MONARCH CASINO & RESORT INC - Annual Report: 2006 (Form 10-K)
United
States
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-K
(MARK
ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
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
[Missing
Graphic Reference]
MONARCH
CASINO & RESORT, INC.
(Exact
name of registrant as specified in its charter)
|
Nevada
|
88-0300760
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
3800
S. Virginia Street
|
|
|
Reno,
Nevada
|
89502
|
|
(Address
of Principal Executive Offices)
|
(ZIP
Code)
|
|
1175
W. Moana Lane, Suite 200, Reno, Nevada 89509
|
|
|
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
|
|
Registrant's
telephone number, including area code:
(775) 335-4600
___________________
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b)
OF THE
ACT:
Name
of
each exchange
Title
of each class on
which registered
None
None
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g)
OF THE
ACT:
COMMON
STOCK, $0.01 PAR VALUE
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ] Accelerated Filer [X] Non-accelerated Filer [
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES [ ] NO [X]
The
aggregate market value of voting and non-voting common equity held by
nonaffiliates as of June 30, 2006, based on the closing price as reported on
The
Nasdaq Stock Market (SM) of $28.12 per share, was approximately
$389,199,753.
As
of
March 5,
2007,
Registrant had 19,072,634 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for Registrant's 2007 Annual Meeting of Stockholders,
which Proxy Statement shall be filed with the Commission not later than 120
days
after the end of the fiscal year covered by this report, are incorporated by
reference into Part III.
STATEMENTS
IN THIS ANNUAL REPORT ON FORM 10-K WHICH EXPRESS THE "BELIEF", "ANTICIPATION",
"INTENTION", "EXPECTATION", OR "SCHEDULES" AS WELL AS OTHER STATEMENTS WHICH
ARE
NOT HISTORICAL FACT, AND STATEMENTS AS TO BUSINESS OPPORTUNITIES, MARKET
CONDITIONS, COST ESTIMATIONS AND OPERATING PERFORMANCE INSOFAR AS THEY MAY
APPLY
PROSPECTIVELY, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF
1934 AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED.
PART
I
ITEM
1. BUSINESS
Monarch
Casino & Resort, Inc. (the "Company" or "we"), through its wholly-owned
subsidiary, Golden Road Motor Inn, Inc. ("Golden Road"), owns and operates
the
tropically-themed Atlantis Casino Resort Spa, a hotel/casino facility in Reno,
Nevada (the "Atlantis"). Unless otherwise indicated, "Monarch" or the "Company"
refers to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
Monarch was incorporated in 1993 under Nevada law for the purpose of acquiring
all of the stock of Golden Road. The principal asset of Monarch is the stock
of
Golden Road, which holds all of the assets of the Atlantis. Our principal
executive offices are located at 3800 S. Virginia Street; Reno, Nevada 89502;
telephone (775)
335-4600.
AVAILABLE
INFORMATION
Our
website address is www.monarchcasino.com. We make available free of charge
on or
through our internet website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934, as amended, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission.
THE
ATLANTIS CASINO RESORT SPA
Through
our Golden Road subsidiary, we own and operate the tropically-themed
Atlantis
Casino
Resort Spa, which is located approximately three miles south of downtown in
the
generally more affluent and rapidly growing south area of Reno, Nevada. The
Atlantis features approximately
51,000 square
feet of casino space interspersed with waterfalls, giant artificial palm trees,
thatched-roof huts, and other tropical decor; a hotel and a motor lodge
with
975
guest
rooms;
nine
food
outlets; an enclosed year-round pool with waterfall; an outdoor pool; a health
spa; two retail outlets offering clothing and traditional gift shop
merchandise;
a full
service salon for men and women; an 8,000 square-foot family entertainment
center; and approximately 25,000 square
feet of banquet, convention and meeting room space.
The
Reno-Sparks Convention Center is located across the street from the Atlantis,
the only hotel-casino within easy walking distance. The Reno-Sparks Convention
Center offers approximately 570,000 square feet of exhibition, meeting room,
ballroom, and lobby space.
ATLANTIS
CASINO
The
Atlantis Casino offers approximately 1,450 slot and video poker machines;
approximately 38 table games, including blackjack, craps, roulette and others;
a
sports book (which is operated by an unaffiliated party pursuant to a lease
arrangement); Keno; and a poker room.
The
following table summarizes the components of our casino revenues for the periods
shown:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Slot
& video poker
|
81.9%
|
81.7%
|
79.7%
|
|
Table
games
|
15.1%
|
15.5%
|
17.5%
|
|
Keno,
poker room and sports book rent
|
3.0%
|
2.8%
|
2.8%
|
The
Atlantis offers what we believe are higher than average payout rates on slot
machines relative to other northern Nevada casinos and has adopted liberal
rules for its blackjack games, including the use of single decks of cards at
some tables. We seek to attract high-end players
through high quality amenities and services and by extension of gaming credit
after a careful credit history evaluation.
HOTEL
AND MOTOR LODGE
The
Atlantis includes three contiguous high-rise hotel towers with 826 rooms and
suites, and a low-rise motor lodge with another 149 rooms, for a total of 975
guest rooms. The first of the three hotel towers, which was completed in April
1991, contains 160 rooms and suites in 13 stories. The 19-story second hotel
tower was completed in September 1994 and underwent a $3.8 million complete
interior renovation
that was completed in
March
2004.
As part
of the renovation, certain suites were expanded and, as a result, five regular
hotel rooms were eliminated. The second hotel tower now contains 278
rooms
and
suites. The third tower was completed
in June 1999 and contains 388 rooms and suites in 28 stories. The
rooms on
the top seven floors in this newest tower are nearly 20% larger than the
standard guest rooms and offer key card elevator access, upscale accommodations
and a private concierge service.
The
Atlantis hotel rooms feature upbeat, colorful interior decorations and
furnishings consistent with the Atlantis' tropical theme, as well as nine-foot
ceilings (most standard hotel rooms have eight-foot ceilings), which create
an
open and spacious feel. The newest hotel tower features a four-story waterfall
with an adjacent year-round swimming pool in a climate controlled, five-story
glass enclosure, which shares an outdoor third floor pool deck with a seasonal
outdoor swimming pool and year round whirlpool. A full service salon (the "Salon
at Atlantis") overlooks the third floor sundeck and outdoor seasonal swimming
pool and offers salon-grade products and treatments for hair, nails, skincare
and body services for both men and women. A health spa is located
adjacent
to the swimming areas. The hotel also features glass elevators rising the full
19 and 28 stories, respectively, of the two taller hotel towers, providing
panoramic views of the Reno area and the Sierra Nevada mountain range separating
Nevada from California.
The
149-room motor lodge is a two-story structure located adjacent to
the
hotel.
The motor lodge rooms, which are also decorated and furnished in a manner
consistent with the Atlantis' tropical theme, are smaller than the tower hotel
rooms and have standard eight-foot ceilings. We believe the motor lodge rooms
appeal to value conscious travelers who still want to enjoy the experience
and
amenities of a first-class hotel-casino resort.
The
average occupancy rate and average daily room rate at the Atlantis for the
following periods were:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Occupancy
rate
|
93.30%
|
93.00%
|
93.60%
|
|
Average
daily room rate
|
$69.87
|
$63.24
|
$64.16
|
We
continually monitor and adjust hotel room rates based upon demand and other
competitive factors. Our Average Daily Room Rate ("ADR") has also been impacted
by rooms sold at discounted rates to select wholesale operators for tour and
travel packages. The decreases in ADR and occupancy in 2005 compared to 2004
were due to fewer conventions at the adjacent Reno-Sparks Convention Center
and
the fact that Reno did not host a major bowling tournament in 2005. Conventions
typically draw higher room rates.
RESTAURANTS
AND DINING
The
Atlantis has
seven
restaurants, one snack bar and one gourmet coffee bar, as described
below.
| · |
The
600-seat
Toucan Charlie's Buffet & Grill, which offers a wide variety of
standard hot food selections, salads and seafood,
specialty substations featuring made-to-order items such as Mongolian
barbecue, fresh Southwest and Asian specialties,
meats roasted in wood-fired rotisserie ovens, two salad stations,
and a
wide variety of freshly made
desserts.
|
| · |
The
135-seat, aquatic-themed Atlantis Seafood Steakhouse gourmet
restaurant.
|
| · |
The
200-seat, upscale MonteVigna Italian Ristorante, featuring a centrally
located wine cellar.
|
| · |
The
Oyster Bar restaurant in the Sky Terrace offering fresh seafood,
soups and
bisques made to order.
|
| · |
The
Sushi Bar, also in the Sky Terrace, offering a variety of fresh raw
and
cooked sushi specialties, including all-you-can-eat lunch and dinner
selections. Combined, the Oyster Bar and Sushi Bar can accommodate
up to
139 guests.
|
| · |
The
178-seat 24-hour Purple Parrot coffee
shop.
|
| · |
The
122-seat
Cafe΄
Alfresco restaurant serving pizzas prepared in a wood-fired, brick
oven
and a variety of gelato deserts.
|
| · |
A
gourmet coffee bar, offering specialty coffee drinks, pastries and
desserts made fresh daily in the Atlantis
bakery.
|
| · |
A
snack bar and soda fountain serving ice cream and arcade-style
refreshments.
|
THE
SKY TERRACE
The
Sky
Terrace is a unique structure with a diamond-shaped, blue glass body suspended
approximately 55 feet above street level and spanning 160 feet across South
Virginia Street. The Sky Terrace connects the Atlantis with additional parking
on a 16-acre site owned by us across South Virginia Street from the Atlantis.
The structure rests at each end on two 100-foot tall Grecian columns with no
intermediate support pillars. The tropically-themed interior of the Sky Terrace
contains the Oyster Bar, a video poker bar, banks of slot machines,
a
lounge area with oversized leather sofas and chairs and the Sushi Bar.
Operations
at the Atlantis are conducted 24 hours a day, every day of the year. The
Atlantis' business is moderately seasonal in nature, with higher revenues during
the summer months and lower revenues during the winter months.
ATLANTIS
IMPROVEMENTS
We
have
continuously invested in upgrading the Atlantis. Our capital expenditures at
the
Atlantis were $5.8 million in 2006, $6.1 million in 2005 and $9.7 million
in 2004. A summary of capital expenditures for the last three years is as
follows (in millions):
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Cash
acquisitions of property and equipment
|
$5.8
|
$6.1
|
$9.1
|
|
Financed
purchases of property and equipment
|
-
|
-
|
0.6
|
|
Total
capital expenditures
|
$5.8
|
$6.1
|
$9.7
|
During
2006, capital expenditures primarily consisted of acquisition
of gaming and computer equipment, the installation of a casino high-definition
video display system, renovation of our Java Coast Gourmet Coffee and pastry
bar, initial design and planning expenditures associated with our Atlantis
expansion and ongoing property public area renovations and upgrades. During
2005, capital expenditures primarily consisted of the replacement
of and upgrade to our ventilation and cooling system, acquisition of gaming
and
computer systems equipment, and continued renovations to the facility. During
2004, capital expenditures consisted primarily of renovations to our second
tower hotel rooms and suites, the installation of a new slot player tracking
system, $1.35 million in leased driveway improvements and continued acquisitions
of and upgrades to gaming equipment.
In
2004,
we constructed a driveway that is being shared between the Atlantis and the
adjacent Sierra Marketplace Shopping Center (the "Shopping Center") that is
owned and controlled by affiliates of our chief executive officer and our
president. A new traffic signal was erected at mid-block on South Virginia
Street, serving the new driveway. As part of this project, we are leasing a
37,368 square-foot corner section of the Shopping Center for a minimum lease
term of 15 years at an annual rent of $300,000, subject to increase every 60
months based on the consumer price index. We also use part of the common area
of
the Shopping Center and pay our proportional share of the common area expense
of
the Shopping Center. We have the option to renew the lease for 3 five-year
terms, and at the end of the extension period, we have the option to purchase
the leased section of the Shopping Center at a price to be determined based
on
an MAI Appraisal. We use the leased space for pedestrian and vehicle access
to
the Atlantis, and we have use of a portion of the parking spaces at the Shopping
Center. The total cost of the project was $2.0 million; we were responsible
for
two thirds of the total cost, or $1.35 million. The project was completed,
the
driveway was put into use and we began paying rent on September 30, 2004 (see
Part III - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated
herein by reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007). The cost of the new driveway is being
depreciated over the initial 15-year lease term; some components of the new
driveway are being depreciated over a shorter period of time (see “Property and
Equipment” in Notes to Consolidated Financial Statements - Note 1. Summary of
Significant Accounting Policies”). We remain committed to implementing
renovations and upgrades and will consider all capital expenditure projects
proposed by our executive officers and key employees.
CURRENT
EXPANSION
We
expect
to begin construction in the second quarter of 2007 on the next expansion phase
of the Atlantis. New space to be added to the first floor casino level, the
second and third floors and the basement level will total approximately 116,000
square feet. Once complete, the existing casino floor will be expanded by over
10,000 square feet, or approximately 20%. The first floor plans include a
redesigned, updated and expanded race and sports book of approximately 4,000
square feet and an enlarged poker room. The plans also include a New York-style
deli restaurant. The second floor expansion will create additional ballroom
and
convention space of approximately 27,000 square feet, doubling our existing
facilities. The spa and fitness center will be remodeled and expanded to create
an ultra-modern spa and fitness center facility. We also plan to add a
pedestrian skywalk over Peckham Street that will connect the Reno-Sparks
Convention Center directly to the Atlantis. Construction is expected to take
approximately twelve months and is expected to be funded entirely out of
existing cash on hand plus cash flow from operations. Excluding the cost of
the
skywalk, the expansion is estimated to cost approximately $50 million. Final
design plans, and the resultant cost estimate, of the skywalk have not been
completed.
ADDITIONAL
EXPANSION POTENTIAL
LAND
CURRENTLY OWNED: Our expansion potential at the current site is twofold. First,
we could further expand our existing hotel and casino, thereby giving us more
hotel rooms, amenities and more room for additional slot machines. Second,
we
could expand by developing the 16-acre parcel that we own across the street
from
the Atlantis. This site is connected to the Atlantis by the Sky Terrace and
is
currently used for parking and special events related to the Atlantis. Our
16-acre parcel meets all current Reno zoning requirements in the event we decide
to build another resort casino or entertainment facility.
EFFORTS
TO ACQUIRE ADDITIONAL LAND: On May 3, 2006, Monarch notified Ben Farahi, in
his
capacity as the manager of Maxum, LLC, the general partner of Biggest Little
Investment L.P. (“BLI”), that the board of directors of Monarch wished to
commence negotiations for purchasing the 18.95 acre shopping center property
(the “Shopping Center”) owned by BLI located adjacent to the Atlantis. On July
26, 2006, Monarch submitted a formal offer, formulated and delivered by a
committee comprised of the Company’s independent directors (the “Committee”), to
purchase the Shopping Center. On October 16, 2006, the Committee received a
letter from counsel to BLI advising the Company that BLI, through its general
partner, Maxum, L.L.C., had “decided that such offer is not in the best interest
of the Partnership’s limited partners and, therefore, will not be entering into
negotiations with Monarch.” The Board of Directors continues to consider
expansion alternatives.
Collectively,
John Farahi, Bob Farahi and Ben Farahi, beneficially own a controlling interest
in BLI through their beneficial ownership interest in Western Real Estate
Investments, LLC.
MARKETING
STRATEGY
Our
revenues and operating income are principally dependent on the level of gaming
activity at the Atlantis casino. Our predominant marketing goal is to utilize
all of the Atlantis facilities to generate additional casino play. Our secondary
goal is to maximize revenues from our hotel, restaurants, cocktail lounges,
convention and meeting rooms and other amenities.
Our
marketing efforts are directed toward three broad consumer groups: Reno area
residents, leisure travelers and conventioneers. We believe the Atlantis'
location outside the downtown area, near the airport and across the street
from
the Reno-Sparks Convention Center makes the facility appealing to all three
groups.
RENO
AREA
RESIDENTS: The Atlantis' proximity to rapidly growing, generally more affluent,
south Reno residential areas provides a significant source of middle to
upper-middle income gaming customers. We market to Reno area residents (referred
to from time to time as "Locals") on the basis of the Atlantis location and
accessibility, convenient surface parking, gaming values, ambiance, friendly,
efficient service, and quality and relative value of food and beverage
offerings, entertainment and promotions.
We
believe local gaming customers prefer slot and video poker machines to table
games, and prefer video poker machines to reel-spinning (or electronically
simulated reel-spinning) slot machines. Accordingly, the Atlantis provides
a
diverse selection of video poker machines. Moreover, we believe that Reno area
residents seek out and frequent casinos with higher payout rates on slot and
video poker machines and more liberal rules on table games relative to other
northern Nevada casinos. We believe the Atlantis offers higher than average
payout rates on slot machines and we have adopted liberal
rules for blackjack games, including the use of single decks of cards at some
tables.
We also
utilize a frequent player club called "Club Paradise" to encourage Locals'
repeat play at our casino. Members of Club Paradise earn points for their casino
play that can be redeemed for complimentary products and services offered by
the
Atlantis.
LEISURE
TRAVELERS: Reno
is a
popular gaming and vacation destination that enjoys direct freeway access to
nearly all major northern California population centers and non-stop air service
from most large cities in the western United States and many mid-west and
southern population centers such as
Chicago, Dallas and
Atlanta.
The
principal segments of Reno's leisure traveler market are independent travelers,
package tour and travel customers and high-end players. We attempt to maximize
our gaming revenues and hotel occupancy through a balanced marketing approach
that addresses each market segment.
Independent
travelers make reservations directly with hotels of their choice or through
independent travel agents. We believe this market segment is largely comprised
of individuals who drive and, to a lesser extent, fly to Reno primarily northern
California and the Pacific Northwest. We strive to attract the middle to
upper-middle income strata of this consumer segment through advertising and
direct marketing in select regions. This segment represents a significant
portion of the Atlantis' customers, especially those visiting on
weekends.
The
package tour and travel segment consists of visitors who utilize travel packages
offered by wholesale operators. We market to this segment through relationships
with select wholesalers, primarily to generate customer visits and supplement
mid-week occupancy.
We
welcome direct on-line reservations on the Atlantis' website www.atlantiscasino.com
and are
also featured on major package tour and travel websites.
We
market
to high-end players selectively through direct sales. We utilize complimentary
rooms, food and beverage, special events and the extension of gaming credit
to
attract high-end players.
CONVENTIONEERS: Convention
business, like package tour and travel, generates mid-week customer visits
and
supplements occupancy during lower-demand periods. Conventioneers also typically
pay higher average room rates than non-conventioneers. We selectively seek
convention and meeting groups that we believe will materially enhance the
Atlantis' occupancy and daily room rates, as well as those we believe will
be
more likely to utilize our gaming products. As the only hotel-casino within
easy
walking distance of the Reno-Sparks Convention Center, the Atlantis is, in
our
view, uniquely positioned to capitalize on this expanding segment.
We
believe the Reno-Sparks Convention Center has created, and we expect will
continue to create, additional customer traffic for the Atlantis from a market
segment that is presently underserved in the Reno area. As described in the
“CURRENT EXPANSION” section above, we
plan to
add a pedestrian skywalk over Peckham Street that will connect the Reno-Sparks
Convention Center directly to the Atlantis.
We
market
to all customer segments, including conventioneers, on the basis of the
location, quality and ambiance of the Atlantis facility, gaming values,
friendly, efficient service, and the quality and relative value of its rooms,
food and beverage offerings, entertainment and promotions.
Our
frequent player club, "Club Paradise," allows our customers to be eligible
to
receive rewards and privileges based on the amount of their play, while allowing
us to track their play through a computerized system. We use this information
to
determine appropriate levels of complimentary awards, and in our direct
marketing efforts. We believe that Club Paradise significantly enhances our
ability to build customer loyalty and generate repeat customer
visits.
COMPETITION
Competition
in the Reno area gaming market is intense. Based on information obtained from
the December 31, 2006 Gaming Revenue Report published by the Nevada State Gaming
Control Board, there are approximately 13 casinos in the Reno area which
generate more than $12.0 million each in annual gaming revenues.
We
believe that the Atlantis' competition for Locals comes primarily from other
large-scale casinos located outside of downtown Reno that offer amenities that
appeal to middle to upper-middle income customers, and secondarily with those
casinos located in downtown Reno that offer similar amenities. We compete for
Locals primarily on the basis of the desirability of our location, the quality
and ambiance of the Atlantis facility, friendly, efficient service, the quality
and relative value of its food and beverage offerings, entertainment offerings,
promotions and gaming values. We believe the Atlantis' proximity to residential
areas in south Reno and its abundant surface parking provide us an advantage
over the casinos located in downtown Reno in attracting Locals.
Station
Casinos, Inc., a casino operator operating primarily in the Las Vegas market
and
catering mainly to Locals (“Station”), has acquired three sites in the Reno area
and has announced plans to build two casinos, one of which will be located
within one mile of our Atlantis Casino Resort Spa. Station is the dominant
Locals casino operator in the Las Vegas market. Should Station proceed with
its
plans, Station will create additional competition for us in the Locals,
conventioneer and tour and travel markets and could have a material adverse
impact on our business. We also believe, however, that Station’s plans could
contribute to the synergies of concentration for casino properties in the Reno
area near the Atlantis which could draw gaming patrons away from downtown Reno
and that properties in this area, including the Atlantis, could
benefit.
We
believe that the Atlantis' primary competition for leisure travelers comes
from
other large-scale casinos, including those located in downtown Reno and those
located away from downtown Reno, that offer amenities that appeal to middle
to
upper-middle income customers. We compete for leisure travelers on the basis
of
the desirability of our location, the quality and ambiance of the Atlantis
facility, friendly, efficient service, the quality and relative value of its
rooms and food and beverage offerings, entertainment offerings, promotions
and
gaming values. We believe that our location away from downtown Reno is appealing
to many customers who prefer to avoid the more congested downtown area; however,
the Atlantis' location is a disadvantage in that it does not afford us the
ability to generate walk-in traffic (except with respect to persons attending
events at the Convention Center), which is a significant source of customers
for
some casinos located in downtown Reno.
