activities totaled $14.0 million, an increase of 6.3% compared to the same period last year. Net cash used in investing activities for the same period totaled $4.0 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 $11.9 million as the Company used cash to reduce long-term debt. As a result, at September 30, 2002, the Company had cash of $6.4 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 September 30, 2002, the outstanding balance of the Credit Facility was $60.8 million, down from $67.9 million at September 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 $1.0 million in the first nine 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 September 30, 2002, over the next five years are as follows: <TABLE> <CAPTION> Payments Due by Period ------------------------------------------------ <S> <C> <C> <C> <C> Contractual Cash Less than 1 to 3 4 to 5 Obligations Total 1 year years years - ------------------------- ------------------------------------------------ Long term debt $61,618,510 $ 7,118,510 $54,500,000 $ - Capital lease obligations - - - - Operating leases 430,030 161,261 268,769 - ----------- ----------- ----------- --------- Total contractual cash obligations $62,048,540 $ 7,279,771 $54,768,769 $ - =========== =========== =========== ========= </TABLE> 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. -14- 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 and 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 of 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 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. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. -15- (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART II. OTHER INFORMATION ITEM 5. 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 5,100 square feet in the shopping center and pays rent of approximately $4,400 per month. 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 None. -16- 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) <TABLE> <S> <C> Date: November 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) </TABLE> CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Farahi, President and Chief Executive Officer of Monarch Casino & Resort, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino & Resort, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; -17- 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ John Farahi --------------- John Farahi President and Chief Executive Officer -18- CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ben Farahi, Chief Financial Officer of Monarch Casino & Resort, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino & Resort, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. -19- Date: November 13, 2002 By: /s/ Ben Farahi --------------- Ben Farahi President and Chief Executive Officer EXHIBIT INDEX <TABLE> <S> <C> <C> Exhibit No. Description Page No. - ----------- ----------- -------- 99.01 Certification of Financial Condition and Results of Operations 21 </TABLE> -20- EXHIBIT 99.01 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Monarch Casino & Resort, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Farahi, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, certify that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. (2) 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 November 2002. /s/ John Farahi - --------------- John Farahi Chief Executive Officer This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -21- CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Monarch Casino & Resort, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ben Farahi, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, certify that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. (2) 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 November 2002. /s/ Ben Farahi - --------------- Ben Farahi CHIEF FINANCIAL OFFICER This certification is made solely for the purposes of 18 U.S.C. section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -22-