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 March 31, 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 May 14, 2002, there were 9,436,275 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 INCOME <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2002 2001 ------------ ------------ (Unaudited) (Unaudited) <S> <C> <C> Revenues Casino...................................... $ 16,579,314 $ 14,993,171 Food and beverage........................... 8,003,566 7,510,012 Hotel....................................... 4,378,916 4,090,180 Other....................................... 830,603 783,296 ------------ ------------ Gross revenues........................... 29,792,399 27,376,659 Less promotional allowances................. (3,996,198) (3,633,978) ------------ ------------ Net revenues............................. 25,796,201 23,742,681 ------------ ------------ Operating expenses Casino...................................... 6,537,794 6,262,100 Food and beverage........................... 4,249,507 4,189,108 Hotel....................................... 1,517,613 1,618,342 Other....................................... 321,832 293,688 Selling, general, and administrative........ 7,116,155 6,582,816 Depreciation and amortization............... 2,546,902 2,472,140 ------------ ------------ Total operating expenses................. 22,289,803 21,418,194 ------------ ------------ Income from operations................... 3,506,398 2,324,487 Other expense Interest expense............................ 1,117,990 1,865,697 ------------ ------------ Income before income taxes............... 2,388,408 458,790 Provision for income taxes.................... 803,324 156,479 ------------ ------------ Net income............................... $ 1,585,084 $ 302,311 ============ ============ Net income per share of common stock Basic..................................... $ 0.17 $ 0.03 Diluted................................... $ 0.17 $ 0.03 Weighted average number of common shares and potential common shares outstanding Basic................................... 9,436,275 9,436,275 Diluted................................. 9,502,697 9,473,880 </TABLE> 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 <TABLE> <CAPTION> March 31, December 31, 2002 2001 ------------- ------------- (Unaudited) <S> <C> <C> ASSETS Current assets Cash............................................ $ 7,909,182 $ 8,385,743 Receivables, net................................ 2,488,081 2,863,939 Federal income tax refund receivable............ - 770,019 Related party receivables....................... 22,414 4,759 Inventories..................................... 903,423 976,141 Prepaid expenses................................ 1,922,488 1,635,125 Deferred income taxes........................... 720,184 1,146,058 ------------- ------------- Total current assets......................... 13,965,772 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........................... 4,770,772 4,763,904 Furniture and equipment......................... 54,418,885 54,101,471 ------------- ------------- 151,658,401 151,334,119 Less accumulated depreciation and amortization.. (49,692,549) (47,164,026) ------------- ------------- 101,965,852 104,170,093 Construction in progress........................ 2,350,880 625,048 ------------- ------------- Net property and equipment................... 104,316,732 104,795,141 ------------- ------------- Other assets, net................................. 440,870 486,592 ------------- ------------- Total assets................................. $ 118,723,374 $ 121,063,517 ============= ============= </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> March 31, December 31, 2002 2001 ------------- ------------- (Unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt............ $ 8,722,362 $ 8,106,296 Accounts payable................................ 5,127,673 6,449,087 Accounts payable construction................... 408,210 147,481 Accrued expenses................................ 5,003,391 5,702,850 Federal income taxes payable.................... 355,535 - ------------- ------------- Total current liabilities.................... 19,617,171 20,405,714 Long-term debt, less current maturities........... 61,247,970 64,236,548 Deferred income taxes............................. 4,842,723 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; 9,436,275 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............................... 16,008,234 14,423,150 ------------- ------------- Total stockholders' equity................... 33,015,510 31,430,426 ------------- ------------- Total liabilities and stockholders' equity... $ 118,723,374 $ 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 STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2002 2001 ------------ ------------ (Unaudited) (Unaudited) <S> <C> <C> Cash flows from operating activities: Net income.................................. $ 1,585,084 $ 302,311 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 2,591,759 2,516,997 Loss on disposal of assets................ 1,864 - Deferred income taxes..................... 277,768 156,469 Decrease in receivables, net.............. 1,128,222 743,069 Decrease in inventories................... 72,718 68,631 Increase in prepaid expenses.............. (287,363) (316,445) Decrease in other assets.................. - 5,435 Decrease in accounts payable.............. (1,321,414) (2,118,340) (Decrease) increase in accrued expenses and federal income taxes payable........ (343,924) 1,774,237 ------------ ------------ Net cash provided by operating activities.................... 3,704,714 3,132,364 ------------ ------------ Cash flows from investing activities: Proceeds from sale of assets................ 2,500 - Acquisition of property and equipment....... (1,821,028) (288,292) Increase (decrease) in accounts payable construction.............................. 260,729 (12,872) ------------ ------------ Net cash used in investing activities.... (1,557,799) (301,164) ------------ ------------ Cash flows from financing activities: Principal payments on long-term debt........ (2,623,476) (1,765,789) ------------ ------------ Net cash used in financing activities.................... (2,623,476) (1,765,789) ------------ ------------ Net increase (decrease) in cash.......... (476,561) 1,065,411 Cash at beginning of period................... 8,385,743 6,783,998 ------------ ------------ Cash at end of period......................... $ 7,909,182 $ 7,849,409 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest...................... $ 1,132,987 $ 1,162,697 Supplemental schedule of non-cash investing and financing activities: The Company financed the purchase of property and equipment in the following amounts........................... $ 250,964 $ 59,492 </TABLE> 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"), owns and 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. Reclassifications Certain amounts in the three months ended March 31, 2001 condensed consolidated financial statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect on the Company's previously reported net income. 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. Stockholder Guarantee Fees All of the Company's bank debt is personally guaranteed by the Company's three largest stockholders. 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. During the three months ended March 31, 2002, and 2001, the Company recorded an interest expense in the amount of approximately $350 thousand and $390 thousand in guarantee fees, respectively. -6- NOTE 2. INTERIM FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements for the three month periods ended March 31, 2002 and March 31, 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 month period ended March 31, 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 March 31, ----------------------------------- 2002 2001 ---------------- ---------------- Per Share Per Share Shares Amount Shares Amount ------ --------- ------ --------- <S> <C> <C> <C> <C> Net Income Basic..................... 9,436 $ 0.17 9,436 $ 0.03 Effect of dilutive stock options............ 67 - 38 - ------ ------- ------ ------- Diluted................... 9,503 $ 0.17 9,474 $ 0.03 ====== ======= ====== ======= </TABLE> 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 March 31, ----------------------------------- 2002 2001 ---------------- ---------------- <S> <C> <C> Options to purchase shares of common stock (in thousands)... - 14 Exercise prices................ - $5.25-$5.94 Expiration dates............... - 9/03-2/10 </TABLE> -7- 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 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 condensed consolidated financial statements. RESULTS OF OPERATIONS Comparison of Operating Results for the Three Month Periods Ended March 31, 2002 and 2001 For the three month period ended March 31, 2002, the Company earned net income of $1.6 million, or $0.17 per share, on net revenues of $25.8 million, an increase from net income of $302 thousand, or $.03 per share, on net revenues of $23.7 million for the three months ended March 31, 2001. Income from operations for the three months ended March 31, 2002 totaled $3.5 million, compared to $2.3 million for the same period in 2001. Both net revenues and net income for the first quarter of 2002 represent new first quarter records for the Company. Net revenues increased 8.6%, and net income increased 424.3% when compared to last year's first quarter. In the Reno area market, the January through March period encompassing the Company's first quarter has traditionally been marked by weather-related seasonality, with -8- winter storms producing moderate to severe travel delays and difficulties for visitors to the region. Due to the relatively mild winter, management believes that the impact of the weather this year was, once again, relatively minor. Casino revenues totaled $16.6 million in the first quarter of 2002, a 10.6% increase from the $15.0 million in the first quarter of 2001, reflecting increases in slot, table game and poker win. Slot revenues were up 7.2% in the first quarter of 2002 compared to the first quarter of 2001 due to an increase in the volume of slot machine play. Table game and poker room revenue in the first quarter of 2002 increased 26.1% from the first quarter of 2001 due to an increase in table game and poker room drop and a higher hold percentage. Keno win decreased 24.9% in the first quarter 2002 compared to the first quarter 2001. Although keno write increased approximately 3.1%, the increase was offset by a lower win percentage in the first quarter of 2002 compared to the first quarter 2001. Casino operating expenses amounted to 39.4% of casino revenues in the first quarter of 2002, compared to 41.8% in the first quarter of 2001, with the difference due primarily to more efficient operations. Food and beverage revenues totaled $8.0 million in the first quarter of 2002, a 6.6% increase from the $7.5 million in the first quarter of 2001, due primarily to the popularity of