We
believe that the Atlantis' primary competition for conventioneers comes from
other large-scale hotel casinos in the Reno area that actively target the
convention market segment, and secondarily from other cities on the U.S. West
Coast with large convention facilities and substantial hotel capacity, including
Las Vegas. We compete for conventioneers based on the desirability of our
location, the quality and ambiance of the Atlantis facility, meeting and banquet
rooms designed to appeal to conventions and groups, friendly, efficient service,
and the quality and relative value of its rooms and food and beverage offerings.
We believe that the Atlantis' proximity to the Reno-Sparks Convention Center
affords us a distinct competitive advantage in attracting
conventioneers.
The
Atlantis also competes for gaming customers with hotel casino operations located
in other parts of Nevada, especially Las Vegas and Lake Tahoe, and with hotel
casinos, Indian casinos, and riverboat casinos located elsewhere throughout
the
United States and the world. We believe that the Atlantis also competes to
a
lesser extent with state-sponsored lotteries, off-track wagering, card parlors,
and other forms of legalized gaming, particularly in northern California and
the
Pacific Northwest.
The
constitutional amendment approved by California voters in 1999 allowing the
expansion of Indian casinos in California has had an adverse impact on casino
revenues in Nevada in general, and many analysts have continued to predict
the
impact will be more significant on the Reno-Lake Tahoe market. The extent of
this continued impact is difficult to predict, but we believe that the impact
on
us will continue to be mitigated to some extent by the revenue generated from
the Reno area residents and our proximity to the Reno-Sparks Convention Center.
However, if other Reno area casinos continue to suffer business losses due
to
increased pressure from California Indian casinos, they may intensify their
marketing efforts to Reno-area residents as well. However, we believe our
numerous amenities, such as a wide array of restaurants, a video arcade, banquet
facilities and surface parking are a key factor in our ability to attract Locals
which competitor facilities will not easily be able to match without major
capital expenditures.
Certain
experienced Nevada gaming operators have agreements to build and manage Indian
casino facilities near San Francisco, one of Reno's key feeder markets. Once
these facilities receive all the required permits and are built, they could
provide an alternative to Reno area casinos, especially during certain winter
periods when auto travel through the Sierra Nevada mountain passes is hampered.
One major facility near Sacramento has been operating since June 2003 and has
been very successful, adversely impacting many hotel casinos in
Reno.
We
also
believe that the legalization of unlimited land-based casino gaming in or near
any major metropolitan area in the Atlantis' feeder markets, such as San
Francisco or Sacramento, could have a material adverse impact on our
business.
In
June
2004, five California Indian tribes signed compacts with the state of California
that allow the tribes to increase the number of slot machines beyond the
previous limit of 2,000-per-tribe limit in exchange for higher fees from each
of
the five tribes. The State of California hopes to execute similar compacts
with
more Indian tribes.
REGULATION
AND LICENSING
The
ownership and operation of casino gaming facilities in Nevada are subject to
the
Nevada Gaming Control Act and the regulations promulgated thereunder, referred
to as the Nevada Act, and various local regulations. Our gaming operations
are
subject to the licensing and regulatory control of the Nevada Gaming Commission,
the Nevada State Gaming Control Board, and the Reno City Council, referred
to
collectively as the Nevada Gaming Authorities.
The
laws,
regulations and supervisory procedures of the Nevada Gaming Authorities are
based upon declarations of public policy that are concerned with, among other
things:
| · |
the
prevention of unsavory or unsuitable persons from having a direct
or
indirect involvement with gaming at any time or in any
capacity;
|
| · |
the
establishment and maintenance of responsible accounting practices
and
procedures;
|
| · |
the
maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal
fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports
with
the Nevada Gaming Authorities;
|
| · |
the
prevention of cheating and fraudulent practices; and
|
| · |
providing
a source of state and local revenues through taxation and licensing
fees.
|
Changes
in such laws, regulations and procedures could have an adverse effect on our
gaming operations.
Golden
Road, our subsidiary which operates the Atlantis, is required to be licensed
by
the Nevada Gaming Authorities. The gaming license requires the periodic payment
of fees and taxes and is not transferable. We are registered by the Nevada
Gaming Commission as a publicly traded , or Registered Corporation. As such,
we
are required periodically to submit detailed financial and operating reports
to
the Nevada Gaming Commission and furnish any other information that the Nevada
Gaming Commission may require. No person may become a stockholder of, or receive
any percentage of profits from, Golden Road without first obtaining licenses
and
approvals from the Nevada Gaming Authorities. Golden Road and Monarch have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming activities
in Nevada.
The
Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, Golden Road or Monarch in order
to determine whether that individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and key employees
of Golden Road must file applications with the Nevada Gaming Authorities and
may
be required to be licensed or found suitable by the Nevada Gaming Authorities.
Our officers, directors and key employees who are actively and directly involved
in gaming activities of Golden Road may be required to be licensed or found
suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may
deny an application for licensing for any cause that they deem reasonable.
A
finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. Applicants for licensing or a finding of suitability must pay
all
costs of the investigation. Changes in licensed positions must be reported
to
the Nevada Gaming Authorities. In addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities also have jurisdiction to disapprove a change in a corporate
position.
If
the
Nevada Gaming Authorities were to find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
Golden Road or us, the companies involved would have to sever all relationships
with that person. In addition, the Nevada Gaming Commission may require that
we
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
We
are
required to submit detailed financial and operating reports to the Nevada Gaming
Commission. Substantially all material loans, leases, sales of securities and
similar financing transactions by us must be reported to, or approved by, the
Nevada Gaming Commission.
If
it
were determined that we violated the Nevada Act, our gaming licenses and
registrations with the Nevada Gaming Commission could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, we and the persons involved could be subject
to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, the Nevada Gaming Commission
could
appoint a supervisor to operate our gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of our gaming properties) could be forfeited
to
the State of Nevada. The limitation, conditioning or suspension of any gaming
license or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect our gaming operations.
Any
beneficial holder of our voting securities, regardless of the number of shares
owned, may be required to file an application, be investigated, and have his
suitability as a beneficial holder of our voting securities determined if the
Nevada Gaming Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada.
The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The
Nevada Gaming Act requires any person who acquires more than 5% of Monarch’s
voting securities to report the acquisition to the Nevada Gaming Commission.
The
Nevada Act requires that beneficial owners of more than 10% of our voting
securities apply to the Nevada Gaming Commission for a finding of suitability
within 30 days after the Chairman of the Nevada Gaming Control Board mails
the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more
than
10%, but not more than 15%, of our voting securities may apply to the Nevada
Gaming Commission for a waiver of such finding of suitability if the
institutional investor holds the voting securities for investment purposes
only.
An institutional investor is not deemed to hold voting securities for investment
purposes unless they were acquired and are held in the ordinary course of
business as an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members of our board
of directors, any change in our corporate charter, bylaws, management, policies
or operations, or any of our gaming affiliates, or any other action that the
Nevada Gaming Commission finds to be inconsistent with holding our voting
securities for investment purposes only. Activities that are not deemed to
be
inconsistent with holding voting securities for investment purposes only
include:
| · |
voting
on all matters voted on by
stockholders;
|
| · |
making
financial and other inquiries of management of the type normally
made by
securities analysts for informational purposes and not to cause a
change
in its management, policies or operations;
and
|
| · |
such
other activities as the Nevada Gaming Commission may determine to
be
consistent with such investment intent.
|
If
the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant
is
required to pay all costs of investigation.
Any
person who fails or refuses to apply for a finding of suitability or a license
within 30 days after being ordered to do so by the Nevada Gaming Commission
or
the Chairman of the Nevada State Gaming Control Board, may be found unsuitable.
The same restrictions apply to a record owner if the record owner, after
request, fails to identify the beneficial owner. Any stockholder found
unsuitable and who holds, directly or indirectly, any beneficial ownership
of
the common stock of a Registered Corporation beyond such period of time as
may
be prescribed by the Nevada Gaming Commission may be guilty of a criminal
offense. We are subject to disciplinary action if, after we receive notice
that
a person is unsuitable to be a stockholder or to have any other relationship
with us, we:
| · |
pay
that person any dividend or interest upon voting
securities,
|
| · |
allow
that person to exercise, directly or indirectly, any voting right
conferred through securities held by that
person,
|
| · |
pay
remuneration in any form to that person for services rendered or
otherwise, or
|
| · |
fail
to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities for cash at fair market
value.
|
The
Nevada Gaming Commission may, in its discretion, require the holder of any
debt
security of a Registered Corporation to file applications, be investigated
and
be found suitable to own the debt security of a Registered Corporation. If
the
Nevada Gaming Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals if, without the prior approval
of the Nevada Gaming Commission, it:
| · |
pays
to the unsuitable person any dividend, interest, or any
distribution;
|
| · |
recognizes
any voting right by such unsuitable person in connection with such
securities;
|
| · |
pays
the unsuitable person remuneration in any form;
or
|
| · |
makes
any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar
transaction.
|
We
are
required to maintain a current stock ledger in Nevada, and the Nevada Gaming
Authorities may examine the ledger at any time. If any securities are held
in
trust by an agent or a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Nevada Gaming Authorities. A failure
to make such disclosure may be grounds for finding the record holder unsuitable.
We are also required to render maximum assistance in determining the identity
of
the beneficial owner. The Nevada Gaming Commission has the power to require
our
stock certificates to bear a legend indicating that the securities are subject
to the Nevada Act.
We
may
not make a public offering of our securities without the prior approval of
the
Nevada Gaming Commission if the securities or proceeds there from are intended
to be used to construct, acquire or finance gaming facilities in Nevada, or
to
retire or extend obligations incurred for purposes of constructing, acquiring
or
financing gaming facilities. Any approval, if granted, does not constitute
a
finding, recommendation or approval by the Nevada Gaming Commission or the
Nevada Gaming Control Board as to the accuracy or adequacy of the prospectus
or
the investment merits of the securities offered. Any representation to the
contrary is unlawful.
Changes
in our control through merger, consolidation, stock or asset acquisitions,
management or consulting agreements, or any act or conduct by a person whereby
that person obtains control (including foreclosure on the pledged shares),
may
not occur without the prior approval of the Nevada Gaming Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
State Gaming Control Board and Nevada Gaming Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Gaming Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated
and
licensed as part of the approval process relating to the
transaction.
The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Gaming Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to:
| · |
assure
the financial stability of corporate gaming operators and their
affiliates;
|
| · |
preserve
the beneficial aspects of conducting business in the corporate form;
and
|
| · |
promote
a neutral environment for the orderly governance of corporate affairs.
|
We
are,
in certain circumstances, required to receive approval from the Nevada Gaming
Commission before we can make exceptional repurchases of voting securities
above
their current market price and before we can consummate a corporate acquisition
opposed by management. The Nevada Act also requires prior approval of a plan
of
recapitalization proposed by our board of directors in response to a tender
offer made directly to a Registered Corporation's stockholders for the purposes
of acquiring control of the Registered Corporation.
Licensee
fees and taxes, computed in various ways depending on the type of gaming or
activity involved, are payable to the State of Nevada and to the counties and
cities in which the Nevada licensee's respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable monthly, quarterly or annually and are based upon either:
| · |
a
percentage of the gross revenues
received;
|
| · |
the
number of gaming devices operated;
or
|
| · |
the
number of table games operated.
|
A
live
entertainment tax is also paid where entertainment is furnished in connection
with the selling of food or refreshments. Nevada licensees that hold a license
as an operator of a slot route, a manufacturer or a distributor also pay certain
fees and taxes to the State of Nevada.
Any
person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons, referred to as
Licensees, and who is or proposes to become involved in a gaming venture outside
of Nevada is required to deposit with the Nevada State Gaming Control Board,
and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada State Gaming Control Board of their
participation in foreign gaming. The revolving fund is subject to increase
or
decrease in the discretion of the Nevada Gaming Commission. Thereafter,
Licensees are required to comply with certain reporting requirements imposed
by
the Nevada Act. Licensees are also subject to disciplinary action by the Nevada
Gaming Commission if they knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation, fail to conduct the foreign gaming
operation in accordance with the standards of honesty and integrity required
of
Nevada gaming operations, engage in activities that are harmful to the State
of
Nevada or its ability to collect gaming taxes and fees, or employ a person
in
the foreign operation who has been denied a license or finding of suitability
in
Nevada on the ground of personal unsuitability.
EMPLOYEES
As
of
February 19, 2007, we had approximately 1,900 employees. None of our employees
are covered by collective bargaining agreements. We believe that our
relationship with our employees is good.
ITEM
1A. RISK FACTORS
Our
business prospects are subject to various risks and uncertainties that impact
our business. You should carefully consider the following discussion of risks,
and the other information provided in this annual report on Form 10-K. The
risks
described below are not the only ones facing us. Additional risks that are
presently unknown to us or that we currently deem immaterial may also impact
our
business.
THE
GAMING INDUSTRY IS HIGHLY COMPETITIVE AND INCREASED COMPETITION COULD HAVE
A
MATERIAL ADVERSE EFFECT ON OUR FUTURE OPERATIONS
The
gaming industry is highly competitive. As competitive pressures from California
Native American casinos increase, other Reno area casinos may intensify their
targeting of the Reno area resident market, which is one of our key markets.
Increased competitive pressures in the local market could adversely impact
our
ability to continue to attract local residents to the Atlantis or require us
to
use more expensive and therefore less profitable promotions to compete more
efficiently.
Several
Native American casinos have opened in Northern California since passage of
the
1999 constitutional amendment. Certain experienced Nevada gaming operators
manage Indian casino facilities near Sacramento, one of Reno's key feeder
markets. One major facility near Sacramento has been operating since June 2003
and has been very successful, adversely impacting many hotel casinos in Reno.
Central and Northern California gaming facilities could provide an alternative
to Reno area casinos, especially during certain winter periods when auto travel
through the Sierra Nevada mountain passes is hampered. This loss of California
drive-in customers could adversely affect our operations.
We
also
believe that the legalization of 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 impact on our
business.
In
June
2004, five California Indian tribes signed compacts with the state that allow
the tribes to increase the number of slot machines beyond the previous
2,000-per-tribe limit in exchange for higher fees from each of the five tribes.
The State of California has expressed interest in executing similar compacts
with more Indian tribes. The resulting increase in the number of slot machines
permitted in California Native American Casinos could further adversely impact
Reno area casino operations and our operations.
Other
states are also considering legislation that would enable the development and
operation of casinos or casino-like operations.
In
addition, Native American gaming facilities in California and other
jurisdictions in some instances operate under regulatory requirements, less
stringent than those imposed on Nevada licensed casinos, which could provide
them a competitive advantage in our markets. Moreover, increases in the
popularity of, and competition from, Internet and other account wagering gaming
services, which allow their customers to wager on a wide variety of sporting
events and play Las Vegas-style casino games from home, could have a material
adverse effect on our business, financial condition, operating results and
prospects.
OUR
LOCALS BUSINESS MAY BE ADVERSELY IMPACTED BY THE ENTRY OF STATION CASINOS IN
THE
RENO MARKET
Station
Casinos, Inc., a casino operator operating primarily in the Las Vegas market
and
catering mainly to Locals (“Station”), has acquired three sites in the Reno area
and has announced plans to build two casinos, one of which will be located
within one mile of our Atlantis Casino Resort Spa. Station is the dominant
Locals casino operator in the Las Vegas market. Should Station proceed with
its
plans, Station will create additional competition for us in the Locals,
conventioneer and tour and travel markets and could have a material adverse
impact on our business.
CONSTRUCTION
RELATED DISRUPTIONS TO OUR BUSINESS COULD IMPACT OUR BUSINESS OPERATIONS
THROUGHOUT THE REMAINDER OF 2007 AND IN THE FIRST HALF OF
2008
As
discussed above in “Item 1. Business—Current Expansion,” we intend to commence
construction on a $50 million expansion to certain areas of the Atlantis in
the
second quarter of 2007. The expected construction period of twelve months will
continue into the second quarter of 2008. During the construction period, there
could be disruptions to our operations from different construction activities
on
the property. In addition, the presence of construction activity on our property
may make it more inconvenient for our patrons to access certain locations at
the
Atlantis, and certain patrons may elect to patronize other Reno area casinos
rather than deal with any construction-related inconveniences. As a result,
our
business and our results of operations may be adversely impacted during the
remainder of 2007 and in the first half of 2008.
COST
OVERRUNS AND DELAYS ON EXPANSION PROJECTS COULD ADVERSELY AFFECT OUR BUSINESS
We
expect
to begin construction in the second quarter of 2007 on the next expansion phase
of the Atlantis. A variety of factors outside our control, such as weather
and
difficulties in obtaining permits or other regulatory approvals, as well as
the
performance by third party contractors, may result in increased costs or delays
in construction. Cost overruns or delays in completing a project could have
an
adverse effect on our results of operations and cash flows.
OUR
BUSINESS MAY BE ADVERSELY IMPACTED IF THE RENO ECONOMY
DECLINES
We
heavily market to and rely upon business from Reno area residents. In recent
years, Reno has enjoyed robust business growth and has attracted a number of
technology, product distribution and marketing companies. These businesses
have
created jobs and helped fuel residential development, including the southwest
Reno metropolitan area near the Atlantis. Should there be adverse changes in
the
business and employment conditions in Reno, our Locals business could be
adversely impacted.
OUR
BUSINESS MAY BE ADVERSELY IMPACTED BY EXPANDED NATIVE AMERICAN GAMING OPERATIONS
IN CALIFORNIA AND THE PACIFIC NORTHWEST
Our
largest source of leisure traveler customers is California and the Pacific
Northwest, including a large number who drive to Reno from the San Francisco
and
Sacramento metropolitan areas. Since 1999, several large-scale Native
American-owned casino facilities have commenced operations in that state, some
of which are located close to our key markets. The increased competition from
these facilities could have a material adverse impact on our business.
OUR
BUSINESS MAY BE ADVERSELY IMPACTED IF WE ARE UNABLE TO ADEQUATELY STAFF OUR
OPERATIONS
The
robust business growth Reno has enjoyed in recent years has increased the
competition for employees. The new and growing businesses in the area have
created job opportunities that at times have exceeded the area’s supply of
qualified employees. The unemployment rate in the Reno area has been
significantly lower than the national average over the last several years and
this trend is expected to continue. If we are unable to attract and retain
qualified employees, or if competition for employees results in materially
increased wages, our ability to maintain and grow our business could be
adversely impacted.
OUR
BUSINESS MAY BE ADVERSELY IMPACTED BY WEAKENED ECONOMIC CONDITIONS IN CALIFORNIA
AND THE PACIFIC NORTHWEST
Because
California and the Pacific Northwest are significant markets for our leisure
traveler and conventioneer customers, our business may be adversely impacted
in
the event of weakened economic conditions in those geographical
markets.
OUR
BUSINESS MAY BE ADVERSELY IMPACTED BY DOMESTIC AND INTERNATIONAL
EVENTS
The
terrorist attacks that took place in the United States on September 11, 2001,
were unprecedented events that created economic and business uncertainties,
especially for the travel and tourism industry. The potential for
future terrorist attacks, the national and international responses, and other
acts of war or hostility, including the ongoing conflict in Iraq, have created
economic and political uncertainties that could materially adversely affect
our
business, results of operations and financial condition in ways we cannot
predict.
AN
OUTBREAK OF HIGHLY INFECTIOUS DISEASE COULD ADVERSELY AFFECT THE NUMBER OF
VISITORS TO OUR FACILITIES AND DISRUPT OUR OPERATIONS, RESULTING IN A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH
FLOWS
There
have been recent fears concerning the spread of an “avian flu” and cruise ships
have reported other highly infectious virus outbreaks. Potential future
outbreaks of avian flu or other highly infectious diseases may adversely affect
the number of visitors to our property and our business and prospects.
Furthermore, an outbreak might disrupt our ability to adequately staff our
business and could generally disrupt our operations. If any of our customers
or
employees is suspected of having contracted certain highly contagious diseases,
we may be required to quarantine these customers or employees or the affected
areas of our facilities and temporarily suspend part or all of our operations
at
affected facilities. Any new outbreak of such a highly infectious disease could
have a material adverse effect on our financial condition, results of operations
and cash flows.
FAILURE
OF THE RENO-SPARKS CONVENTION CENTER TO BOOK AND ATTRACT CONVENTION BUSINESS
COULD ADVERSELY IMPACT OUR BUSINESS
The
Atlantis is the closest hotel-casino to the Reno-Sparks Convention Center.
If
the Reno-Sparks Convention Center does not succeed in booking the anticipated
level of conventions, our future results of operations could be adversely
impacted.
BECAUSE
WE ARE CURRENTLY DEPENDENT UPON A SINGLE PROPERTY IN A SINGLE MARKET FOR ALL
OF
OUR CASH FLOW, WE ARE SUBJECT TO GREATER RISKS THAN A GAMING COMPANY WITH MORE
OPERATING PROPERTIES OR THAT OPERATES IN MORE MARKETS
We
currently do not have material assets or operations other than the Atlantis.
As
a result, we are entirely dependent upon the Atlantis property for all of our
cash flow until we develop other properties.
OUR
ABILITY TO INCREASE REVENUES IS LIMITED UNTIL MATERIAL EXPANSION OF OUR
OPERATIONS OCCURS
We
are
solely dependent on our single operation, the Atlantis. Our ability to
materially increase revenues and other operating results is limited by capacity
constraints at the Atlantis. While an expansion is currently underway, our
ability to produce material increases in revenues is relatively limited, unless
we complete a material expansion of the Atlantis, open or acquire another
hotel-casino, or acquire or combine with another hotel-casino
company.
