MCRI

Business Context and Reporting Period

Company: Monarch Casino & Resort, Inc.
Reporting Period: Quarterly Report (Form 10-Q) for the period ended September 30, 1999.
Operations: The Company operates the Atlantis Casino Resort in Reno, Nevada. The reporting period covers the completion and initial operation of a major expansion project (the "Atlantis Expansion"), which includes a new 27-story hotel tower and a skywalk connecting to an adjacent site.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($5,090,336) plus Long-term debt less current maturities ($80,913,545).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 43.6% for the three months ended September 30, 1999, compared to the same period in 1998 ($23.6M vs. $16.4M). For the nine-month period, net revenues increased 20.1% ($57.1M vs. $47.5M).
• Profitability Decline: Despite revenue growth, Net Income decreased significantly. For the three months ended September 30, 1999, Net Income fell 48.8% to $0.75M from $1.46M in 1998. For the nine-month period, Net Income dropped 65.8% to $1.35M from $3.97M in 1998.
• Expense Increases: Operating expenses rose due to the expansion. Interest expense surged 216% for the quarter ($1.74M vs. $0.55M) and 82% for the nine-month period ($3.19M vs. $1.75M) due to increased debt financing for the Atlantis Expansion.
• Segment Performance:
  • Casino: Revenues up 28.9% (quarter) and 15.5% (nine months).
  • Food & Beverage: Revenues up 65.6% (quarter) and 32.0% (nine months).
  • Hotel: Revenues up 65.3% (quarter) and 27.4% (nine months), driven by a 33,614 room night capacity increase.

Guidance, Outlook, Risks, and Contingencies

• Expansion Impact: Management attributes the decline in net income to construction disruption and start-up expenses related to the Atlantis Expansion. The project is substantially complete, with new rooms and casino space now operational.
• Liquidity and Debt: The Company has fully drawn down its $80 million Credit Facility and a secondary $4.5 million facility to fund the expansion. Total outstanding debt is approximately $82 million. Management believes existing cash and operating cash flow are sufficient for operations but warns of potential liquidity pressure if cash flow declines unexpectedly.
• Legal Contingencies: Several vendors have filed liens against the Atlantis property totaling $1,243,630 related to the Skywalk construction. The Company disputes many of these claims as duplications or for services already paid and intends to defend against them.
• Competitive Risks: Proposed Indian gaming facilities in California (e.g., near Sacramento) could adversely impact the Reno gaming market, though the impact is currently unassessable.
• Year 2000 Compliance: The Company believes critical systems are compliant or will be by year-end 1999. Costs are not expected to be material, but failure to resolve issues could impact operations.

Investor Verification Checklist

• Verify the resolution status of the $1.24 million in vendor liens filed against the Atlantis property.
• Confirm the occupancy rates and revenue per available room (RevPAR) for the new hotel tower in the fourth quarter to assess if start-up costs are stabilizing.
• Monitor the Company's ability to service its $82 million debt load given the fully drawn credit facilities and reduced net income margins.
• Assess the potential impact of new California Indian gaming facilities on the Company's future market share in the Reno area.
• Review the change in certifying accountants from Grant Thornton, LLP to Arthur Andersen & Co. effective October 28, 1999.