Atlantis' restaurants, buffet, convention facilities and an increase in hotel occupancy. Food and beverage operating expenses amounted to 53.1% of food and beverage revenues during the first quarter of 2002, compared to 55.8% in the first quarter of 2001, which was primarily due to more efficient operations achieved through reduced average cost of sales and reduced variable operating expenses. Hotel revenues were $4.4 million for the first quarter of 2002, an increase of 7.1% from the $4.1 million in hotel revenues in the 2001 first quarter. This increase was the result of increases in both hotel occupancy and the average daily room rate (ADR). First quarter 2002 revenues also included a $3 per occupied room energy surcharge that was not assessed during the first quarter of 2001. During the first quarter of 2002, the Atlantis experienced a 91.0% occupancy rate, up from an 89.2% occupancy rate for the same period in 2001. The Atlantis' ADR was $48.71 in the first quarter of 2002 compared to $47.95 in the first quarter of 2001. Hotel operating expenses as a percent of hotel revenues decreased to 34.7% in the 2002 first quarter, compared to 39.6% in the 2001 first quarter, primarily due to increased efficiencies. Other revenues increased 6.0% to $831 thousand in the 2002 first quarter compared to $783 thousand in the same period last year. The increase reflects increased retail sales in both the gift and sundries shops and the entertainment fun center. Other expenses in the 2002 first quarter amounted to 38.7% of other revenues, compared to 37.5% in the 2001 first quarter, reflecting a slight increase as a result of higher costs of sales and equipment repair costs. Selling, general and administrative expenses amounted to 27.6% of net revenues in the first quarter of 2002, relatively unchanged compared to 27.7% in the first quarter of 2001. -9- Interest expense for the 2002 first quarter totaled $1.1 million, a decrease of 40.1%, from $1.9 million in the 2001 first quarter. The decrease reflects the Company's reduction in debt outstanding and lower applicable interest rates. Interest expense for both the quarters ending March 31, 2002, and 2001, included guarantee fees paid to the three principal stockholders of the Company. Starting January 2001, the Company began compensating the three principal stockholders of the Company for their personal guarantees of the Company's outstanding bank debt at the rate of 2% per annum of the quarterly average outstanding bank debt. These guarantee expenses totaled approximately $350 thousand and $390 thousand in the first quarters of 2002 and 2001, respectively. OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS The constitutional amendment approved by California voters in 1999 allowing the expansion of Indian casinos in California will have an impact on casino revenues in Nevada in general, and many analysts have predicted the impact will be more significant on the Reno-Lake Tahoe market. The extent of this impact is difficult to predict, but the Company believes that the impact on the Company will be mitigated to an extent due to the Atlantis' emphasis on Reno area residents as a significant base of its business. However, if other Reno area casinos suffer business losses due to increased pressure from California Indian casinos, they may intensify their marketing efforts to Reno area residents as well. The Company also believes that unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis' key non-Reno marketing areas, such as San Francisco or Sacramento, could have a material adverse effect on its business. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 2002, net cash provided by operating activities totaled $3.7 million, an increase of 18.3% compared to the same period last year. Net cash used in investing activities totaled $1.6 million and were used primarily in the acquisition of property and equipment at the Atlantis in the first quarter of 2002. Net cash used in financing activities totaled $2.6 million for the first quarter of 2002, compared to $1.8 million for the same period last year, as the Company used funds to reduce long-term debt. As a result, at March 31, 2002, the Company had a cash balance of $7.9 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 March 31, 2002, the total balance outstanding on the Credit Facility was $66.3 million. 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 $350 thousand in the first quarter 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. The Company believes that its existing cash balances, cash flow from operations, and availability of equipment financing, if necessary, will provide the Company with sufficient resources to fund its operations, meet its existing debt obligations, and fulfill its capital expenditure requirements; -10- 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. Contractual cash obligations for the Company as of March 31, 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 $69,822,101 $ 8,680,919 $61,141,182 $ - Capital Lease Obligations 169,638 52,179 104,358 13,101 Operating Leases 524,098 161,261 322,522 40,315 ----------- ----------- ----------- --------- Total Contractual Cash $70,515,837 $ 8,894,359 $61,568,062 $ 53,416 Obligations </TABLE> 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. 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 3,400 square feet in the shopping center and pays rent of approximately $3,400 per month. -11- 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: May 14, 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> -12-