OUR
BUSINESS IS SUBJECT TO RESTRICTIONS AND LIMITATIONS IMPOSED BY GAMING REGULATORY
AUTHORITIES THAT COULD ADVERSELY AFFECT US
The
ownership and operation of casino gaming facilities are subject to extensive
state and local regulation. The State of Nevada and the applicable local
authorities require various licenses, registrations, permits and approvals
to be
held by us and our subsidiary. The Nevada Gaming Commission may, among other
things, limit, condition, suspend, revoke or decline to renew a license or
approval to own the stock of our Nevada subsidiary for any cause deemed
reasonable by such licensing authority. If we violate gaming laws or
regulations, substantial fines could be levied against us, our subsidiary and
the persons involved, and we could be forced to forfeit a portion of our assets.
The suspension, revocation or non-renewal of any of our licenses or the levy
on
us of substantial fines or forfeiture of assets would have a material adverse
effect on our business, financial condition and results of
operations.
To
date,
we have obtained all governmental licenses, findings of suitability,
registrations, permits and approvals necessary for the operation of our current
gaming activities. However, gaming licenses and related approvals are deemed
to
be privileges under Nevada law. We cannot assure you that our existing licenses,
permits and approvals will be maintained or extended.
OUR
INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COVER ALL POSSIBLE LOSSES THAT OUR
PROPERTY COULD SUFFER. IN ADDITION, OUR INSURANCE COSTS MAY INCREASE AND WE
MAY
NOT BE ABLE TO OBTAIN THE SAME INSURANCE COVERAGE IN THE
FUTURE
Although
we have general property insurance covering damage caused by a casualty loss
(such as fire and natural disasters), each such policy has certain exclusions.
In addition, our property insurance is in an amount that may be less than the
expected replacement cost of rebuilding the complex if there was a total loss.
Our level of insurance coverage may not be adequate to cover all losses in
the
event of a major casualty. In addition, certain casualty events, such as labor
strikes, nuclear events, acts of war, loss of income due to cancellation of
room
reservations or conventions due to fear of terrorism, deterioration or
corrosion, insect or animal damage and pollution, might not be covered at all
under our policies. Therefore, certain acts could expose us to heavy, uninsured
losses.
In
addition, although we currently have insurance coverage for occurrences of
terrorist acts and for certain losses that could result from these acts, our
terrorism coverage is subject to the same risks and deficiencies as those
described above for our general property coverage. The lack of sufficient
insurance for these types of acts could expose us to heavy losses in the event
that any damages occur, directly or indirectly, as a result of terrorist attacks
or otherwise, which could have a significant negative impact on our operations.
In
addition to the damage caused to our property by a casualty loss (such as fire,
natural disasters, acts of war or terrorism), we may suffer business disruption
as a result of these events or be subject to claims by third parties injured
or
harmed. While we carry business interruption insurance and general liability
insurance, this insurance may not be adequate to cover all losses in such event.
We
renew
our insurance policies on an annual basis. The cost of coverage may become
so
high that we may need to reduce our policy limits or agree to certain exclusions
from our coverage. Among other factors, it is possible that the situation in
Iraq, homeland security concerns, other catastrophic events or any change in
government legislation governing insurance coverage for acts of terrorism could
materially adversely affect available insurance coverage and result in increased
premiums on available coverage (which may cause us to elect to reduce our policy
limits) and additional exclusions from coverage. Among other potential future
adverse changes, in the future we may elect not to, or may not be able to,
obtain any coverage for losses due to acts of terrorism.
Our
debt
instruments and other material agreements require us to maintain a certain
minimum level of insurance. Failure to satisfy these requirements could result
in an event of default under these debt instruments or material agreements,
which would have a material adverse effect on our financial condition, results
of operations or cash flows.
IF
THE STATE OF NEVADA OR THE CITY OF RENO INCREASES GAMING TAXES AND FEES, OUR
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
State
and
local authorities raise a significant amount of revenue through taxes and fees
on gaming activities. From time to time, legislators and officials have proposed
changes in tax laws, or in the administration of such laws, affecting the gaming
industry. In addition, worsening economic conditions could intensify the efforts
of state and local governments to raise revenues through increases in gaming
taxes. If the State of Nevada or the City of Reno were to increase gaming taxes
and fees, our results of operations could be adversely affected.
IF
WE LOSE OUR KEY PERSONNEL, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED
We
depend
on the continued performances of John Farahi and Bob Farahi, our Chief Executive
Officer and our President, respectively, and their management team. If we lose
the services of the Farahi brothers, or our other senior Atlantis management
personnel, and cannot replace such persons in a timely manner, our business
could be materially adversely affected.
ADVERSE
WINTER WEATHER CONDITIONS IN THE SIERRA NEVADA MOUNTAINS AND RENO-LAKE TAHOE
AREA COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Adverse
winter weather conditions, particularly snowfall, can deter our customers from
traveling or make it difficult for them to drive to the Atlantis. Adverse winter
weather would most significantly affect our drive-in customers from northern
California and the Pacific Northwest. If the Reno area itself were to experience
prolonged adverse winter weather conditions, our results of operations and
financial condition could also be materially adversely affected.
CLAIMS
HAVE BEEN BROUGHT AGAINST US AND OUR SUBSIDIARY IN VARIOUS LEGAL PROCEEDINGS,
AND ADDITIONAL LEGAL AND TAX CLAIMS ARISE FROM TIME TO
TIME
It
is
possible that our cash flows and results of operations could be affected by
the
resolution of legal and other claims. We believe that the ultimate disposition
of current matters will not have a material impact on our financial condition
or
results of operations. Please see the further discussion under “Legal
Proceedings” in Item 3 of this Form 10-K.
ENERGY
PRICE INCREASES MAY ADVERSELY AFFECT OUR COST OF OPERATIONS AND OUR
REVENUES
Our
facility uses significant amounts of electricity, natural gas and other forms
of
energy. While no shortages of energy or fuel have been experienced to date,
substantial increases in energy and fuel prices in the United States have
negatively affected and may continue to negatively affect, our operating
results. The extent of the impact is subject to the magnitude and duration
of
the energy and fuel price increases, but this impact could be material. In
addition, energy and gasoline price increases in cities that constitute a
significant source of customers for our properties could result in a decline
in
disposable income of potential customers and a corresponding decrease in
visitation and spending at our properties, which would negatively impact
revenues.
CHANGES
IN REGULATIONS ON LAND USE REQUIREMENTS COULD ADVERSELY IMPACT OUR
BUSINESS
A
change
in regulations on land use requirements with regard to development of new hotel
casinos in the proximity of the Atlantis could have an adverse impact on our
business,
results of operations, and financial condition. A relaxation in such regulations
could make it easier for competitors to enter our immediate market. A tightening
of such regulations could adversely impact our future expansions
opportunities.
OUR
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY HIGH-END PLAYERS'
WINNINGS
Although
not the major focus of our marketing efforts, we have selectively targeted
high-end players since opening our newest tower in 1999. Should one or more
of
these high-end players win large sums in our casino, or should a material amount
of credit extended to such players not be repaid, our results of operations
could be adversely impacted.
ITEM
1B. UNRESOLVED STAFF COMMENTS
There
were no unresolved comments from the SEC staff at the time of filing this
Form
10-K.
ITEM
2. PROPERTIES
Our
properties consist of:
(a)
An
approximate 13-acre site in Reno, Nevada on which the Atlantis is situated,
including the hotel towers, casino, restaurant facilities and surrounding
parking.
(b)
An
approximately 16-acre site, adjacent to the Atlantis and connected to the
Atlantis by the Sky Terrace, which includes approximately 11 acres of paved
parking used for customer, employee and valet parking. The remainder of the
site
is undeveloped. This site is compliant with all casino zoning requirements
and
is suitable and available for future expansion of the Atlantis facilities,
parking, or complementary resort casino and/or entertainment amenities. We
have
not determined the ultimate use of this site.
(c)
Leased land consisting of 37,368 square-feet next door to the Atlantis serving
as a driveway entrance to the Atlantis.
ITEM
3. LEGAL PROCEEDINGS
As
previously disclosed, litigation was filed against Monarch on January 27, 2006,
by Kerzner International Limited (“ Kerzner ") owner of the Atlantis, Paradise
Island, Bahamas in the United States District Court, District of Nevada. The
case number assigned to the matter is 3:06-cv-00232-ECR (RAM). The complaint
seeks declaratory judgment prohibiting Monarch from using the name "Atlantis"
in
connection with offering casino services other than at Monarch's Atlantis Casino
Resort Spa located in Reno, Nevada, and particularly prohibiting Monarch from
using the "Atlantis" name in connection with offering casino services in Las
Vegas, Nevada; injunctive relief enforcing the same; unspecified compensatory
and punitive damages; and other relief. Monarch believes Kerzner's claims to
be
entirely without merit and is defending vigorously against the suit. Further,
Monarch has filed a counterclaim against Kerzner seeking to enforce the license
agreement granting Monarch the exclusive right to use the Atlantis name in
association with lodging throughout the state of Nevada; to cancel Kerzner's
registration of the Atlantis mark for casino services on the basis that the
mark
was fraudulently obtained by Kerzner; and to obtain declaratory relief on these
issues. Litigation is in the discovery phase.
We
are
party to other claims that arise in the normal course of business. Management
believes that the outcomes of such claims will not have a material adverse
impact on our financial condition, cash flows or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of our security holders during the fourth
quarter of 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a)
Our
common stock trades on The NASDAQ Stock Market under the symbol MCRI. The
following table sets forth the high and low bid prices of our common stock,
as
reported by The NASDAQ Stock Market, during the periods indicated. Prices prior
to March 31, 2005, are adjusted to reflect a 2-for-1 stock split effective
on
such date.
|
2006
|
2005
|
|||
|
High
|
Low
|
High
|
Low
|
|
|
First
quarter
|
$29.85
|
$22.44
|
$21.72
|
$18.95
|
|
Second
quarter
|
$32.97
|
$25.14
|
$24.98
|
$16.56
|
|
Third
quarter
|
$28.50
|
$17.50
|
$26.32
|
$14.82
|
|
Fourth
quarter
|
$25.74
|
$19.45
|
$22.94
|
$15.50
|
As
of
March 5, 2007, there were approximately 87 holders of record of our common
stock, and approximately 1,571 beneficial stockholders.
We
have
never paid dividends. We presently intend to retain earnings and use free cash
flow to finance our operating activities, for maintenance and for expansion
capital expenditures. We do not anticipate declaring cash dividends in the
foreseeable future. Our bank loan agreement also contains provisions that
require the achievement of certain financial ratios before we can pay or declare
dividends to our stockholders. See Item 8, "FINANCIAL STATEMENTS, Notes to
Consolidated Financial Statements, Note 5."
Securities
Authorized for Issuance Under Equity Compensation Plans. See Part III, Item
12 -
Security Ownership of Certain Beneficial Owners and Management.
(b)
Not
applicable.
(c)
On
March 10, 2003, the Company announced a plan to repurchase up to 500,000 shares
(adjusted for the 2 for 1 stock split effective March 31, 2005), or 2.6%, of
the
Company’s common stock in open market transactions (the “First Plan”). During
2003, the Company purchased 360,000 shares (adjusted for the 2 for 1 stock
split
mentioned above) pursuant to the First Plan and made no subsequent purchases.
On
September 28, 2006, the Company’s Board of Directors terminated the First Plan
and authorized a second stock repurchase plan (the “Second Plan”).
Under
the
Second Plan, the Board of Directors authorized a program to repurchase up to
1,000,000 shares of the Company’s common stock in the open market or in
privately negotiated transactions from time to time, in compliance with Rule
10b-18 of the Securities and Exchange Act of 1934, subject to market conditions,
applicable legal requirements and other factors. The Second Plan does not
obligate the Company to acquire any particular amount of common stock and the
plan may be suspended at any time at the Company’s discretion. As of December
31, 2006, the Company made no purchases pursuant to the Second Plan.
ITEM
6. SELECTED FINANCIAL DATA
Years
ended December 31,
Amounts
in thousands, except per share amounts
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||
|
OPERATING
RESULTS
|
||||||||||||
|
Casino
revenues
|
$
103,333
|
$
94,501
|
$
84,132
|
$
74,956
|
$
70,773
|
|||||||
|
Other
revenues
|
72,329
|
67,165
|
65,545
|
59,741
|
57,641
|
|||||||
|
Gross
revenues
|
175,662
|
161,666
|
149,677
|
134,697
|
128,414
|
|||||||
|
Promotional
allowances
|
(23,693)
|
(21,881)
|
(20,220)
|
(18,746)
|
(17,376)
|
|||||||
|
Net
revenues
|
151,969
|
139,785
|
129,457
|
115,951
|
111,038
|
|||||||
|
Income
from operations
|
33,492
|
(F1)
|
33,069
|
(F2)
|
26,274
|
(F3)
|
17,209
|
(F4)
|
17,196
|
(F5)
|
||
|
Income
before income tax
|
33,860
|
32,056
|
24,689
|
14,572
|
13,033
|
|||||||
|
Net
income
|
$
22,080
|
$
21,035
|
$
16,526
|
$
9,606
|
$
8,603
|
|||||||
|
INCOME
PER SHARE OF COMMON STOCK (F6)
|
||||||||||||
|
Net
income per share
|
||||||||||||
|
Basic
|
$
1.16
|
$
1.12
|
$
0.88
|
$
0.51
|
$
0.46
|
|||||||
|
Diluted
|
$
1.15
|
$
1.10
|
$
0.88
|
$
0.51
|
$
0.45
|
|||||||
|
Weighted
average number of common shares and potential common shares
outstanding
|
||||||||||||
|
Basic
|
18,990
|
18,849
|
18,756
|
18,759
|
18,916
|
|||||||
|
Diluted
|
19,275
|
19,094
|
18,815
|
18,825
|
19,042
|
|||||||
|
OTHER
DATA
|
||||||||||||
|
Depreciation
and amortization
|
$
8,559
|
$
8,379
|
$
9,628
|
$
10,797
|
$
10,320
|
|||||||
|
Other
income (expense)
|
$
368
|
$ (1,013)
|
$
(1,584)
|
$
(2,638)
|
$
(3,934)
|
|||||||
|
Capital
expenditures (F7)
|
$
5,795
|
$
6,113
|
$
9,710
|
$
8,406
|
$
6,534
|
|||||||
|
BALANCE
SHEET DATA
|
||||||||||||
|
Total
assets
|
$138,381
|
$117,670
|
$118,339
|
$115,877
|
$117,480
|
|||||||
|
Current
maturities of long-term debt
|
$
-
|
$
-
|
$
-
|
$
6,060
|
$
8,279
|
|||||||
|
Long-term
debt, less current maturities
|
$
-
|
$
8,100
|
$
32,400
|
$
41,125
|
$
52,000
|
|||||||
|
Stockholders'
equity (F8)
|
$115,646
|
$
87,559
|
$
65,763
|
$
48,723
|
$
40,301
|
|||||||
Footnotes
to Selected Financial Data:
(F1)
2006
includes a $55 thousand loss on disposal of fixed assets
(F2)
2005
includes a $42 thousand gain on
disposal of fixed assets.
(F3)
2004
includes a $173 thousand loss on disposal of fixed assets.
(F4)
2003
includes a $133
thousand
gain on disposal of fixed assets.
(F5)
2002
includes a $35 thousand gain on disposal of fixed assets
(F6)
Per
share data and shares outstanding prior to 2005 are adjusted to reflect a
2-for-1 stock split
effective
March 31, 2005.
(F7)
Includes amounts financed with debt or capitalized lease
obligations.
(F8)
We
paid no dividends during the five year period ended December 31,
2006.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
Monarch
Casino & Resort, Inc., through its wholly-owned subsidiary, Golden Road
Motor Inn, Inc. ("Golden Road"), owns and operates the tropically-themed
Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the
"Atlantis"). Monarch was incorporated in 1993 under Nevada law for the purpose
of acquiring all of the stock of Golden Road. The principal asset of Monarch
is
the stock of Golden Road, which holds all of the assets of the
Atlantis.
Our
sole
operating asset, the Atlantis, is a hotel/casino resort located in Reno, Nevada.
Our business strategy is to maximize the Atlantis' revenues, operating income
and cash flow primarily through our casino, our food and beverage operations
and
our hotel operations. We capitalize on the Atlantis' location for Locals, tour
and travel visitors and conventioneers by offering exceptional service, value
and an appealing theme to our guests. Our hands-on management style focuses
on
customer service and cost efficiencies.
Unless
otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch
Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING
RESULTS SUMMARY
During
2006, we exceeded all previously reported Company annual casino revenues, net
revenues, net income and earnings per share.
|
Amounts
in millions, except per share amounts
|
Percentage
|
|||||
|
Increase
/ (Decrease)
|
||||||
|
2006
|
2005
|
2004
|
06
vs 05
|
05
vs 04
|
||
|
Casino
revenues
|
$103.3
|
$
94.5
|
$
84.1
|
9.3%
|
12.3%
|
|
|
Food
and beverage revenues
|
41.0
|
38.6
|
37.3
|
6.2%
|
3.3%
|
|
|
Hotel
revenues
|
26.4
|
23.9
|
24.3
|
10.5%
|
(1.7)%
|
|
|
Other
revenues
|
4.9
|
4.7
|
3.9
|
4.3%
|
20.5%
|
|
|
Net
revenues
|
152.0
|
139.8
|
129.5
|
8.7%
|
8.0%
|
|
|
Sales,
general and admin exp
|
46.3
|
38.1
|
35.0
|
21.5%
|
8.9%
|
|
|
Income
from operations
|
33.5
|
33.1
|
26.3
|
1.2%
|
25.9%
|
|
|
Net
income
|
22.1
|
21.0
|
16.5
|
5.2%
|
27.3%
|
|
|
Earnings
per share - diluted
|
1.15
|
1.10
|
0.88
|
4.5%
|
25.0%
|
|
|
Operating
margin
|
22.0%
|
23.7%
|
20.3%
|
(1.7)
pts
|
3.4
pts
|
|
We
attribute our improved results to our experienced management team, the superb
location of the Atlantis in the more affluent and growing south part of Reno,
the quality of our product that drives repeat business, our ability to attract
leisure travelers, and our steadily declining interest expense resulting from
overall reductions in our outstanding debt.
In
2006,
our income from operations increased 1.2% over 2005, while our net income and
earnings per diluted share increased 5.2% and 4.5%, respectively. Significant
factors that affected our 2006 results are listed below. These items are
discussed in greater detail elsewhere in our discussion of operating results
and
in the Liquidity and Capital Resources section.
| · |
Net
revenues in 2006 increased 8.7% over 2005 due to increases in our
casino,
food and beverage, hotel and other revenue segments, which increased
9.3%,
6.2%, 10.5% and 4.3%, respectively, over
2005.
|
| · |
Effective
January 1, 2006, we began recognizing expense related to the issuance
of
stock options in accordance with SFAS 123R. For the year, we recorded
$3.3
million of stock options expense (pre-tax), $3.1 million of which
was
reported as sales, general and administrative expense with the balance
reported as operating expense in the appropriate revenue center expense
line consistent with the assignment of the respective employee receiving
the stock options benefit. No similar expense is reflected in the
financial statements for periods prior to 2006. Of the $3.3 million
of
stock option expense recorded in 2006, $1.2 million related to a
one-time,
non-cash charge related to early vesting of stock options for the
company’s former Co-Chairman and Chief Financial Officer who resigned in
the second quarter of 2006.
|
| · |
Sales,
general and administrative expenses increased 21.5% over 2005 primarily
driven by the stock option expense described above, increased marketing
and promotional expenses, higher energy and utilities expense, higher
professional fees and higher bad debt
expense.
|
| · |
We
paid off all of our bank related debt in the first quarter of 2006
and
began investing available cash in short-term, interest bearing
instruments. As a result, interest expense declined in 2006 compared
to
2005 by $915,000 while interest income increased by $466,000 over
that
same period.
|
CAPITAL
SPENDING AND DEVELOPMENT
We
seek
to continuously upgrade and maintain the Atlantis in order to present a fresh
product to our guests and to maintain high quality standards.
Capital
expenditures at the Atlantis (including non-cash capital expenditures) totaled
approximately $5.8 million, $6.1 million and $9.7 million in 2006, 2005, and
2004, respectively. During
2006, capital expenditures primarily consisted of acquisition
of gaming and computer equipment, the installation of a casino high-definition
video display system, renovation of our Java Coast Gourmet Coffee and pastry
bar, initial design and planning expenditures associated with our Atlantis
expansion and ongoing property public area renovations and upgrades. During
2005, capital expenditures consisted primarily of the replacement
of and upgrade to our ventilation and cooling system, acquisition of gaming
and
computer systems equipment, and continued renovations to the facility. During
2004, capital expenditures consisted primarily of renovations to our second
tower hotel rooms and suites, the installation of a new slot player tracking
system, $1.35 million in leased driveway improvements and continued acquisitions
of and upgrades to gaming equipment.
In
2004,
a driveway was constructed that is being shared between the Atlantis and the
adjacent Sierra Marketplace Shopping Center that is owned and controlled by
affiliates of our principal stockholders (the "Shopping Center"). As part of
this project, we are leasing a 37,368 square-foot corner section of the Shopping
Center for a minimum lease term of 15 years at an annual rent of $300,000
subject to increase every 60 months based on the consumer price index. We are
also using part of the common area of the Shopping Center and pay our
proportional share of the common area expense of the Shopping Center. We have
the option to renew the lease for 3 five-year terms, and at the end of the
extension period, we have the option to purchase the leased section of the
Shopping Center at a price to be determined based on an MAI appraisal. We use
the leased space for pedestrian and vehicle access to the Atlantis and we have
use of a portion of the parking spaces at the Shopping Center. The total cost
of
the project was $2.0 million; we were responsible for two thirds of the total
cost, or $1.35 million. This project was completed, the driveway was put into
use and we began paying rent on September 30, 2004 (see Part III - ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS incorporated herein by reference
to the Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held
on
May 22, 2007). The cost of the new driveway is being depreciated over the
initial 15-year lease term; some components of the new driveway are being
depreciated over a shorter period of time (see “Property and Equipment” in Notes
to Consolidated Financial Statements - Note 1. Summary of Significant Accounting
Policies”).
Future
cash needed to finance ongoing capital expenditures is expected to be available
from cash on-hand and operating cash flow, the Credit Facility (see Item 8,
"FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5.")
and, if necessary, additional borrowings.
We
expect
to begin construction in the second quarter of 2007 on the next expansion phase
of the Atlantis. New space to be added to the first floor casino level, the
second and third floors and the basement level will total approximately 116,000
square feet. Once complete, the existing casino floor will be expanded by over
10,000 square feet, or approximately 20%. The first floor plans include a
redesigned, updated and expanded race and sports book of approximately 4,000
square feet and an enlarged poker room. The plans also include a New York-style
deli restaurant. The second floor expansion will create additional ballroom
and
convention space of approximately 27,000 square feet, doubling our existing
facilities. The spa and fitness center will be remodeled and expanded to create
an ultra-modern spa and fitness center facility. We are currently in
negotiations to add a pedestrian skywalk over Peckham Street that will connect
the Reno-Sparks Convention Center directly to the Atlantis. Upon completion
of
an agreement, construction is expected to take approximately twelve months
and
is expected to be funded entirely out of existing cash on hand plus cash flow
from operations. Excluding the cost of the skywalk, the expansion is estimated
to cost approximately $50 million. Final design plans, and the resultant cost
estimate, of the skywalk have not been completed.
STATEMENT
ON FORWARD-LOOKING INFORMATION
Certain
information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as
statements relating to anticipated expenses, capital spending and financing
sources. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made herein. These risks and uncertainties include,
but are not limited to, those relating to competitive industry conditions,
expansion of Indian casinos in California, Reno-area tourism conditions,
dependence on existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), the regulation of the gaming
industry (including actions affecting licensing), outcome of litigation,
domestic or global economic conditions including those affected by the events
of
September 11, 2001, and the ongoing situation in Iraq, and changes in federal
or
state tax laws or the administration of such laws as well as other factors
described in ITEM 1A. RISK FACTORS.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
prepare our consolidated financial statements in conformity with principles
generally accepted in the United States. Certain of our policies, including
the
estimated lives assigned to our assets, the determination of bad debt, self
insurance reserves, credit risk, and the calculation of income tax liabilities,
require that we 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. Our 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 our estimates. To provide an
understanding of the methodologies applied, our significant accounting policies
are discussed where appropriate in this discussion and analysis and in the
Notes
to Consolidated Financial Statements.
The
consolidated financial statements include the accounts of Monarch and Golden
Road. Intercompany balances and transactions are eliminated.
Self-insurance
Reserves
The
Company reviews self-insurance reserves at least quarterly. The amount of
reserve is determined by reviewing the actual expenditures for the previous
twelve-month period and reviewing reports prepared by the third party plan
administrator for any significant unpaid claims. The reserve is accrued at
an
amount that approximates amounts needed to pay both reported and unreported
claims as of the balance sheet date, which management believes are
adequate.
Inventories
Inventories,
consisting primarily of food, beverages, and retail merchandise, are stated
at
the lower of cost or market. Cost is determined on a first-in, first-out
basis.
Advertising
Costs
All
advertising costs are expensed as incurred.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Since inception, property and equipment have been depreciated
principally on a straight line basis over the estimated service lives as
follows:
Land
improvements 15-40
years
Buildings 30-40
years
Building
improvements 15-40
years
Furniture 5-10
years
Equipment
5-20
years
Expenditures
for maintenance and repairs are expensed as incurred; expenditures for material
asset improvements are generally capitalized. We periodically evaluate our
fixed
and other long-term assets for impairment to ensure that they are appropriately
valued.
Casino
Revenues
Casino
revenues represent the net win from gaming activity, which is the difference
between wins and losses. Additionally, net win is reduced by a provision for
anticipated payouts on slot participation fees, progressive jackpots and any
pre-arranged marker discounts.
Promotional
Allowances
The
retail value of hotel, food and beverage services provided to customers without
charge is included in gross revenue and deducted as promotional
allowances.
Income
Taxes
Income
taxes are recorded in accordance with the liability method specified by
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes." Under the asset and liability approach for financial accounting
and reporting for income taxes, the following basic principles are applied
in
accounting for income taxes at the date of the financial statements: (a) a
current liability or asset is recognized for the estimated taxes payable or
refundable on taxes for the current year; (b) a deferred income tax liability
or
asset is recognized for the estimated future tax effects attributable to
temporary differences and carryforwards; (c) the measurement of current and
deferred tax liabilities and assets is based on the provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not anticipated;
and (d) the measurement of deferred income taxes is reduced, if necessary,
by
the amount of any tax benefits that, based upon available evidence, are not
expected to be realized.
Concentrations
of Credit Risk
Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of bank deposits and trade receivables. We maintain our
cash
in bank deposit accounts which, at times, may exceed federally insured limits.
We have not experienced any losses in such accounts. Concentrations of credit
risk with respect to trade receivables are limited due to the large number
of
customers comprising our customer base. We believe we are not exposed to any
significant credit risk on cash and accounts receivable.
Stockholder
Guarantee Fees
All
of
our bank debt was personally guaranteed by our three largest stockholders since
the inception of our original loan agreement on December 29, 1997.
Effective
January 1, 2001, until February 20, 2004, we compensated the guarantors at
the
rate of 2% per annum of the quarterly average outstanding bank debt amount.
There were no stockholder guarantee fees during the twelve months ended December
31, 2006 and 2005. For
the
twelve months ended December 31, 2004, we recorded interest expense of
approximately $136,000 related to these guarantee fees. The individuals who
guaranteed the Original Credit Facility were not required to do so for the
New
Credit Facility (as defined below).
RESULTS
OF OPERATIONS
2006
Compared with 2005
For
the
year ended December 31, 2006, we earned net income of $22.1 million, or $1.15
per diluted share, on net revenues of $152.0 million, compared to net income
of
$21.0 million, or $1.10 per diluted share, on net revenues of $139.8 million
for
the year ended December 31, 2005. Net revenue for 2006 is the highest in Company
history. Income from operations totaled $33.5 million for 2006, a 1.2% increase
when compared to $33.1 million for 2005. Net income for the year 2006 represents
a record high for our Company. We believe the Atlantis continued to benefit
in
2006 from the rapid growth occurring in the residential and commercial areas
south of the Atlantis in Reno, from the increasing popularity of the Atlantis
with visitors to the Reno area and from our commitment to ongoing property
upgrades and renovations.
Casino
revenues totaled $103.3 million in 2006, up 9.3% from $94.5 million in 2005,
driven
by
increases in slot, table games, poker and Keno win. Revenue from slot and video
poker machines ("slot machines") increased approximately 9.6% in 2006 compared
to 2005. We believe that increased slot machine play was due to continued
effective marketing and continuous upgrade of facilities and equipment. Table
game win increased approximately 6.2% in 2006 compared to 2005 due to a higher
win percentage partially offset by a decrease in drop. Keno and poker room
revenues combined increased approximately 21.7% in 2006 over 2005. Keno write
increased approximately 15.1% in 2006 compared to 2005 while poker revenue
increased approximately 32.6% compared to 2005 due to continued effective
marketing. Casino operating expenses were 33.0% of casino revenues in 2006,
a
slight improvement from 33.9% in 2005.
Food
and
beverage revenues increased 6.2% to $41.0 million in 2006 from $38.6 million
in
2005, primarily due to a 5.6% increase in average revenue per cover. Food and
beverage operating expenses decreased to 47.6% of food and beverage revenues
in
2006 compared to 48.7% in 2005, due to increased revenue per cover partially
offset by a slight increase in cost of sales per cover and higher operating
expenses.
Hotel
revenues totaled $26.4 million in 2006, an increase of 10.5% from $23.9 million
in 2005. The increase reflects an increase in both the average daily room rate
(“ADR”) and occupancy rate during the twelve month period of 2006 compared to
the same period in 2005. The Atlantis' ADR was $69.87 in 2006, compared to
$63.24 in 2005. The average occupancy rate at the Atlantis was 93.3% in 2006
compared to 93.0% in 2005. Hotel operating expenses decreased slightly to 31.7%
of hotel revenues in 2006, compared to 32.2% in 2005. This decrease in operating
expenses as a percentage of hotel revenues resulted primarily from the revenue
impact of the increased ADR partially offset by increased direct hotel operating
expenses.
Promotional
allowances increased to $23.7 million in 2006 compared to $21.9 million in
2005.
As a percentage of gross revenue, both 2006 and 2005 represent 13.5%. The dollar
increase is attributable to continued efforts to generate additional revenues
and reflects efforts to ensure that promotional costs are directed toward gaming
guests.
Other
revenues increased 4.3% in 2006 to $4.9 million from $4.7 million in 2005.
The
overall increase was primarily driven by a 10.5% increase in gift and sundries
retail shops revenue. Other operating expenses were 29.7% of other revenues
in
2006, an increase from 28.6% in 2005.
Selling,
general and administrative ("SG&A") expenses totaled $46.3 million, or 30.5%
of net revenues, in 2006 compared to $38.1 million, or 27.2% of net revenues,
in
2005 for a year over year increase of $8.2 million or 21.5%. Effective
January 1, 2006, we began recognizing expense related to the issuance of stock
options in accordance with SFAS 123R. For the year, we recorded $3.3 million
of
stock option expense (pre-tax), $3.1 million of which was reported as SG&A
expense with the balance reported as operating expense in the appropriate
revenue center expense line consistent with the assignment of the respective
employee receiving the stock options benefit. No similar expense is reflected
in
the financial statements for periods prior to 2006. Of the $3.3 million of
stock
option expense recorded in 2006, $1.2 million related to a one-time, non-cash
charge related to early vesting of stock options for the Company’s former
Co-Chairman and Chief Financial Officer who resigned in the second quarter
of
2006. In addition to stock option expense, significant drivers of this increase
in SG&A were increased marketing and promotional expense, higher energy and
utilities expense, higher professional fees and higher bad debt
expense.
Depreciation
and amortization expense was $8.6 million in 2006, an increase of 2.4% compared
to $8.4 million in 2005.
Interest
expense for 2006 totaled $98,000 compared to $1,013,000 in 2005, a decrease
of
$915,000, as a result of the repayment of all of our bank related debt in the
first quarter of 2006. In that same quarter, we began investing surplus cash
in
short-term, interest bearing instruments which drove an increase in interest
income in 2006 compared to 2005 of $466,000.
2005
Compared with 2004
For
the
year ended December 31, 2005, we earned net income of $21.0 million, or $1.10
per diluted share, on net revenues of $139.8 million, compared to a net income
of $16.5 million, or $0.88 per diluted share, on net revenues of $129.5 million
for the year ended December 31, 2004. Our income from operations totaled $33.1
million for 2005, a 25.9% increase when compared to $26.3 million for 2004.
We
believe the Atlantis continued to benefit in 2005 from the rapid growth
occurring in the residential and commercial areas south of the Atlantis in
Reno,
from the increasing popularity of the Atlantis with visitors to the Reno area
and from our commitment to ongoing property upgrades and
renovations.
Casino
revenues totaled $94.5 million in 2005, up 12.3% from $84.1 million in 2004,
driven by increases in slot, poker and Keno win, partially offset by flat
revenues in table game win. Revenue from slot and video poker machines ("slot
machines") increased approximately 15.2% in 2005 compared to 2004. We believe
that increased slot machine play was due to continued effective marketing and
continuous upgrade of facilities and equipment. Table game win decreased
approximately 0.2% in 2005 compared to 2004 due to a slightly lower win
percentage partially offset by an increase in drop. Keno and poker room revenues
combined increased approximately 9.6% in 2005 over 2004. Keno write increased
approximately 7.7% in 2005 compared to 2004 while poker revenue increased
approximately 10.1% compared to 2004 due to continued effective marketing.
Casino operating expenses were 33.9% of casino revenues in 2005, an improvement
from 36.3% in 2004. The improved casino margin in 2005 over 2004 was due to
improved win percentages, reduced payroll and benefit costs, reduced
complimentary costs and reduced direct operating costs as a percentage of casino
revenue resulting in more efficient operations.
Food
and
beverage revenues increased 3.3% to $38.6 million in 2005 from $37.3 million
in
2004, primarily due to a 7.1% increase in average revenue per cover, partially
offset by a ---4.1% decrease in the number of covers served. Food and beverage
operating expenses decreased to 48.7% of food and beverage revenues in 2005
compared to 50.5% in 2004, due to increased revenue per cover, a slight decrease
in cost of sales and more efficient operations.
Hotel
revenues totaled $23.9 million in 2005, a decrease of 1.7% from $24.3 million
in
2004. The decrease reflects a decrease in both the average daily room rate
(“ADR”) and occupancy rate during the twelve month period of 2005 compared to
the same period in 2004. Year 2005 revenues also included a $3.00 per occupied
room energy surcharge that was also assessed during 2004. The Atlantis' ADR
was
$63.24 in 2005, compared to $64.16 in 2004. The average occupancy rate at the
Atlantis was 93.0% in 2005 compared to 93.6% in 2004. Hotel operating expenses
decreased slightly to 32.2% of hotel revenues in 2005, compared to 32.3% in
2004. The decreases in ADR and occupancy in 2005 were due to fewer conventions
at the adjacent Reno-Sparks Convention Center and the fact that Reno did not
host a major bowling tournament in 2005. Conventions typically draw higher
room
rates. This decrease in operating expenses as a percentage of hotel revenues
resulted primarily from reduced direct departmental expenses as a percentage
of
hotel revenue, partially offset by an increase in payroll and benefit costs
as a
percentage of hotel revenue.
Promotional
allowances increased to $21.9 million, or 13.5% of gross revenues, in 2005
compared to $20.2 million, or also 13.5% of gross revenues, in 2004. The dollar
increase is attributable to continued efforts to generate additional revenues
and reflects efforts to ensure that promotional costs are directed toward gaming
guests.
Other
revenues increased approximately 20.5% in 2005 to $4.7 million from $3.9 million
in 2004. The overall increase includes a 1.6% increase in entertainment fun
center revenue and a 10.5% increase in gift and sundries retail shops revenue.
These increases were partially offset by an approximate $173,000 loss on
disposition of assets recorded in 2004 as opposed to a $42,000 gain in 2005.
Other expenses were approximately 28.6% of other revenues in 2005, a decrease
from 34.5% in 2004.
Selling,
general and administrative ("SG&A") expenses totaled $38.1 million, or 27.2%
of net revenues, in 2005 compared to $35.0 million, or 27.0% of net revenues,
in
2004. The slight increase in these expenses as a percentage of revenues reflects
increased payroll and benefit costs, increased rental expense, increased energy
costs and increased marketing and promotional expenditures.
Depreciation
and amortization expense was $8.4 million in 2005, a decrease of 13.0% compared
to $9.6 million in 2004. The decrease is due to the fact that previously
capitalized assets have become fully depreciated. The
Company, in its ordinary course of business and as part of its ongoing capital
expenditures, intends to replace old and obsolete equipment with newer, more
current equipment.
Interest
expenses for 2005 totaled approximately $1.0 million, down 36.0% from $1.6
million in 2004, due to lower outstanding debt which was partially offset by
slightly higher prevailing interest rates. There were no guarantee fees paid
to
our three principal stockholders in 2005, while we paid approximately $136,000
in 2004. The individuals who guaranteed the Company's Original Credit Facility
(defined in "The Credit Facility" below) did not provide such guarantees for
the
New Credit Facility (also defined in "The Credit Facility" below) and,
therefore, the Company will no longer be required to pay such fees in the
future. At December 31, 2005, all of our interest-bearing debt was related
to a
reducing revolving credit facility with floating interest rates tied to a base
rate approximately equal to the prime rate or LIBOR (at our option) plus a
margin which fluctuates according to our ratio of funded debt to Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA")(See Item 8, "FINANCIAL
STATEMENTS, Notes to Consolidated Financial Statements, Note 5."). An increase
in interest rates could have a material effect on our financial results.
LIQUIDITY
AND CAPITAL RESOURCES
We
have
historically funded our daily hotel and casino activities with net cash provided
by operating activities. For the years 2006, 2005 and 2004, net cash provided
by
operating activities totaled $35.2 million, $31.0 million and $25.7 million,
respectively. During each of the three years, net cash provided by operating
activities was sufficient to fund our day-to-day operating
expenses.
Net
cash
used in investing activities, which consisted of acquisitions of property and
equipment, totaled $5.8 million, $6.1 million and $9.1 million
in 2006, 2005 and 2004, respectively. Total capital expenditures, including
amounts financed, were $5.8 million, $6.1 million and $9.7 million in 2006,
2005
and 2004, respectively.
Net
cash
used in financing activities, principally related to our ongoing paydown on
our
outstanding debt, totaled $5.4 million in 2006, $23.9 million
in 2005 and $14.5 million in 2004.
COMMITMENTS
AND CONTINGENCIES
Our
contractual cash obligations as of December 31, 2006 and the next five years
and
thereafter are as follows:
|
|
Payments
Due by Period
|
||||||
|
|
less
than
|
1
to 3
|
4
to 5
|
more
than
|
|||
|
Total
|
1
year
|
years
|
years
|
5
years
|
|||
|
Long-Term
Debt
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
||
|
Operating
Leases(1)
|
4,717,000
|
370,000
|
740,000
|
740,000
|
2,867,000
|
||
|
Purchase
Obligations(2)
|
2,054,000
|
2,054,000
|
-
|
-
|
-
|
||
|
Total
Contractual Cash
Obligations
|
$6,771,000
|
$2,424,000
|
$740,000
|
$740,000
|
$2,867,000
|
||
(1)
Operating leases include $370,000 per year in lease and common expense payments
to the shopping center adjacent to the Atlantis (see Capital Spending and
Development).
(2)
Our
open purchase order commitments total approximately $2.1 million. Of the total
purchase order commitments, approximately $1.8 million are cancelable by the
Company upon providing a 30-day notice.
On
March
10, 2003, the Company announced a plan to repurchase up to 500,000 shares
(adjusted for the 2 for 1 stock split effective March 31, 2005), or 2.6%, of
the
Company’s common stock in open market transactions (the “First Plan”). During
2003, the Company purchased 360,000 shares (adjusted for the 2 for 1 stock
split
mentioned above) pursuant to the First Plan and made no subsequent purchases.
On
September 28, 2006, the Company’s Board of Directors terminated the First Plan
and authorized a second stock repurchase plan (the “Second Plan”).
Under
the
Second Plan, the Board of Directors authorized a program to repurchase up to
1,000,000 shares of the Company’s common stock in the open market or in
privately negotiated transactions from time to time, in compliance with Rule
10b-18 of the Securities and Exchange Act of 1934, subject to market conditions,
applicable legal requirements and other factors. The Second Plan does not
obligate the Company to acquire any particular amount of common stock and the
plan may be suspended at any time at the Company’s discretion. As of December
31, 2006, the Company made no purchases pursuant to the Second
Plan.
We
expect
to begin construction in the second quarter of 2007 on the next expansion phase
of the Atlantis. New space to be added to the first floor casino level, the
second and third floors and the basement level will total approximately 116,000
square feet. Once complete, the existing casino floor will be expanded by over
10,000 square feet, or approximately 20%. The first floor plans include a
redesigned, updated and expanded race and sports book of approximately 4,000
square feet and an enlarged poker room. The plans also include a New York-style
deli restaurant. The second floor expansion will create additional ballroom
and
convention space of approximately 27,000 square feet, doubling our existing
facilities. The spa and fitness center will be remodeled and expanded to create
an ultra-modern spa and fitness center facility. We are currently in
negotiations to add a pedestrian skywalk over Peckham Street that will connect
the Reno-Sparks Convention Center directly to the Atlantis. Upon completion
of
an agreement, construction is expected to take approximately twelve months
and
is expected to be funded entirely out of existing cash on hand plus cash flow
from operations. Excluding the cost of the skywalk, the expansion is estimated
to cost approximately $50 million. Final design plans, and the resultant cost
estimate, of the skywalk have not been completed.
We
believe that our existing cash balances, cash flow from operations, equipment
financing, and borrowings available under the New Credit Facility will provide
us with sufficient resources to fund our operations, meet our debt obligations,
and fulfill our capital expenditure requirements; however, our operations are
subject to financial, economic, competitive, regulatory, and other factors,
many
of which are beyond our control. If we are unable to generate sufficient cash
flow, we 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.
THE
CREDIT FACILITY
Until
February 20, 2004, we had a reducing revolving term loan credit facility with
a
consortium of banks that was to expire on June 30, 2004, and in the original
amount of $80 million but that had been reduced to $46 million at payoff (the
"Original Credit Facility").
On
February 20, 2004, the Original Credit Facility was refinanced (the "New Credit
Facility") for $50 million, which included the $46 million payoff of the unpaid
balance of the Original Credit Facility. At our option, borrowings under the
New
Credit Facility will accrue interest at a rate designated by the agent bank
at
its base rate (the "Base Rate") or at the London Interbank Offered Rate
("LIBOR") for one, two, three or six month periods. The rate of interest paid
by
us will include a margin added to either the Base Rate or to LIBOR that is
tied
to our ratio of funded debt to EBITDA (the "Leverage Ratio"). Depending on
our
Leverage Ratio, this margin can vary between 0.25 percent and 1.25 percent
above
the Base Rate, and between 1.50 percent and 2.50 percent above LIBOR (under
the
Original Credit Facility, this margin varied between 0.00 percent and 2.00
percent above the Base Rate, and between 1.50 percent and 3.50 percent above
LIBOR). At December 31, 2006, we had no borrowings under the New Credit
Facility; however, our leverage ratio was such that the pricing for borrowings
would have been the Base Rate plus 0.25 percent or LIBOR plus 1.50
percent.
Subject
to our February 2007 decision to reduce the total borrowing availability to
$5
million as described below, we may utilize proceeds from the New Credit Facility
for working capital needs, general corporate purposes and for ongoing capital
expenditure requirements at the Atlantis.
The
New
Credit Facility is secured by liens on substantially all of the real and
personal property of the Atlantis, and is guaranteed by Monarch. The Original
Credit Facility was guaranteed individually by certain controlling stockholders
of the Company. These individuals were not required to provide any personal
guarantees for the New Credit Facility and, therefore, going forward, we will
no
longer incur guarantee fee expenses.
The
New
Credit Facility contains covenants customary and typical for a facility of
this
nature, including, but not limited to, covenants requiring the preservation
and
maintenance of our assets and covenants restricting our ability to merge,
transfer ownership of Monarch, incur additional indebtedness, encumber assets
and make certain investments. The New Credit Facility also contains covenants
requiring us to maintain certain financial ratios and contains provisions that
restrict cash transfers between Monarch and its affiliates. The New Credit
Facility also contains provisions requiring the achievement of certain financial
ratios before we can repurchase our common stock. We do not consider the
covenants to restrict our operations.
The
maturity date of the New Credit Facility is February 23, 2009. Beginning June
30, 2004, the maximum principal available under the Credit Facility was to
be
reduced over five years by an aggregate of $30.875 million in equal increments
of $1.625 million per quarter with the remaining balance due at the maturity
date. We may prepay borrowings under the New Credit Facility without penalty
(subject to certain charges applicable to the prepayment of LIBOR borrowings
prior to the end of the applicable interest period). Amounts prepaid under
the
New Credit Facility may be reborrowed so long as the total borrowings
outstanding do not exceed the maximum principal available. At December 31,
2006,
our available borrowings were $24.0
million.
Effective February 2007, in consideration of our cash balance, cash expected
to
be generated from operations and to avoid agency and commitment fees, we elected
to permanently reduce the available borrowings to $5 million. We may permanently
reduce the maximum principal available under the New Credit Facility at any
time
so long as the amount of such reduction is at least $500,000 and a multiple
of
$50,000.
We
paid
various one-time fees and other loan costs upon the closing of the refinancing
of the New Credit Facility that will be amortized over the term of the New
Credit Facility using the straight-line method.
STOCKHOLDER
GUARANTEE FEES
From
December 29, 1997 until February 20, 2004, all of our bank debt was personally
guaranteed by our three largest stockholders.
Effective
January 1, 2001 and until February 20, 2004, we compensated the guarantors
at
the rate of 2% per annum of the quarterly average outstanding bank debt. We
did
not pay any stockholder guarantee fees for
the
twelve months ended December 31, 2006 or 2005. For the twelve months ended
December 31, 2004, we recorded interest expense of approximately $136,000 for
these guarantee fees. The individuals who guaranteed our bank debt were not
required to
guarantee the New Credit Facility, and, as a result, we will no longer incur
these expenses.
SHORT-TERM
DEBT
At
December 31, 2006, we had no slot purchase contracts or other short-term debt
outstanding.
STATEMENT
ON FORWARD LOOKING INFORMATION
Certain
information included herein contains statements that may be considered
forward-looking, such as statements relating to projections of future results
of
operations or financial condition, expectations for our casino, and expectations
of the continued availability of capital resources. Any forward-looking
statement made by us necessarily is based upon a number of estimates and
assumptions that, while considered reasonable by us, is inherently subject
to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control, and are subject to change. Actual results
of our operations may vary materially from any forward-looking statement made
by
us or on our behalf. Forward-looking statements should not be regarded as
representation by us or any other person that the forward-looking statements
will be achieved. Undue reliance should not be placed on any forward-looking
statements. Some of the contingencies and uncertainties to which any
forward-looking statement contained herein are subject to include, but are
not
limited to, those set forth above in the heading “ITEM 1A. Risk
Factors.”
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
March
2006, the Financial Accounting Standards Board (FASB) issued SFAS 156,
Accounting for Servicing of Financial Assets - an Amendment of SFAS 140. This
Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. Adoption
of
this SFAS is required as
of
January 1, 2007.
The
Company does not expect that the adoption of SFAS 156 will have a significant
impact on the Company’s financial position or results of operations.
In
June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN
48), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes, by prescribing
a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company will adopt FIN 48 as of
January 1, 2007, as required. The cumulative effect of adoption FIN 48 will
be
recorded in retained earnings. The Company does not expect that the adoption
of
FIN 48 will have a significant impact on the Company’s financial position or
results of operations.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, accordingly, this Statement
does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. This Statement
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating the provisions of SFAS 157 to determine its impact, if
any,
on the Company’s financial position and results of operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk is the risk of loss arising from adverse changes in market risks and
prices, such as interest rates, foreign currency exchange rates and commodity
prices. We do not have any cash or cash equivalents as of December 31, 2006
that
are subject to market risk.
As
of
December 31, 2006 we had no outstanding debt subject to market risk; however,
we
had variable interest rate debt in the amount of approximately $8.1 million
as
of December 31, 2005 and $32.4 million as of December 31, 2004, which was
subject to market risk.
A
one
percent increase in interest rates would have resulted in an increase in
interest expense of approximately $186,000 in 2005 and $397,000 in
2004.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of Monarch Casino & Resort,
Inc.:
We
have
audited the accompanying consolidated balance sheets of Monarch Casino and
Resort, Inc. and Subsidiary (the “Company”) as of December 31, 2006 and 2005,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule listed in the index
at
Item 15(a). These financial statements and schedule are the responsibility
of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2006 and 2005, and the consolidated results of their operations
and
their cash flows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles. Also,
in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly
in
all material respects the information set forth herein.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for Share-Based Payments in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004) on January
1,
2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission and our report dated March
9, 2007 expressed an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Las
Vegas, Nevada
March
9,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of Monarch Casino & Resort,
Inc.:
We
have
audited management’s assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Monarch Casino &
Resort, Inc. and Subsidiary (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2006 and 2005, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2006 of the Company and our report dated March 9,
2007 expressed
an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Las
Vegas, Nevada
March
9,
2007
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
ended December 31,
|
|||||
|
2006
|
|
2005
|
|
2004
|
|
|
Revenues
|
|||||
|
Casino
|
$103,332,559
|
$94,501,028
|
$
84,131,876
|
||
|
Food
and beverage
|
41,037,321
|
38,564,365
|
37,333,977
|
||
|
Hotel
|
26,412,755
|
23,909,915
|
24,318,082
|
||
|
Other
|
4,878,840
|
4,690,105
|
3,892,669
|
||
|
Gross
revenues
|
175,661,475
|
161,665,413
|
149,676,604
|
||
|
Less
promotional allowances
|
(23,692,521)
|
(21,880,793)
|
(20,219,714)
|
||
|
Net
revenues
|
151,968,954
|
139,784,620
|
129,456,890
|
||
|
Operating
expenses
|
|||||
|
Casino
|
34,134,518
|
31,990,758
|
30,513,391
|
||
|
Food
and beverage
|
19,533,532
|
18,795,268
|
18,859,211
|
||
|
Hotel
|
8,383,382
|
7,696,576
|
7,858,616
|
||
|
Other
|
1,450,100
|
1,340,556
|
1,344,163
|
||
|
Selling,
general and administrative
|
46,309,938
|
38,073,313
|
34,979,998
|
||
|
Gaming
development costs
|
106,477
|
439,984
|
-
|
||
|
Depreciation
and amortization
|
8,559,374
|
8,379,033
|
9,627,870
|
||
|
Total
operating expenses
|
118,477,321
|
106,715,488
|
103,183,249
|
||
|
Income
from operations
|
33,491,633
|
33,069,132
|
26,273,641
|
||
|
Other
income (expense)
|
|||||
|
Stockholder
guarantee fee expense
|
-
|
-
|
(136,164)
|
||
|
Interest
income
|
466,050
|
257
|
-
|
||
|
Interest
expense
|
(97,722)
|
(1,013,377)
|
(1,448,125)
|
||
|
Total
other income (expense)
|
368,328
|
(1,013,120)
|
(1,584,289)
|
||
|
Income
before income taxes
|
33,859,961
|
32,056,012
|
24,689,352
|
||
|
Provision
for income taxes
|
11,779,590
|
11,020,552
|
8,162,912
|
||
|
Net
income
|
$
22,080,371
|
$21,035,460
|
$
16,526,440
|
||
|
Earnings
per share of common stock
|
|||||
|
Net
income
|
|||||
|
Basic
|
$
1.16
|
$ 1.12
|
$
0.88
|
||
|
Diluted
|
$
1.15
|
$ 1.10
|
$
0.88
|
||
|
Weighted
average number of
|
|||||
|
common
shares and potential
|
|||||
|
common
shares outstanding:
|
|||||
|
Basic
|
18,990,331
|
18,848,532
|
18,756,450
|
||
|
Diluted
|
19,274,847
|
19,093,777
|
18,814,686
|
||
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
|
$
|
36,985,187
|
$
|
12,886,494
|
|||
|
Receivables,
net
|
3,268,970
|
3,559,602
|
|||||
|
Federal
income tax refund receivable
|
-
|
286,760
|
|||||
|
Inventories
|
1,471,667
|
1,456,453
|
|||||
|
Prepaid
expenses
|
2,833,126
|
2,401,619
|
|||||
|
Deferred
income taxes
|
965,025
|
1,326,224
|
|||||
|
Total
current assets
|
45,523,975
|
21,917,152
|
|||||
|
Property
and equipment
|
|||||||
|
Land
|
10,339,530
|
10,339,530
|
|||||
|
Land
improvements
|
3,166,107
|
3,166,107
|
|||||
|
Buildings
|
78,955,538
|
78,955,538
|
|||||
|
Building
improvements
|
10,435,062
|
10,398,814
|
|||||
|
Furniture
& equipment
|
72,708,061
|
67,393,755
|
|||||
|
Leasehold
improvements
|
1,346,965
|
1,346,965
|
|||||
|
176,951,263
|
171,600,709
|
||||||
|
Less
accumulated depreciation and amortization
|
(84,325,578
|
)
|
(76,117,346
|
)
|
|||
|
Net
property and equipment
|
92,625,685
|
95,483,363
|
|||||
|
Other
assets, net
|
231,247
|
269,524
|
|||||
|
Total
assets
|
$
|
138,380,907
|
$
|
117,670,039
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
December
31,
|
||||||
|
Current
liabilities
|
2006
|
2005
|
|||||
|
Accounts
payable
|
$
8,590,669
|
$
7,335,630
|
|||||
|
Accrued
expenses
|
9,878,851
|
8,722,221
|
|||||
|
Federal
income taxes payable
|
16,457
|
-
|
|||||
|
Total
current liabilities
|
18,485,977
|
16,057,851
|
|||||
|
Long-term
debt, less current maturities
|
-
|
8,100,000
|
|||||
|
Deferred
income taxes
|
4,248,614
|
5,953,193
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred stock, $.01 par value, 10,000,000
|
|||||||
|
shares authorized; none issued
|
-
|
-
|
|||||
|
Common stock, $.01 par value, 30,000,000
|
|||||||
|
shares authorized; 19,072,550 shares issued;
|
|||||||
|
19,065,968 outstanding at 12/31/06
|
|||||||
|
18,879,310 outstanding at 12/31/05
|
190,726
|
190,726
|
|||||
|
Additional paid-in capital
|
23,205,045
|
17,882,827
|
|||||
|
Treasury stock, 6,582 shares at 12/31/06
|
|||||||
|
193,240 shares at 12/31/05, at cost
|
(24,145
|
)
|
(708,877
|
)
|
|||
|
Retained earnings
|
92,274,690
|
70,194,319
|
|||||
|
Total
stockholders' equity
|
115,646,316
|
87,558,995
|
|||||
|
Total liabilities and stockholder's equity
|
$
|
138,380,907
|
$
|
117,670,039
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
Common
Stock
|
Additional
|
|||||||||||
|
Shares
|
Paid-in
|
Retained
|
Treasury
|
|||||||||
|
Outstanding
|
Amount
|
Capital
|
Earnings
|
Stock
|
Total
|
|||||||
|
Balance,
January 1, 2004
|
18,680,656
|
$190,726
|
$
17,337,272
|
$32,632,419
|
$(1,437,614)
|
$
48,722,803
|
||||||
|
Exercise
of stock options
|
131,792
|
30,637
|
483,462
|
514,099
|
||||||||
|
Net
income
|
|
|
|
16,526,440
|
|
16,526,440
|
||||||
|
Balance,
December 31, 2004
|
18,812,448
|
190,726
|
17,367,909
|
49,158,859
|
(954,152)
|
65,763,342
|
||||||
|
Exercise
of stock options, including
|
66,862
|
514,918
|
245,275
|
760,193
|
||||||||
|
related
tax benefit
|
||||||||||||
|
Net
income
|
|
|
|
21,035,460
|
|
21,035,460
|
||||||
|
Balance,
December 31, 2005
|
18,879,310
|
190,726
|
17,882,827
|
70,194,319
|
(708,877)
|
87,558,995
|
||||||
|
Exercise
of stock options, including
|
186,658
|
1,528,757
|
684,732
|
2,213,489
|
||||||||
|
related
tax benefit
|
||||||||||||
|
Share
based compensation expense
|
3,793,461
|
3,793,461
|
||||||||||
|
Net
income
|
22,080,371
|
|
22,080,371
|
|||||||||
|
Balance,
December 31, 2006
|
19,065,968
|
$190,726
|
$
23,205,045
|
$92,274,690
|
$ (24,145)
|
$
115,646,316
|
||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$
22,080,371
|
$
21,035,460
|
$
16,526,440
|
|||||||||
|
Adjustments
to reconcile net income to net
|
||||||||||||
|
cash
provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
8,559,374
|
8,379,033
|
9,627,870
|
|||||||||
|
Amortization
of deferred loan costs
|
38,277
|
137,096
|
173,708
|
|||||||||
|
Share
based compensation
|
3,273,708
|
-
|
-
|
|||||||||
|
Provision
for bad debts
|
903,426
|
550,512
|
394,065
|
|||||||||
|
Loss
(gain) on disposal of assets
|
55,115
|
(41,636)
|
172,893
|
|||||||||
|
Deferred
income taxes
|
(1,343,380)
|
(766,817)
|
1,081,656
|
|||||||||
|
Changes
in assets and liabilities
|
||||||||||||
|
Receivables,
net
|
(326,034)
|
(943,183)
|
(272,331)
|
|||||||||
|
Inventories
|
(15,214)
|
(3,756)
|
(206,728)
|
|||||||||
|
Prepaid
expenses
|
(431,507)
|
(55,377)
|
(111,469)
|
|||||||||
|
Other
assets
|
-
|
-
|
(452,065)
|
|||||||||
|
Accounts
payable
|
1,255,038
|
1,587,855
|
(2,660,112)
|
|||||||||
|
Accrued
expenses
|
1,156,630
|
1,134,254
|
1,459,395
|
|||||||||
|
Federal
income taxes payable
|
16,457
|
-
|
-
|
|||||||||
|
Net
cash provided by operating activities
|
35,222,261
|
31,013,441
|
25,733,322
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from sale of assets
|
38,280
|
41,636
|
38,954
|
|||||||||
|
Acquisition
of property and equipment
|
(5,795,089)
|
(6,113,220)
|
(9,149,964)
|
|||||||||
|
Net
cash used in investing activities
|
(5,756,809)
|
(6,071,584)
|
(9,111,010)
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from exercise of stock options
|
2,213,489
|
429,859
|
265,747
|
|||||||||
|
Deferred
tax asset write-off
|
(203,067)
|
-
|
-
|
|||||||||
|
Tax
benefit of stock option exercise
|
722,819
|
-
|
-
|
|||||||||
|
Proceeds
from long-term borrowings
|
-
|
3,000,000
|
49,460,304
|
|||||||||
|
Principal
payments on long-term debt
|
(8,100,000)
|
(27,300,000)
|
(64,244,895)
|
|||||||||
|
Net
cash used in financing activities
|
(5,366,759)
|
(23,870,141)
|
(14,518,844)
|
|||||||||
|
Net
increase in cash
|
24,098,693
|
1,071,716
|
2,103,468
|
|||||||||
|
Cash
at beginning of year
|
12,886,494
|
11,814,778
|
9,711,310
|
|||||||||
|
Cash
at end of year
|
$
36,985,187
|
$
12,886,494
|
$
11,814,778
|
|||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for interest.
|
$
66,659
|
$
973,314
|
$
1,420,230
|
|||||||||
|
Cash
paid for income taxes
|
$
12,300,000
|
$ 11,250,000
|
$
6,570,000
|
|||||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
|
The
Company financed the purchase of property and
|
||||||||||||
|
equipment
in the following amounts
|
$
-
|
$
-
|
$
560,304
|
|||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
MONARCH
CASINO & RESORT, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Monarch
Casino & Resort, Inc. ("Monarch"), a Nevada corporation, was incorporated in
1993. Monarch's wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("Golden
Road"), operates the Atlantis Casino Resort Spa (the "Atlantis"), a hotel/casino
facility in Reno, Nevada. Unless stated otherwise, the "Company" refers
collectively to Monarch and its Golden Road subsidiary.
The
consolidated financial statements include the accounts of Monarch and Golden
Road. Intercompany balances and transactions are eliminated.
On
March
16, 2005, the Company declared a 2 for 1 stock split effective March 31, 2005.
As a result of the split, 9,536,275 additional shares were issued. Stockholders’
equity has been restated to give retroactive recognition to the stock split
for
all periods presented by reclassifying the par value of the additional shares
arising from the split from additional paid-in capital to common stock. All
references in the financial statements and notes thereto to the number of shares
and per share amounts reflect the stock split.
Use
of
Estimates
In
preparing these financial statements in conformity with U.S. generally accepted
accounting principles, 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.
Self-insurance
Reserves
The
Company reviews self-insurance reserves at least quarterly. The amount of
reserve is determined by reviewing the actual expenditures for the previous
twelve-month period and reviewing reports prepared by the third party plan
administrator for any significant unpaid claims. The reserve is accrued at
an
amount that approximates amounts needed to pay both reported and unreported
claims as of the balance sheet date, which management believes are
adequate.
Capitalized
Interest
The
Company capitalizes interest costs associated with debt incurred in connection
with major construction projects. When no debt is specifically identified as
being incurred in connection with a construction project, the Company
capitalizes interest on amounts expended on the project at the Company's average
cost of borrowed money. Interest capitalization is ceased when the project
is
substantially complete. The Company did not record capitalized interest during
the years ended December 31, 2006, 2005 and 2004.
Stockholder
Guarantee Fees
All
of
the Company's bank debt was personally guaranteed by the Company's three largest
stockholders since the inception of our original loan agreement on December
29,
1997.
Effective
January 1, 2001, until February 20, 2004, the Company compensated the guarantors
at the rate of 2% per annum of the quarterly average outstanding bank debt
amount. For
the
year ended December 31, 2004 the Company recorded interest expense of
approximately $136,000 for these guarantee fees. The individuals who guaranteed
our Original Credit Facility were not required to do so for the New Credit
Facility (as defined in NOTE 5. - LONG-TERM DEBT). Therefore, the Company no
longer incurs such guarantee fee expenses.
Inventories
Inventories,
consisting primarily of food, beverages, and retail merchandise, are stated
at
the lower of cost or market. Cost is determined on a first-in, first-out
basis.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Since inception, property and equipment have been depreciated
principally on a straight line basis over the estimated service lives as
follows:
Land
improvements 15-40
years
Buildings 30-40
years
Building
improvements 15-40
years
Furniture
5-10
years
Equipment
5-20
years
In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets," the Company
evaluates the carrying value of its long-lived assets for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable from related future
undiscounted cash flows. Indicators which could trigger an impairment review
include legal and regulatory factors, market conditions and operational
performance. Any resulting impairment loss, measured as the difference between
the carrying amount and the fair value of the assets, could have a material
adverse impact on the Company's financial condition and results of
operations.
Casino
Revenues
Casino
revenues represent the net win from gaming activity, which is the difference
between wins and losses. Additionally, net win is reduced by a provision for
anticipated payouts on slot participation fees, progressive jackpots and any
pre-arranged marker discounts.
Promotional
Allowances
Our
frequent player program, Club Paradise, allows members, through the frequency
of
their play at our casino, to earn and accumulate points which may be redeemed
for a variety of goods and services at our Atlantis Casino Resort Spa. Points
may be applied toward room stays at our hotel, food and beverage consumption
at
any of our food outlets, gift shop items as well as goods and services at our
spa and beauty salon. Points earned may also be applied toward off-property
events such as concerts, shows and sporting events. Points may not be redeemed
for cash.
Awards
under our frequent player program are recognized as promotional expenses at
the
time of redemption.
The
retail value of hotel, food and beverage services provided to customers without
charge is included in gross revenue and deducted as promotional allowances.
The
estimated departmental costs of providing such promotional allowances are
included in casino costs and expenses as follows:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Food
and beverage
|
$11,706,382
|
$11,363,365
|
$10,393,036
|
|
Hotel
|
2,004,909
|
1,820,435
|
1,692,539
|
|
Other
|
504,945
|
436,430
|
402,496
|
|
$14,216,236
|
$13,620,230
|
$12,488,071
|
|
Advertising
Costs
All
advertising costs are expensed as incurred. Advertising expense, which is
included in selling, general & administrative expense, was $3,533,057,
$3,321,653 and $3,455,130 for 2006, 2005 and 2004, respectively.
Income
Taxes
Income
taxes are recorded in accordance with the liability method specified by SFAS
No.
109, "Accounting for Income Taxes." Under the asset and liability approach
for
financial accounting and reporting for income taxes, the following basic
principles are applied in accounting for income taxes at the date of the
financial statements: (a) a current liability or asset is recognized for the
estimated taxes payable or refundable on taxes for the current year; (b) a
deferred income tax liability or asset is recognized for the estimated future
tax effects attributable to temporary differences and carryforwards; (c) the
measurement of current and deferred tax liabilities and assets is based on
the
provisions of the enacted tax law; the effects of future changes in tax laws
or
rates are not anticipated; and (d) the measurement of deferred income taxes
is
reduced, if necessary, by the amount of any tax benefits that, based upon
available evidence, are not expected to be realized.
Allowance
for Doubtful Accounts
The
Company extends short-term credit to its gaming customers. Such credit is
non-interest bearing and due on demand. In addition, the Company also has
receivables due from hotel guests which are primarily secured with a credit
card
at the time a customer checks in. An allowance for doubtful accounts is set
up
for all Company receivables based upon the Company’s historical collection and
write-off experience, unless situations warrant a specific identification of
a
necessary reserve related to certain receivables. The Company charges off its
uncollectible receivables once all efforts have been made to collect such
receivables. The book value of receivables approximates fair value due to the
short-term nature of the receivables.
Stock
Based Compensation
The
Company maintains three stock option plans, which are described more fully
in
Note 7. Prior to January 1, 2006, the Company accounted for these plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations in accounting for its plans. For the years ended
December 31, 2005 and 2004, no stock-based compensation costs are reflected
in
net income, as all options granted under those plans had an exercise price
equal
to the market value of the underlying common stock on the date of the grant.
Effective
January 1, 2006, the Company adopted the fair value recognitions provisions
of
FASB Statement 123(R), Share-Based Payment, using the modified prospective
transition method. Under that transition method, compensation cost recognized
in
the year ended December 31, 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006,
based on the grant date fair value estimated in accordance with the provisions
of Statement 123(R), and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of Statement 123(R). Results for
prior periods have not been restated.
As
a
result of adopting Statement 123(R) on January 1, 2006, the Company’s income
before income taxes and net income for the year ended January 31, 2006 are
$3.3
million and $2.2 lower, respectively, than if it had continued to account for
share based compensation under APB 25. Basic and diluted earnings per share
for
the year ended December 31, 2006 would have been $1.28 and $1.26, respectively,
if the Company had not adopted Statement 123(R), compared to reported basic
and
diluted earnings per share of $1.16 and $1.15, respectively.
Prior
to
the adoption of Statement 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of
the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The $722,819 excess tax benefit for the
year
ended December 31, 2006 classified as a financing cash inflow would have been
classified as an operating cash inflow if the Company had not adopted Statement
123(R).
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of Statement
123
to options granted under the Company’s stock option plans in all periods
presented. If the Company had elected to recognize compensation cost on the
fair
market value at the grant dates for awards under the stock option plans,
consistent with the method prescribed by Statement 123, net income and income
per share for the years ended December 31, 2005 and 2004 would have been changed
to the pro forma amounts indicated below:
|
Year
ended December 31,
|
||
|
2005
|
2004
|
|
|
Net
income, as reported
|
$21,035,460
|
$16,526,440
|
|
Stock
based employee compensation
expensed
determined under the fair
value
based method for all awards,
net
of related tax effects
|
(1,113,398)
|
(45,264)
|
|
Pro
forma net income
|
$19,922,062
|
$16,481,176
|
|
Basic
earnings per share
|
||
|
As
reported
|
$
1.12
|
$
0.88
|
|
Pro
forma
|
$
1.06
|
$
0.88
|
|
Diluted
earnings per share
|
||
|
As
reported
|
$
1.10
|
$
0.88
|
|
Pro
forma
|
$
1.04
|
$
0.88
|
Earnings
Per Share
The
Company reports "basic" earnings per share and "diluted" earnings per share
in
accordance with the provisions of 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):
|
Years
ended December 31,
|
||||||||
|
2006
|
2005
|
2004
|
||||||
|
Shares
|
Per
Share Amount
|
Shares
|
Per
Share Amount
|
Shares
|
Per
Share Amount
|
|||
|
Net
income
|
||||||||
|
Basic
|
18,990
|
$
1.16
|
18,849
|
$
1.12
|
18,756
|
$
0.88
|
||
|
Effect
of dilutive
stock
options
|
285
|
(0.01)
|
245
|
(0.02)
|
59
|
-
|
||
|
Diluted
|
19,275
|
$
1.15
|
19,094
|
$
1.10
|
18,815
|
$
0.88
|
||
The
following options were not included in the computation of diluted earnings
per
share because the options' exercise prices were greater than the average market
price of the common shares and their inclusion would be
antidilutive:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Options
to purchase shares of
common
stock (in thousands)
|
122
|
35
|
812
|
|
Exercise
prices
|
$25.89-$28.25
|
$19.98-$21.46
|
$11.69-$17.20
|
|
Expiration
dates (mo./yr.)
|
5/16-6/16
|
4/15-11/15
|
10/14-11/14
|
Fair
Value of Financial Instruments
The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107 "Disclosures About
Fair
Value of Financial Instruments." The estimated fair value of the Company's
financial instruments has been determined by the Company, using available market
information and valuation methodologies. However, considerable judgment is
required to develop the estimates of fair value; thus, the estimates provided
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
The
carrying amounts of cash, receivables, accounts payable and accrued expenses
approximate fair value because of the short-term nature of these
instruments.
The
fair
value of long-term debt approximates fair value based on the current borrowing
rates offered to the Company for debt of the same remaining
maturities.
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of bank deposits and trade receivables. The Company
maintains its cash in bank, and certificates of deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any
losses in such accounts. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. The Company believes it is not exposed to any
significant credit risk on cash and accounts receivable.
Certain
Risks and Uncertainties
A
significant portion of the Company's revenues and operating income are generated
from patrons who are residents of northern California. A change in general
economic conditions or the extent and nature of casino gaming in California,
Washington or Oregon could adversely affect the Company's operating results.
The
constitutional amendment approved by California voters in 1999 allowing the
expansion of Indian casinos in California has had an impact on casino revenues
in Nevada in general, and many analysts have continued to predict the impact
will be more significant on the Reno-Lake Tahoe market. The extent of this
continued impact is difficult to predict, but we believe that the impact on
us
will continue to be mitigated to some extent due to the Atlantis' emphasis
on
Reno area residents as a significant base of its business, as well as its
proximity to the Reno-Sparks Convention Center. However, if other Reno area
casinos continue to suffer business losses due to increased pressure from
California Indian casinos, they may intensify their marketing efforts to
Reno-area residents as well. However, we believe our numerous amenities such
as
a wide array of restaurants, a video arcade, banquet facilities and surface
parking are a key factor in our ability to attract Locals which competitor
facilities will not easily be able to match without major capital
expenditures.
Certain
experienced Nevada gaming operators have agreements to build and manage Indian
casino facilities near San Francisco, one of Reno's key feeder markets. One
major facility near Sacramento has been operating since June 2003 and has been
very successful, adversely impacting many hotel casinos in Reno. Once these
facilities receive all the required permits and are built, they could provide
an
alternative to Reno area casinos, especially during certain winter periods
when
auto travel through the Sierra Nevada mountain passes is hampered.
We
also
believe that the legalization of 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 impact on our
business.
In
June
2004, five California Indian tribes signed compacts with the state that allows
the tribes to increase the number of slot machines beyond the previous
2,000-per-tribe limit in exchange for higher fees from each of the five tribes.
The State of California hopes to sign similar compacts with more Indian
tribes.
In
addition, the Company relies on non-conventioneer visitors partially comprised
of individuals flying into the Reno area. The “War on Terrorism,” combined with
the ongoing situation in Iraq and the threat of further terrorist attacks could
have an adverse effect on the Company's revenues from this segment. The
terrorist attacks that took place in the United States on September 11, 2001
were unprecedented events that created economic and business uncertainties,
especially for the travel and tourism industry. The potential for future
terrorist attacks, the national and international responses, and other acts
of
war or hostility including the ongoing situation in Iraq, have created economic
and political uncertainties that could materially adversely affect our business,
results of operations, and financial condition in ways we cannot
predict.
A
change
in regulations on land use requirements with regard to development of new hotel
casinos in the proximity of the Atlantis could have an adverse impact on our
business, results of operations, and financial condition. Also see other factors
described in ITEM 1A. RISK FACTORS in the Company’s filing on form
10-K.
Impact
of Recently Issued Accounting Standards
In
March
2006, the Financial Accounting Standards Board (FASB) issued SFAS 156,
Accounting for Servicing of Financial Assets - an Amendment of SFAS 140. This
Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. Adoption
of
this SFAS is required
as of
January
1, 2007.
The
Company does not expect that the adoption of SFAS 156 will have a significant
impact on the Company’s financial position or results of operations.
In
June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN
48), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes, by prescribing
a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company will adopt FIN 48 as of
January 1, 2007, as required. The cumulative effect of adoption FIN 48 will
be
recorded in retained earnings. The Company does not expect that the adoption
of
FIN 48 will have a significant impact on the Company’s financial position or
results of operations.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, accordingly, this Statement
does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. This Statement
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating the provisions of SFAS 157 to determine its impact, if
any,
on the Company’s financial position and results of operations.
NOTE
2. ACCOUNTS RECEIVABLE
Accounts
receivable consist of the following:
|
December
31,
|
||
|
2006
|
2005
|
|
|
Casino
|
$
3,338,227
|
$
3,390,539
|
|
Hotel
|
1,019,019
|
749,578
|
|
Other
|
165,021
|
501,232
|
|
4,522,267
|
4,641,349
|
|
|
Less
allowance for
doubtful
accounts
|
(1,253,297)
|
(1,081,747)
|
|
$
3,268,970
|
$
3,559,602
|
|
The
Company
recorded bad debt expense of $903,426, $550,512 and $394,065 in 2006, 2005
and
2004, respectively.
NOTE
3. ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
December
31,
|
||
|
2006
|
2005
|
|
|
Accrued
salaries, wages
and
related benefits
|
$4,714,956
|
$4,365,618
|
|
Progressive
slot machine
and
other gaming accruals
|
2,539,657
|
2,286,389
|
|
Accrued
gaming taxes
|
660,478
|
527,996
|
|
Accrued
interest
|
25,534
|
32,749
|
|
Other
accrued liabilities
|
1,938,226
|
1,509,469
|
|
$9,878,851
|
$8,722,221
|
|
NOTE
4. LEASE COMMITMENTS
The
Company leases certain furniture and equipment. The leases generally provide
for
the lessee to pay taxes, maintenance, insurance, and certain other operating
costs of the leased property. The leases on most of the properties contain
renewal provisions.
In
2004,
a driveway was constructed that is being shared between the Atlantis and the
adjacent Sierra Marketplace Shopping Center that is owned and controlled by
affiliates of the Company's principal stockholders (the "Shopping Center").
A
new traffic signal was erected at mid-block on South Virginia Street, serving
the new driveway. As part of this project, the Company is leasing a 37,368
square-foot corner section of the Shopping Center for a minimum lease term
of 15
years at an annual rent of $300,000, subject to increase every 60 months based
on the Consumer Price Index. The Company is also using part of the common area
of the Shopping Center and pays its proportional share of the common area
expense of the Shopping Center. The Company has the option to renew the lease
for 3 five-year terms, and at the end of the extension period, the Company
has
the option to purchase the leased section of the Shopping Center at a price
to
be determined based on an MAI appraisal. The Company uses the leased space
for
pedestrian and vehicle access to the Atlantis, and the Company has use of a
portion of the parking spaces at the Shopping Center. The total cost of the
project was $2.0 million; the Company was responsible for two thirds of the
total cost, or $1.35 million. The project was completed, the driveway was put
into use and the Company began paying rent on September 30, 2004. The cost
of
the new driveway is being depreciated over the initial 15-year lease term;
some
components of the new driveway are being depreciated over a shorter period
of
time.
The
Company accounts for its rental expense using the straight-line method over
the
original lease term. Rental increases based on the change in the CPI are
contingent and accounted for prospectively.
Following
is a summary of future minimum payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year at December 31,
2006:
|
Operating
Leases
|
|
|
Year
ending December 31,
|
|
|
2007
|
$
370,000
|
|
2008
|
370,000
|
|
2009
|
370,000
|
|
2010
|
370,000
|
|
2011
|
370,000
|
|
Thereafter
|
2,867,000
|
|
Total
minimum lease payments
|
$4,717,000
|
Rental
expense for operating leases amounted to $9,085,
$79,383 and $175,596 in 2006, 2005 and 2004, respectively, as reported in
selling, general and administrative expenses in the statements of
income.
NOTE
5. LONG-TERM DEBT
Long-term
debt consists of the following:
|
December
31,
|
||
|
2006
|
2005
|
|
|
Amounts
outstanding under bank reducing
revolving
credit facility (the "New Credit
Facility"),
collateralized by substantially all
property
and equipment of Golden Road
and
guaranteed by Monarch, with floating
interest
rates tied to a base rate
approximately
equal to the prime rate or
LIBOR
(at the Company's option) plus a
margin
which fluctuates according to the
Company's
ratio of funded debt to Earnings
Before
Interest, Taxes, Depreciation and
Amortization
("EBITDA"). The weighted
average
interest rate was approximately
6.09%
at December 31, 2005 (see “The
Credit
Facility” below
|
$
-
|
$
8,100,000
|
|
Less
current maturities
|
-
|
-
|
|
$
-
|
$
8,100,000
|
|
THE
CREDIT FACILITY
Until
February 20, 2004, the Company had a reducing revolving term loan credit
facility with a consortium of banks that was to expire on June 30, 2004, and
in
the original amount of $80 million but that had been reduced to $46 million
at
payoff (the "Original Credit Facility").
On
February 20, 2004, the Original Credit Facility was refinanced (the "New Credit
Facility") for $50 million, which included the $46 million payoff of the unpaid
balance of the Original Credit Facility. At the Company’s option, borrowings
under the New Credit Facility accrue interest at a rate designated by the agent
bank at its base rate (the "Base Rate") or at the London Interbank Offered
Rate
("LIBOR") for one, two, three or six month periods. The rate of interest paid
by
the Company will include a margin added to either the Base Rate or to LIBOR
that
is tied to our ratio of funded debt to EBITDA (the "Leverage Ratio"). Depending
on our Leverage Ratio, this margin can vary between 0.25 percent and 1.25
percent above the Base Rate, and between 1.50 percent and 2.50 percent above
LIBOR (under the Original Credit Facility, this margin varied between 0.00
percent and 2.00 percent above the Base Rate, and between 1.50 percent and
3.50
percent above LIBOR). At December 31, 2006, the Company had no borrowings under
the New Credit Facility; however, its leverage ratio was such that the pricing
for borrowings would have been the Base Rate plus 0.25 percent or LIBOR plus
1.50 percent.
Subject
to the Company’s February 2007 decision to reduce the total borrowings available
to $5 million as described below, the Company may utilize proceeds from the
New
Credit Facility for working capital needs, general corporate purposes and for
ongoing capital expenditure requirements at the Atlantis.
The
New
Credit Facility is secured by liens on substantially all of the real and
personal property of the Atlantis, and is guaranteed by Monarch. The Original
Credit Facility was guaranteed individually by certain controlling stockholders
of the Company. These individuals were not required to provide any personal
guarantees for the New Credit Facility and, therefore, going forward, the
Company will no longer incur guarantee fee expenses.
The
New
Credit Facility contains covenants customary and typical for a facility of
this
nature, including, but not limited to, covenants requiring the preservation
and
maintenance of Company assets and covenants restricting the Company’s ability to
merge, transfer ownership of Monarch, incur additional indebtedness, encumber
assets and make certain investments. The New Credit Facility also contains
covenants requiring the Company to maintain certain financial ratios and
contains provisions that restrict cash transfers between Monarch and its
affiliates. The New Credit Facility also contains provisions requiring the
achievement of certain financial ratios before the Company can repurchase its
common stock. Management does not consider the covenants to restrict
operations.
The
maturity date of the New Credit Facility is February 23, 2009. Beginning June
30, 2004, the maximum principal available under the Credit Facility was to
be
reduced over five years by an aggregate of $30.875 million in equal increments
of $1.625 million per quarter with the remaining balance due at the maturity
date. The Company may prepay borrowings under the New Credit Facility without
penalty (subject to certain charges applicable to the prepayment of LIBOR
borrowings prior to the end of the applicable interest period). Amounts prepaid
under the New Credit Facility may be reborrowed so long as the total borrowings
outstanding do not exceed the maximum principal available. At December 31,
2006,
available borrowings under the New Credit Facility were $24.0
million.
Effective February 2007, in consideration of the Company’s cash balance, cash
expected to be generated from operations and to avoid agency and commitment
fees, the Company elected to permanently reduce the available borrowings to
$5
million. The Company may permanently reduce the maximum principal available
under the New Credit Facility at any time so long as the amount of such
reduction is at least $500,000 and a multiple of $50,000. The
Company paid various one-time fees and other loan costs upon the closing of
the
refinancing of the New Credit Facility that will be amortized over the term
of
the New Credit Facility using the straight-line method.
NOTE
6. INCOME TAXES
Income
tax provision (benefit) from continuing operations consists of the
following:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Current
provision
|
$13,157,285
|
$11,834,750
|
$7,081,256
|
|
Deferred
provision (benefit)
|
(1,377,695)
|
(814,198)
|
1,081,656
|
|
$11,779,590
|
$11,020,552
|
$8,162,912
|
|
Income
tax benefits were recognized through stockholders’ equity of $519,751, $330,333
and $248,353 during the years of 2006, 2005 and 2004, respectively, as
compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes.
The
difference between the Company's provision for federal income taxes as presented
in the accompanying Consolidated Statements of Income, and the provision for
income taxes computed at the statutory rate is comprised of the items shown
in
the following table as a percentage of pre-tax earnings.
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Income
tax at the statutory rate
|
35.0%
|
35.0%
|
35.0%
|
|
Non-deductible
expenses and other
|
-
|
-
|
(1.1)%
|
|
Tax
credits
|
(0.2)%
|
(0.6)%
|
(0.8)%
|
|
34.8%
|
34.4%
|
33.1%
|
|
The
components of the deferred income tax assets and liabilities at December 31,
2006 and 2005, as presented in the Consolidated Balance Sheets, are as follows:
|
2006
|
2005
|
|
|
DEFERRED
TAX ASSETS
|
||
|
Share
based compensation
|
$
659,231
|
$
-
|
|
Compensation
and benefits
|
393,087
|
412,354
|
|
Bad
debt reserves
|
438,654
|
378,611
|
|
Accrued
gaming liabilities
|
353,360
|
341,435
|
|
Accrued
interest
|
8,937
|
11,462
|
|
Accrued
other
|
199,499
|
182,362
|
|
Deferred
income tax asset
|
$
2,052,768
|
$
1,326,224
|
|
DEFERRED
TAX LIABILITIES
|
||
|
Impairment
of assets
|
$
(72,260)
|
$
(72,260)
|
|
Depreciation
|
(4,749,378)
|
(5,390,693)
|
|
Land
basis
|
(285,706)
|
(285,706)
|
|
Real
estate taxes
|
(229,013)
|
(204,534)
|
|
Deferred
income tax liability
|
$(5,336,357)
|
$(5,953,193)
|
|
NET
DEFERRED INCOME TAX LIABILITY
|
$(3,283,589)
|
$(4,626,969)
|
NOTE
7. BENEFIT PLANS
Savings
Plan - Effective November 1, 1995, the Company adopted a savings plan, which
qualifies under Section 401(k) of the Internal Revenue Code. Under the plan,
participating employees may defer up to 15% of their pre-tax compensation,
but
not more than statutory limits. For years earlier than 2007, the Company
contributed twenty five cents for each dollar contributed by a participant,
with
a maximum contribution of 4% of a participant's compensation. Effective January
1, 2007, the Company increased its contribution to fifty cents for each dollar
contributed by a participant. The Company's matching contributions were
approximately $59,774, $46,504, and
$44,947, and in 2006, 2005 and 2004, respectively.
NOTE
8. SHARE-BASED COMPENSATION
The
Company’s three stock option plans, consisting
of the Directors' Stock Option Plan, the Executive Long-term Incentive Plan,
and
the Employee Stock Option Plan (the "Plans"), which collectively provide for
the
granting of options to purchase up to 2,250,000 common shares. The exercise
price of stock options granted under the Plans is established by the respective
plan committees, but the exercise price may not be less than the market price
of
the Company's common stock on the date the option is granted. The Company stock
options typically vest on a graded schedule, typically in equal, one-third
increments, although the respective stock option committees have the discretion
to impose different vesting periods or modify existing vesting periods. Options
expire ten years from the grant date. By their amended terms, the Plans will
expire in June 2013 after which no options may be granted.
A
summary
of the current year stock option activity as of and for the twelve months ended
December 31, 2006 is presented below:
|
Weighted
Average
|
||||||||
|
Options
|
Shares
|
Exercise
Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
||||
|
Outstanding
at beginning of period
|
1,117,558
|
$13.25
|
-
|
-
|
||||
|
Granted
|
330,299
|
23.75
|
-
|
-
|
||||
|
Exercised
|
(186,658)
|
11.89
|
-
|
-
|
||||
|
Forfeited
|
(140,000)
|
13.91
|
-
|
-
|
||||
|
Expired
|
-
|
-
|
-
|
-
|
||||
|
Outstanding
at end of period
|
1,121,199
|
$16.49
|
8.5
yrs.
|
$8,283,614
|
||||
|
Exercisable
at end of period
|
346,869
|
$10.85
|
6.4
yrs.
|
$3,839,591
|
||||
A
summary
of the status of the Company’s nonvested shares as of December 31, 2006, and
changes during the year and changes during the year ended December 31, 2006,
is
presented below:
|
Nonvested
Shares
|
Shares
|
Weighted-Average
Grant Date Fair Value
|
||
|
Nonvested
at January 1, 2006
|
883,993
|
$13.27
|
||
|
Granted
|
330,299
|
23.75
|
||
|
Vested
|
(299,962)
|
12.92
|
||
|
Forfeited
|
(140,000)
|
13.91
|
||
|
Nonvested
at December 31, 2006
|
774,330
|
$18.14
|
Expense
Measurement and Recognition
On
January 1, 2006, the Company adopted the provisions of SFAS 123R requiring
the
measurement and recognition of all share-based compensation under the fair
value
method. The Company implemented SFAS 123R using the modified prospective
transition method.
Accordingly, for the year ended December 31, 2006, the Company recognized
share-based compensation for all current award grants and for the unvested
portion of previous award grants based on grant date fair values. Prior to
fiscal 2006, the Company accounted for share-based awards under the
disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148, but
applied APB No. 25 and related interpretations in accounting for the
Plans,
which
resulted in pro-forma compensation expense only for stock option awards. Prior
period financial statements have not been adjusted to reflect fair value
share-based compensation expense under SFAS 123R. See additional discussion
at
NOTE
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. With the adoption of SFAS 123R,
we
changed our method of expense attribution for fair value share-based
compensation from the straight-line approach to the accelerated approach for
all
awards granted. The Company anticipates the accelerated method will provide
a
more meaningful measure of costs incurred and be most representative of the
economic reality associated with unvested stock options outstanding.
Unrecognized costs related to all share-based awards outstanding at December
31,
2006 totaled approximately $4.5 million and is expected to be recognized over
a
weighted average period of 1.58 years.
The
Company uses historical data and projections to estimate expected employee,
executive and director behaviors related to option exercises and
forfeitures.
The
Company estimates the fair value of each stock option award on the grant date
using the Black-Scholes valuation model incorporating the assumptions noted
in
the following table. Option valuation models require the input of highly
subjective assumptions, and changes in assumptions used can materially affect
the fair value estimate. Option valuation assumptions for options granted during
each year were as follows:
|
Years
ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Expected
volatility
|
38.0%
|
46.7%
|
45.5%
|
|
Expected
dividends
|
-
|
-
|
-
|
|
Expected
life (in years)
|
|||
|
Directors’
Plan
|
2.5
|
6.2
|
4.7
|
|
Executive
Plan
|
6.9
|
9.0
|
9.0
|
|
Employee
Plan
|
2.9
|
5.5
|
5.0
|
|
Weighted
average risk free rate
|
4.6%
|
4.0%
|
3.8%
|
|
Weighted
average grant date fair value per
share
of options granted
|
$
10.64
|
$
9.19
|
$
5.26
|
|
Total
intrinsic value of options exercised
|
$2,238,390
|
$1,081,274
|
$2,457,211
|
|
Cash
received for all stock option exercises
|
$2,213,489
|
$
429,859
|
$
265,747
|
|
Tax
benefit realized for tax return deductions
|
$
519,752
|
$
330,333
|
$
248,353
|
The
risk-free interest rate is based on the U.S. treasury security rate in
effect as of the date of grant. The expected lives of options are based on
historical data of the Company. In 2006, the Company determined that an implied
volatility is more reflective of market conditions and a better indicator of
expected volatility.
Reported
stock based compensation expense was classified as follows:
|
For
the year ended December 31, 2006
|
|
|
Casino
|
$
59,685
|
|
Food
& beverage
|
51,673
|
|
Hotel
|
47,233
|
|
Selling,
general & administrative
|
3,115,117
|
|
Total
stock-based compensation,
|
|
|
before
taxes
|
3,273,708
|
|
Tax
benefit
|
(1,145,797)
|
|
Total
stock-based compensation,
|
|
|
net
of tax
|
$
2,127,911
|
NOTE
9. COMMITMENTS AND CONTINGENCIES
Self
Insurance - The Company is self-insured for health care claims for eligible
active employees. Benefit plan administrators assist the Company in determining
its liability for self-insured claims, and such claims are not discounted.
The
Company is also self-insured for workers’ compensation. Both plans limit the
Company's maximum liability under stop-loss agreements with insurance companies.
The maximum liability for health care claims under the stop-loss agreement
is
$85,000 per claim. The maximum liability for workers’ compensation under the
stop-loss agreement is $500,000 per claim.
On
March
10, 2003, the Company announced a plan to repurchase up to 500,000 shares
(adjusted for the 2 for 1 stock split effective March 31, 2005), or 2.6%, of
the
Company’s common stock in open market transactions (the “First Plan”). During
2003, the Company purchased 360,000 shares (adjusted for the 2 for 1 stock
split
mentioned above) pursuant to the First Plan and made no subsequent purchases.
On
September 28, 2006, the Company’s Board of Directors terminated the First Plan
and authorized a second stock repurchase plan (the “Second Plan”).
Under
the
Second Plan, the Board of Directors authorized a program to repurchase up to
1,000,000 shares of the Company’s common stock in the open market or in
privately negotiated transactions from time to time, in compliance with Rule
10b-18 of the Securities and Exchange Act of 1934, subject to market conditions,
applicable legal requirements and other factors. The Second Plan does not
obligate the Company to acquire any particular amount of common stock and the
plan may be suspended at any time at the Company’s discretion. As of December
31, 2006, the Company made no purchases pursuant to the Second
Plan.
As
previously disclosed, litigation was filed against Monarch on January 27, 2006,
by Kerzner International Limited (“ Kerzner ") owner of the Atlantis, Paradise
Island, Bahamas in the United States District Court, District of Nevada. The
case number assigned to the matter is 3:06-cv-00232-ECR (RAM). The complaint
seeks declaratory judgment prohibiting Monarch from using the name "Atlantis"
in
connection with offering casino services other than at Monarch's Atlantis Casino
Resort Spa located in Reno, Nevada, and particularly prohibiting Monarch from
using the "Atlantis" name in connection with offering casino services in Las
Vegas, Nevada; injunctive relief enforcing the same; unspecified compensatory
and punitive damages; and other relief. Monarch believes Kerzner's claims to
be
entirely without merit and is defending vigorously against the suit. Further,
Monarch has filed a counterclaim against Kerzner seeking to enforce the license
agreement granting Monarch the exclusive right to use the Atlantis name in
association with lodging throughout the state of Nevada; to cancel Kerzner's
registration of the Atlantis mark for casino services on the basis that the
mark
was fraudulently obtained by Kerzner; and to obtain declaratory relief on these
issues. Litigation is in the discovery phase.
The
Company expects to begin construction in the second quarter of 2007 on the
next
expansion phase of the Atlantis. New space to be added to the first floor casino
level, the second and third floors and the basement level will total
approximately 116,000 square feet. Once complete, the existing casino floor
will
be expanded by over 10,000 square feet, or approximately 20%. The first floor
plans include a redesigned, updated and expanded race and sports book of
approximately 4,000 square feet and an enlarged poker room. The plans also
include a New York-style deli restaurant. The second floor expansion will create
additional ballroom and convention space of approximately 27,000 square feet,
doubling the existing facilities. The spa and fitness center will be remodeled
and expanded to create an ultra-modern spa and fitness center facility. The
Company is currently in negotiations to add a pedestrian skywalk over Peckham
Street that will connect the Reno-Sparks Convention Center directly to the
Atlantis. Upon completion of an agreement, construction is expected to take
approximately twelve months and is expected to be funded entirely out of
existing cash on hand plus cash flow from operations. Excluding the cost of
the
skywalk, the expansion is estimated to cost approximately $50 million. Final
design plans, and the resultant cost estimate, of the skywalk have not been
completed.
The
Company is a defendant in various pending legal proceedings. In the opinion
of
management, all pending claims in such litigation will not, in the aggregate,
have a material adverse effect on the Company's financial position, cash flows
or results of operations.
NOTE
10. RELATED PARTY TRANSACTIONS
On
July
26, 2006, the Company submitted a formal offer to Biggest Little Investments,
L.P. (“BLI”), formulated and delivered by a committee comprised of the Company’s
independent directors (the “Committee”), to purchase the 18.95 acre shopping
center (the “Shopping Center”) adjacent to the Atlantis Casino Resort Spa. On
October 16, 2006, the Committee received a letter from counsel to BLI advising
the Company that BLI, through its general partner, Maxum, L.L.C., had “decided
that such offer is not in the best interest of the Partnership’s limited
partners and, therefore, will not be entering into negotiations with Monarch.”
The Board of Directors continues to consider expansion alternatives.
John
Farahi, Bob Farahi and Ben Farahi, beneficially own a controlling interest
in
BLI through their beneficial ownership interest in Western Real Estate
Investments, LLC. John Farahi is Co-Chairman of the Board, Chief Executive
Officer, Chief Operating Officer and a Director of Monarch. Bob Farahi is
Co-Chairman of the Board, President, Interim Treasurer, Interim Secretary and
a
Director of Monarch. Ben Farahi formerly was the Co-Chairman of the Board,
Secretary, Treasurer, Chief Financial Officer and a Director of Monarch.
Monarch’s board of directors accepted Ben Farahi’s resignation from these
positions on May 23, 2006.
The
Company currently rents various spaces totaling approximately
13,000 square feet in the Shopping Center which it uses as office and storage
space and paid rent of approximately $95,520 plus common area expenses in 2006.
The Company paid rent of approximately $85,730 and $67,200 plus
common
area expenses in 2005 and 2004, respectively.
In
addition, a driveway that is being shared between the Atlantis and the Shopping
Center was completed on September 30, 2004. As part of this project, in January
2004, the Company leased a 37,368 square-foot corner section of the Shopping
Center for a minimum lease term of 15 years at an annual rent of $300,000,
subject to increase every 60 months based on the Consumer Price Index. The
Company began paying rent to the Shopping Center on September 30, 2004. The
Company also uses part of the common area of the Shopping Center and pays its
proportional share of the common area expense of the Shopping Center. The
Company has the option to renew the lease for 3 five-year terms, and at the
end
of the extension periods, the Company has the option to purchase the leased
section of the Shopping Center at a price to be determined based on an MAI
Appraisal. The leased space is being used by the Company for pedestrian and
vehicle access to the Atlantis, and the Company may use a portion of the parking
spaces at the Shopping Center. The
total
cost of the project was $2.0 million; the Company was responsible for two thirds
of the total cost, or $1.35 million. The Company paid approximately $300,000
plus common area charges in 2006 and $300,000 and $75,800 plus common area
charges in 2005 and 2004, respectively, for its leased driveway space at the
Shopping Center.
The
Company is currently leasing sign space from the Shopping Center. The lease
took
effect in March 2005 for a monthly cost of $1. The lease was renewed for another
year with a monthly lease of $1,000 effective January 1, 2006. The Company
paid
$12,000 for the twelve months ended December 31, 2006 and did not make any
payments during 2005.
On
September 23, 2003, the Company entered into an option agreement with an
affiliate of its principal stockholders to purchase property in South Reno
for
development of a new hotel casino. Through
the property owner, the Company filed an application with the City of Reno
for
both master plan and zoning changes for 13 acres of the property.
On
January 20, 2005, the City of Reno Planning Commission approved the application
for zoning change on the property; the Reno City Council would next have to
approve the application. On April 13, 2005, the Reno City Council rejected
the
application for master plan and zoning change. As a result of the City Council’s
decision, the Company expensed in 2005 a charge of approximately $289,000
in
gaming development costs related to the potential new hotel casino. The option
agreement was set to expire on September 15, 2005 and the Company’s Board of
Directors voted to let the agreement expire on such date without exercising
the
option to purchase.
The
Company is currently leasing billboard advertising space from affiliates of
its
principal
stockholders for a total cost of $42,000 in 2006, $31,500 in 2005 and $53,000
in
2004.
The
Company is currently renting office and storage space from a company affiliated
with Monarch’s
principal
stockholders and paid rent of approximately $26,000 in 2006, $28,000 in 2005
and
$27,900
in
2004.
Effective December 2006, Monarch’s principal stockholders sold this building and
the Company continues to rent space from the new owner who is not a related
party to Monarch.
NOTE
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
2006
|
|||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
|||||
|
Net
revenues
|
$35,605,134
|
$37,622,776
|
$41,748,378
|
$36,992,666
|
$151,968,954
|
||||
|
Operating
expenses
|
28,253,119
|
30,334,617
|
30,547,067
|
29,342,518
|
118,477,321
|
||||
|
Income
from operations
|
7,352,016
|
7,288,159
|
11,201,310
|
7,650,148
|
33,491,633
|
||||
|
Net
income
|
4,768,098
|
4,822,232
|
7,371,041
|
5,119,000
|
22,080,371
|
||||
|
Income
per share of
common
stock
|
|||||||||
|
Basic
|
$
0.25
|
$
0.25
|
$
0.39
|
$
0.27
|
$
1.16
|
||||
|
Diluted
|
$
0.25
|
$
0.25
|
$
0.38
|
$
0.27
|
$
1.15
|
||||
|
2005
|
|||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
|||||
|
Net
revenues
|
$31,562,702
|
$34,982,387
|
$38,347,892
|
$34,891,896
|
$139,784,877
|
||||
|
Operating
expenses
|
25,373,622
|
26,746,318
|
27,197,049
|
27,398,499
|
106,715,488
|
||||
|
Income
from operations
|
6,189,080
|
8,236,069
|
11,150,843
|
7,493,397
|
33,069,389
|
||||
|
Net
income
|
3,853,706
|
5,194,106
|
7,087,214
|
4,900,434
|
21,035,460
|
||||
|
Income
per share of
common
stock
|
|||||||||
|
Basic
|
$
0.20
|
$
0.28
|
$
0.38
|
$
0.26
|
$
1.12
|
||||
|
Diluted
|
$
0.20
|
$
0.27
|
$
0.37
|
$
0.26
|
$
1.10
|
||||
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
of the
end of the period covered by this Annual Report on Form 10-K, (the "Evaluation
Date"), an evaluation was carried out by our management, with the participation
of our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined by Rule
13a-15(e) under the Securities Exchange Act of 1934). Based upon the evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. No changes were made to our internal control over
financial reporting (as defined by Rule 13a-15(e) under the Securities Exchange
Act of 1934) during the last fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed
to
provide reasonable assurance to our management and Board of Directors regarding
the preparation and fair presentation of published financial
statements.
All
internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention
or
overriding of controls. Accordingly, even effective internal controls can
provide only reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal controls may vary over time.
Management
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2006. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on our assessment we believe
that, as of December 31, 2006, the Company’s internal control over financial
reporting is effective based on those criteria.
The
Company’s independent registered public accounting firm has issued an audit
report on our assessment of the Company’s internal control over financial
reporting. This report appears in Item 8 of this Form 10-K.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This
information is incorporated by reference from the Company's Proxy Statement
to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007.
ITEM
11. EXECUTIVE COMPENSATION
This
information is incorporated by reference from the Company's Proxy Statement
to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Following
is information related to the Company’s equity compensation.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||
|
(a)
|
(b)
|
(c)
|
||||
|
Equity
compensation plans approved by security holders (F1)
|
1,121,199
|
$16.49
|
575,383
|
|||
|
|
||||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||
|
Total
|
1,121,199
|
$16.49
|
575,383
|
(F1)
Includes the 1993 Directors’ Stock Option Plan, 1993 Employee Stock Option Plan
and 1993 Executive Long-Term Incentive Plan, as amended.
Additional
information is incorporated by reference from the Company's Proxy Statement
to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This
information is incorporated by reference from the Company's Proxy Statement
to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This
information is incorporated by reference from the Company's Proxy Statement
to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 22, 2007.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) |
1.
Financial Statements
|
Included
in Part II of this report:
a)
Report
of Independent Registered Public Accounting Firm
b)
Consolidated Statements of Income for the years ended December 31,
2006,
2005
and
2004.
c)
Consolidated Balance Sheets at December 31, 2006, and 2005.
d)
Consolidated Statements of Stockholders' Equity for the years ended
December
31, 2006, 2005 and 2004.
e)
Consolidated Statements of Cash Flows for the years ended December
31,
2006,
2005 and 2004.
f)
Notes
to Consolidated Financial Statements.
(a)
2.
Financial Statements Schedules
Schedule
II. - VALUATION AND QUALIFYING ACCOUNTS
|
Year
ended December 31,
|
Balance
at beginning of year
|
Charged
to costs and expenses
|
Deductions
(F1)
|
Other
|
Balance
at end of year
|
|||||
|
2004
|
||||||||||
|
Allowance
for doubtful accounts
|
$1,030,618
|
$394,065
|
($624,000)
|
$
-
|
$ 800,683
|
|||||
|
2005
|
||||||||||
|
Allowance
for doubtful accounts
|
$
800,683
|
$550,512
|
($269,448)
|
$
-
|
$1,081,747
|
|||||
|
2006
|
||||||||||
|
Allowance
for doubtful accounts
|
$1,081,747
|
$903,426
|
($731,876)
|
$
-
|
$1,253,297
|
(F1)
The
Company reviews receivables monthly and, accordingly, adjusts the allowance
for
doubtful accounts monthly. The Company records write-offs annually. The amount
charged to Costs and Expenses reflects the bad debt expense recorded in the
consolidated statements of income, while the amount recorded for Deductions
reflects the adjustment to actual allowance for doubtful accounts reserve at
the
end of the period.
| (b) |
Exhibits
|
Number Exhibit
Description
3.01
Articles
of Incorporation of Monarch Casino & Resort, Inc., filed June 11, 1993 are
incorporated herein by reference from the Company's Form S-1 registration
statement (SEC File 33-64556), Part II, Item 16, Exhibit 3.01.
3.02
Bylaws
of
Monarch Casino & Resort, Inc., adopted June 14, 1993 are
incorporated
herein
by
reference from the Company's Form S-1 registration statement (SEC File
33-64556), Part II, Item 16, Exhibit 3.02.
3.03
Articles
of Incorporation of Golden Road Motor Inn, Inc. filed March 6, 1973; Certificate
Amending Articles of Incorporation of Golden Road Motor Inn, Inc. filed August
29, 1973; and Certificate of Amendment of Articles of Incorporation filed April
5, 1984 are incorporated herein by reference from the Company's Form S-1
registration statement (SEC File 33-64556), Part II, Item 16, Exhibit
3.03.
3.04
Bylaws
of
Golden Road Motor Inn, Inc., adopted March 9, 1973
are
incorporated herein by reference from the Company's Form S-1 registration
statement (SEC File 33-64556), Part II, Item 16, Exhibit
3.04.
3.05
Amendment
to Bylaws of Monarch Casino & Resort, Inc. adopted January 24, 1995 is filed
as an exhibit to this Form 10-K.
4.01
Specimen
Common Stock Certificate for the Common Stock of Monarch
Casino
& Resort, Inc. is incorporated herein by reference from the Company's Form
S-1 registration statement (SEC File 33-64556), Part II, Item 16, Exhibit
4.01.
4.02
Amended
and Restated Monarch Casino & Resort, Inc. 1993 Directors' Stock Option Plan
is incorporated herein by reference to the Company's Form 10-K report (SEC
File
0-022088) for the fiscal year ended December 31, 1998, Item 14(c), Exhibit
4.02.
| 4.03 |
Amended
and Restated Monarch Casino & Resort, Inc. 1993 Executive Long-Term
Incentive Plan is incorporated herein by reference to the Company's
Form
10-K report (SEC File 0-22088) for the fiscal year
ended
December 31, 1997, Item 14(c), Exhibit
4.03.
|
| 4.04 |
Amended
and Restated Monarch Casino & Resort, Inc. 1993 Employee Stock Option
Plan is incorporated herein by reference to the Company's Form 10-K
report
(SEC File 0-22088) for the fiscal year ended December 31, 1997, Item
14(c), Exhibit 4.04.
|
4.05 Second
Amendment to Monarch Casino & Resort, Inc. 1993 Directors’ Stock Option Plan
is incorporated herein by reference to the Company's Proxy Statement (SEC File
0-22088) in relation to the Company’s 2003 Annual Meeting of Stockholders
Exhibit A-1.
4.06 Second
Amendment to Monarch Casino & Resort, Inc. 1993 Employee Stock Option Plan
is incorporated herein by reference to the Company's Proxy Statement (SEC File
0-22088) in relation to the Company’s 2003 Annual Meeting of Stockholders
Exhibit A-2.
4.07 Second
Amendment to Monarch Casino & Resort, Inc. 1993 Executive Long-Term
Incentive Plan is incorporated herein by reference to the Company's Proxy
Statement (SEC File 0-22088) in relation to the Company’s 2003 Annual Meeting of
Stockholders Exhibit A-3.
4.08 Third
Amendment to Monarch Casino & Resort, Inc. 1993 Employee Stock Option
Plan.
4.09 Third
Amendment to Monarch Casino & Resort, Inc. 1993 Executive Long-Term
Incentive Plan.
10.01 Non-standardized
401(k) Plan Adoption Agreement between Monarch Casino & Resort, Inc. and
Smith Barney Shearson dated November 7, 1995 is incorporated herein by reference
to the Company's Form 10-K report (SEC File 0-22088) for the fiscal year ended
December 31, 1995, Item 14(a)(3), Exhibit 10.21.
10.02 Trademark
Agreement between Golden Road Motor Inn, Inc. and Atlantis Lodge, Inc., dated
February 3, 1996 is incorporated herein by reference to the Company's Form
10-K
report (SEC File 0-22088) for the fiscal year ended December 31, 1995, Item
14(a)(3), Exhibit 10.23.
10.03 Credit
Agreement, dated as of February 20, 2004, among Golden Road MotorInn,
Inc.
as Borrower, Monarch Casino & Resort, Inc., as Guarantor, the Lenders
as
defined therein, and Wells Fargo Bank as administrative
and collateral Agent for
the
Lenders and Swingline Lender is incorporated herein by reference to the
Company's
Form 8-K report (SEC File 0-22088) dated March 8, 2004, Exhibit
99.1.
10.04 Lease
Agreement and Option to Purchase dated as of January 29, 2004, between Golden
Road Motor Inn, Inc. as Lessee and Biggest Little Investments, L.P. as Lessor
is
incorporated
herein by reference to the Company's Form 10-K (SEC File 0-22088) dated March
11, 2004, Exhibit 10.18.
10.05 First
Amendment, dated as of February 8, 2007, to the Credit Agreement, dated
as
of
February 20, 2004, among Golden Road Motor Inn, Inc. as Borrower, Monarch
Casino & Resort, Inc., as Guarantor, the Lenders as
defined therein, and
Wells
Fargo Bank as administrative and collateral Agent for the Lenders and
Swingline Lender.
21.01 Amended
and Restated List of Subsidiaries of Monarch Casino & Resort, Inc.
incorporated herein by reference to the Company’s Form 10-K (SEC file
0-22088) dated March 14, 2006.
23.1 Consent
of Independent Registered Public Accounting Firm.
31.1 Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 is filed as an exhibit to this
Form 10-K.
| 32.2 |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 is filed as an exhibit
to
this Form 10-K.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
MONARCH
CASINO & RESORT, INC.
(Registrant)
Date:
March 14, 2007 By:
/s/ RONALD ROWAN
Ronald
Rowan, Chief Financial Officer
and
Treasurer (Principal Financial
Officer
and Duly Authorized Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/S/
JOHN FARAHI
Co-Chairman
of the Board
of Directors March
14,
2007
John
Farahi Chief
Executive Officer (Principal
Executive
Officer) and Director
/S/
BOB FARAHI Co-Chairman
of the Board of Directors, March
14,
2007
Bob
Farahi President,
and Director
/S/
RONALD ROWAN Treasurer
and Chief Financial Officer March
14,
2007
Ronald
Rowan (Principal
Financial Officer
and
Principal
Accounting Officer)
/S/
CHARLES W. SCHARER Director March
14, 2007
Charles
W. Scharer
/S/
CRAIG. F. SULLIVAN
Director March
14,
2007
Craig
F.
Sullivan
/S/
RONALD R. ZIDECK
Director March
14,
2007
Ronald
R.
Zideck
EXHIBIT
10.05
FIRST
AMENDMENT, DATED AS OF February 8, 2007, TO THE CREDIT AGREEMENT, DATAED AS
OF
FEBRUARY 20, 2004, AMONG GOLDEN ROAD MOTOR INN, INC. AS BORROWER, MONARCH CASINO
& RESORT, INC., AS GUARANTOR, THE LENDERS AS DEFINED THEREIN, AND WELLS
FARGO BANK AS ADMINISTRATIVE AND COLLATERAL AGENT FOR THE LENDERS AND SWINGLINE
LENDER.
FIRST
AMENDMENT TO
CREDIT
AGREEMENT
THIS
FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") is made and entered
into
as of the 8th
day of
February, 2007, by
and
among GOLDEN ROAD MOTOR INN, INC., a Nevada corporation (the "Borrower") and
MONARCH CASINO & RESORT, INC., a Nevada corporation ("Guarantor"),
each
financial institution whose name is set forth on the signature pages of this
First Amendment (each individually a "Lender" and collectively the "Lenders"),
WELLS FARGO BANK, National Association, as the swingline lender (herein in
such
capacity, together with its successors and assigns, the "Swingline Lender"),
and
WELLS FARGO BANK, National Association, as the issuer of letters of credit
(in
such capacity, together with its successors and assigns, the "L/C Issuer"),
WELLS FARGO BANK, National Association, as administrative and collateral agent
for the Lenders, Swingline Lender and L/C Issuer (herein, in such capacity,
called the "Agent Bank" and, together with the Lenders, Swingline Lender and
L/C
Issuer, collectively referred to as the "Banks").
R_E_C_I_T_A_L_S:
WHEREAS:
A. Borrower,
Guarantor and Banks entered into a Credit Agreement dated as of
February 20, 2004 (the "Existing Credit Agreement") for the purpose of
establishing a revolving line of credit in the initial principal amount of
Fifty
Million Dollars ($50,000,000.00), including a subfacility for the funding of
swingline advances up to the maximum aggregate amount of Two Million Five
Hundred Thousand Dollars ($2,500,000.00) at any time outstanding and a
subfacility for the issuance of letters of credit up to the maximum aggregate
amount of Two Million Five Hundred Thousand Dollars
($2,500,000.00).
B. For
the
purpose of this First Amendment, all capitalized words and terms not otherwise
defined herein shall have the respective meanings and be construed herein as
provided in Section 1.01 of the Existing Credit Agreement and any reference
to a provision of the Existing Credit Agreement shall be deemed to incorporate
that provision as a part hereof, in the same manner and with the same effect
as
if the same were fully set forth herein.
C. Borrower
desires to amend the Existing Credit Agreement for the following
purposes:
(i) Decreasing
the Aggregate Commitment from its present level of Twenty-Four Million Dollars
($24,000,000.00) to Five Million Dollars ($5,000,000.00);
(ii) Restating
the Aggregate Commitment Reduction Schedule and deleting the requirement to
make
any Scheduled Reductions prior to the Maturity Date;
(iii) Restating
the definition of Applicable Margin;
(iv) Restating
the requirements set forth in subsections 5.08(e) and (f); and
(v) Removing
and terminating the Syndication Interests of each of the Lenders, other than
Wells Fargo Bank, National Association ("WFB") and restating the Schedule of
Lenders' Proportions in Credit Facility as of the First Amendment Effective
Date
for the purpose of showing WFB as the holder of one hundred percent (100%)
of
the Syndication Interests in the Credit Facility.
D. Subject
to the terms, provisions and conditions hereinafter set forth, Lenders have
agreed to the amendments, revisions and modifications set forth in this First
Amendment.
NOW,
THEREFORE, in consideration of the foregoing and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree to the amendments and modifications to the Existing
Credit Agreement as specifically hereinafter provided as follows:
1. Definitions.
As of
the First Amendment Effective Date, Section 1.01 of the Existing Credit
Agreement entitled "Definitions" shall be and is hereby amended to include
the
following definitions. Those terms which are currently defined by
Section 1.01 of the Existing Credit Agreement and which are also defined
below shall be superseded and restated by the applicable definition set forth
below:
"Aggregate
Commitment" shall mean, as of the First Amendment Effective Date, reference
to
the aggregate amount committed by Lender for advance to or on behalf of the
Borrower as Borrowings under the Credit Facility up to the maximum principal
amount of Five Million Dollars ($5,000,000.00), as may be reduced from time
to
time by (i) Voluntary Permanent Reductions and/or (ii) Mandatory
Commitment Reductions.
"Aggregate
Commitment Reduction Schedule" shall mean the Aggregate Commitment Reduction
Schedule marked "Schedule 2.01(c)", affixed to the First Amendment and by this
reference incorporated herein and made a part hereof, which revised
Schedule 2.01(c)
shall fully supersede and restate Schedule 2.01(c) attached to the Existing
Credit Agreement.
"Applicable
Margin" means for any Base Rate Loan or LIBOR Loan, the applicable percentage
amount to be added to the Base Rate or LIBO Rate, as the case may be, on and
after the First Amendment Effective Date and continuing on each Rate Adjustment
Date until Bank Facility Termination, the margin rates as set forth in Table
One
below in each instance based on the Leverage Ratio calculated with regard to
the
Borrower as of each Fiscal Quarter end, commencing with the Fiscal Quarter
ending December 31, 2006, together with the immediately preceding three (3)
Fiscal Quarters on a four (4) Fiscal Quarter basis:
|
TABLE
ONE
|
TABLE
TWO
|
||
|
Leverage
Ratio
|
Base
Rate
Margin
|
LIBO
Rate
Margin
|
Commitment
Percentage
|
|
Greater
than or equal to 2.25 to 1.00
|
0.75%
|
1.75%
|
0.350%
|
|
Greater
than or equal to 1.50 to 1.00 but less than 2.25 to 1.00
|
0.50%
|
1.50%
|
0.300%
|
|
Greater
than or equal to 0.75 to 1.0 but less than 1.50 to 1.00
|
0.25%
|
1.25%
|
0.250%
|
|
Less
than 0.75 to 1.00
|
0.00%
|
1.00%
|
0.200%
|
"Credit
Agreement" shall mean the Existing Credit Agreement as amended by the First
Amendment, together with all Schedules, Exhibits and other attachments thereto,
as it may be further amended, modified, extended, renewed or restated from
time
to time.
"Existing
Credit Agreement" shall have the meaning set forth in Recital Paragraph A
of the First Amendment.
"First
Amendment" shall have the meaning set forth in the Preamble of the First
Amendment to Credit Agreement.
"First
Amendment Effective Date" shall mean the date upon which each of the conditions
precedent set forth in Paragraph 6 of the First Amendment has been fully
satisfied.
"Schedule
of Lenders' Proportions in Credit Facility" shall mean, as of the First
Amendment Effective Date, the Schedule of Lenders' Proportions in Credit
Facility, a copy of which is marked "Schedule 2.01(a)", affixed to the
First Amendment and by this reference incorporated herein and made a part
hereof, setting forth the respective Syndication Interest and maximum amount
to
be funded under the Credit Facility by Lender, as the same may be amended,
modified or restated from time to time in connection with an Assignment and
Assumption Agreement, which revised Schedule 2.01(a) shall fully restate and
supersede Schedule 2.01(a) attached to the Existing Credit
Agreement.
2. Commitment
Decrease.
From
and after the First Amendment Effective Date, the Aggregate Commitment shall
be
and is hereby reduced to Five Million Dollars ($5,000,000.00).
3. Restatement
of Section 2.01(a).
As of
the First Amendment Effective Date, Section 2.01(a) of the Existing Credit
Agreement shall be and is hereby fully amended and restated in its entirety
as
follows:
"a. Subject
to the conditions and upon the terms hereinafter set forth and in accordance
with the terms and provisions of the Revolving Credit Note, on and after the
Closing Date Lenders severally agree in the proportions set forth on the
Schedule of Lenders' Proportions in Credit Facility to lend and advance
Borrowings to Borrower, up to the Aggregate Commitment in the amount of Five
Million Dollars ($5,000,000.00), in such amounts as Borrower may request by
Notice of Borrowing duly executed by an Authorized Officer and delivered to
Agent Bank from time to time as provided in Section 2.03. All outstanding
principal and accrued and unpaid interest shall be fully paid on the Maturity
Date."
4. On
and
after the First Amendment Effective Date:
The
definitions of "Aggregate Commitment", "Aggregate Commitment Reduction
Schedule", "Applicable Margin" and "Schedule of Lenders' Proportions in Credit
Facility" shall be deemed fully amended and restated by the definitions set
forth in the First Amendment;
The
definition of "Scheduled Reductions" shall be and is hereby deleted in its
entirety from the Credit Agreement;
Section 2.01(e)
entitled "Commitment Increase" and Section 2.01(f) entitled "Waiver of
Scheduled Reductions" shall be and are hereby deleted in their entirety;
and
WFB
shall
be the sole Lender under the Credit Agreement and the Syndication Interests
held
by each of the Lenders party hereto, other than WFB, shall be deemed terminated
in all respects.
5. Restatement
of Subsections 5.08(e) and (f).
As of
the First Amendment Effective Date, Subsections 5.08(e) and (f) of the Existing
Credit Agreement shall be and are hereby fully amended and restated in their
entirety as follows:
"e. As
soon
as practicable, and in any event no later than March 1 of each Fiscal Year,
projections by Fiscal Quarter for that Fiscal Year, including projected balance
sheet, statement of operations and statement of cash flow of Borrower and
projected consolidated and consolidating balance sheets and statements of
operations and cash flows, of the Borrower, all in reasonable
detail;
f. As
soon
as practicable, and in any event no later than March 1 of each Fiscal Year,
a Capital Expenditure budget by Borrower for the Hotel/Casino Facility for
that
Fiscal Year, all in reasonable detail".
6. Conditions
Precedent to First Amendment Effective Date.
The
occurrence of the First Amendment Effective Date is subject to Agent Bank having
received the following documents and payments, in each case in a form and
substance reasonably satisfactory to Agent Bank, and the occurrence of each
other condition precedent set forth below on or before February 13,
2007:
Due
execution by Borrower and Banks of seven (7) duplicate originals of this First
Amendment;
Payment
by Borrower to Agent Bank for the account of the Lenders of any unpaid
Commitment Fees which are owing as of the First Amendment Effective
Date;
Reimbursement
to Agent Bank by Borrower for all reasonable fees and out-of-pocket expenses
incurred by Agent Bank in connection with the First Amendment, but not limited
to, reasonable attorneys' fees of Henderson & Morgan, LLC and all other like
expenses remaining unpaid as of the First Amendment Effective Date;
and
Such
other documents, instruments or conditions as may be reasonably required by
Agent Bank.
7. Representations
of Borrower.
Borrower hereby represents to the Banks, which representations shall survive
the
First Amendment Effective Date and be deemed incorporated into Article IV of
the
Credit Agreement, that:
The
representations and warranties contained in Article IV of the Existing Credit
Agreement and contained in each of the other Loan Documents (other than
representations and warranties which expressly speak only as of a different
date, which shall be true and correct in all material respects as of such date)
are true and correct on and as of the First Amendment Effective Date in all
material respects as though such representations and warranties had been made
on
and as of the First Amendment Effective Date, except to the extent that such
representations and warranties are not true and correct as a result of a change
which is permitted by the Credit Agreement or by any other Loan Document or
which has been otherwise consented to by Agent Bank or, where applicable, the
Requisite Lenders;
Since
the
date of the most recent financial statements referred to in Section 5.08 of
the
Existing Credit Agreement, no Material Adverse Change has occurred and no event
or circumstance which could reasonably be expected to result in a Material
Adverse Change has occurred;
No
event
has occurred and is continuing which constitutes a Default or Event of Default
under the terms of the Credit Agreement; and
The
execution, delivery and performance of this First Amendment has been duly
authorized by all necessary action of Borrower and this First Amendment
constitutes the valid, binding and enforceable obligation of
Borrower.
8. Consent
to First Amendment and Affirmation and Ratification of Guaranty.
Guarantor joins in the execution of this First Amendment for the purpose of
evidencing its consent to the terms, covenants, provisions and conditions herein
contained for the purpose of ratifying and affirming its obligations under
the
Guaranty for the guaranty of the full and prompt payment and performance of
all
Indebtedness and Obligations under the Credit Facility, as modified and amended
under this First Amendment.
9. Incorporation
by Reference.
This
First Amendment shall be and is hereby incorporated in and forms a part of
the
Existing Credit Agreement.
10. Governing
Law.
This
First Amendment to Credit Agreement shall be governed by the internal laws
of
the State of Nevada without reference to conflicts of laws
principles.
11. Counterparts.
This
First Amendment may be executed in any number of separate counterparts with
the
same effect as if the signatures hereto and hereby were upon the same
instrument. All such counterparts shall together constitute one and the same
document.
12. Continuance
of Terms and Provisions.
All of
the terms and provisions of the Credit Agreement shall remain unchanged except
as specifically modified herein.
13. Replacement
Schedule Attached.
The
following additional and replacement Schedules and Exhibits are attached hereto
and incorporated herein and made a part of the Credit Agreement as
follows:
Schedule
2.01(a) - Schedule
of Lenders' Proportions in Credit Facility as of First Amendment Effective
Date
Schedule
2.01(c) - Aggregate
Commitment Reduction Schedule
IN
WITNESS WHEREOF, the parties hereto have caused this First Amendment to Credit
Agreement to be executed as of the day and year first above
written.
BORROWER:
GOLDEN
ROAD MOTOR INN, INC.,
a
Nevada
corporation
By /s/
John Farahi
Name:
John
Farahi
Title
CEO
MCRI:
MONARCH
CASINO & RESORT, INC.,
a
Nevada
corporation
By /s/
John Farahi
Name
John
Farahi
Title
CEO
BANKS:
WELLS
FARGO BANK,
National
Association,
Agent
Bank, Lender and Swingline Lender
By
/s/
Steven Buntin
Steven
Buntin,
Senior
Vice President
U.S.
BANK
NATIONAL ASSOCIATION
By
/s/
Nicholas Butler
Nicholas
Butler,
Vice
President
COMERICA
WEST INCORPORATED
By
/s/
Fatima Arshad
Fatima
Arshad
Corporate
Banking Representative
THE
CIT
GROUP/EQUIPMENT FINANCING, INC.
By
/s/
Katie J. Saunders
Name
Katie
J. Saunders
Title
Vice
President
BANK
OF
AMERICA, N.A.
By
/s/
Peter J. Vitale
Name
Peter
J. Vitale
Title
Senior
Vice President
BANK
OF
THE WEST
By
/s/John
Hyche
Name
John
Hyche
Title
Senior
Vice President
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 333-85412, 333-85418, and 333-85420) pertaining to the Directors’ Stock
Option Plan, Executive Long-Term Stock Incentive Plan, and Employee Stock Option
Plan, respectively, of Monarch Casino & Resort, Inc. of our reports dated
March 9, 2007, with respect to the consolidated financial statements and
schedule of Monarch Casino & Resort, Monarch Casino & Resort, Inc.
management’s assessment of the effectiveness of internal control over financial
reporting, and the effectiveness of internal control over financial reporting
of
Monarch Casino & Resort, included in the Annual Report (Form 10-K) for the
year ended December 31, 2006.
/s/
Ernst
& Young LLP
Las
Vegas, NV
March
13,
2007
EXHIBIT
31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Ronald
Rowan, Chief Financial Officer of Monarch Casino & Resort,
Inc.,
certify
that:
1.
I have
reviewed this annual report on Form 10-K of Monarch Casino &
Resort,
Inc.,
a
Nevada Corporation;
2.
Based
on my knowledge, this annual 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
report;
3.
Based
on my knowledge, the financial statements, and other financial
information
included in this annual 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
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-15(e) and 15d-15(e)) for the registrant
and
have:
a)
designed such disclosure controls and procedures, or caused such
disclosure
controls and procedures to be designed under our
supervision,
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 report is being prepared;
b)
evaluated the effectiveness of the registrant's disclosure controls
and
procedures and presented in this report our conclusions about the
effectiveness
of the disclosure controls and procedures, as of the
end
of
the period covered by this report based on such evaluation; and
c)
disclosed in this report any change in the registrant's internal
control
over financial reporting that occurred during the registrant's
fourth
fiscal quarter that has materially affected, or is reasonably
likely
to
materially affect, the registrant's internal control over
financial
reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on
our
most
recent evaluation of internal control and reporting, to the
registrant's
auditors and the audit committee of registrant's board of
directors
(or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or
operation
of internal control over financial reporting which are
reasonably
likely to adversely affect the registrant's ability to
record,
process, summarize and report financial information; and
b)
any
fraud, whether or not material, that involves management or other
employees
who have a significant role in the registrant's internal
control
over financial reporting.
Date:
March
14,
2007
By:
/s/ Ronald Rowan
Ronald
Rowan
Chief
Financial Officer and Treasurer
EXHIBIT
31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
John
Farahi, Chief Executive Officer of Monarch Casino & Resort,
Inc.,
certify
that:
1.
I have
reviewed this annual report on Form 10-K of Monarch Casino &
Resort,
Inc.,
a
Nevada Corporation;
2.
Based
on my knowledge, this annual 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
report;
3.
Based
on my knowledge, the financial statements, and other financial
information
included in this annual 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
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-15(e) and 15d-15(e)) for the registrant
and
have:
a)
designed such disclosure controls and procedures, or caused such
disclosure
controls and procedures to be designed under our
supervision,
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 report is being prepared;
b)
evaluated the effectiveness of the registrant's disclosure controls
and
procedures and presented in this report our conclusions about the
effectiveness
of the disclosure controls and procedures, as of the
end
of
the period covered by this report based on such evaluation; and
c)
disclosed in this report any change in the registrant's internal
control
over financial reporting that occurred during the registrant's
fourth
fiscal quarter that has materially affected, or is reasonably
likely
to
materially affect, the registrant's internal control over
financial
reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on
our
most
recent evaluation of internal control and reporting, to the
registrant's
auditors and the audit committee of registrant's board of
directors
(or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or
operation
of internal control over financial reporting which are
reasonably
likely to adversely affect the registrant's ability to
record,
process, summarize and report financial information; and
b)
any
fraud, whether or not material, that involves management or other
employees
who have a significant role in the registrant's internal
control
over financial reporting.
Date:
March
14,
2007
By:
/s/ John Farahi
John
Farahi
Chief
Executive Officer
EXHIBIT
32.1
18
U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In
connection with the Annual Report on Form 10-K of Monarch Casino & Resort,
Inc., (the "Company") for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald
Rowan, Chief Financial Officer and Treasurer of the Company, certify, pursuant
to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
1.
To
the
best of my knowledge, the
Report
fully complies with the
requirements
of section 13(a)
or
15(d) of the Securities Exchange Act
of
1934;
and
2.
To the
best of my knowledge, the information contained in the Report
fairly
presents, in all material respects, the financial condition of
the
Company as of the dates indicated and results of operations of
the
Company for the periods indicated.
/S/
RONALD ROWAN
Chief
Financial Officer and Treasurer
March
14,
2007
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In
connection with the Annual Report on Form 10-K of Monarch Casino & Resort,
Inc., (the "Company") for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John
Farahi, Chief Executive Officer of the Company, certify, pursuant to and for
purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
To the
best of my knowledge, the Report fully complies with the
requirements
of section 13(a) or 15(d) of the Securities Exchange
Act
of
1934; and
2.
To the
best of my knowledge, the information contained in the
Report
fairly presents, in all material respects, the financial
condition
of the Company as of the dates indicated and results of
operations
of the Company for the periods indicated.
/S/
JOHN FARAHI
John
Farahi
Chief
Executive Officer
March
14,
2007