For the transition period from ______to______.
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.
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):
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
MONARCH CASINO & RESORT, INC.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE 3. EARNINGS PER SHARE
14
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
The January 1, 2007 adoption of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, did not affect our financial position. The Company is not subject to foreign or state income tax. The Company files a federal tax return only. As of the date of adoption, tax years 2003 through 2006 were subject to examination by the Internal Revenue Service. As of June 30, 2007, the statute of limitation for the 2003 tax year has closed. The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes.
In July 2006,February 2007, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48Statement of Financial Accounting Standards (“FIN 48”SFAS”) “Accounting159, “The Fair Value Option for Uncertainty in Income TaxesFinancial Assets and Financial Liabilities - including an interpretationamendment of FASB Statement No. 109,”115” that provides companies with an option to clarifyreport certain aspects of accounting for uncertain tax positions, including issues related to the recognitionfinancial assets and measurement of those tax positions.liabilities in their entirety at fair value. This interpretationstatement is effective for fiscal years beginning after DecemberNovember 15, 2006.2007. The Companyfair value option may be applied instrument by instrument, and may be applied only to entire instruments. A business entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. We are evaluating our options provided for under this statement and their potential impact on its financial statements when implemented. SFAS 159 is being reviewed in conjunction with the processrequirements of SFAS 157 discussed below.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value for both assets and liabilities through a fair value hierarchy and expands disclosure requirements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are evaluating SFAS 157 and have not yet determined the impact of the adoption of this interpretationwill have on the Company’s results of operations andconsolidated financial condition.statements.
NOTE 5. RELATED PARTY TRANSACTIONS
On July 26, 2006, the Company madesubmitted a formal offer to purchase the 18.95-acre shopping center adjacent to its Atlantis Casino Resort Spa (the “Shopping Center”), which is owned by Biggest Little Investments, L.P. (“BLI”). The Company’s offer was, formulated and delivered by a committee comprised of the Company’s independent directors.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 of the Independent Directors 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’sPartnership’s limited partners and, therefore, will not be entering into negotiations with Monarch.” The CommitteeBoard 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 Independent DirectorsBoard, Chief Executive Officer, Chief Operating Officer and a Director of Monarch. Bob Farahi is considering this response to determine what action, if any should be taken.
ThreeCo-Chairman of the Company's principal stockholders have ownership interests in the general partnerBoard, President, Secretary and a Director of BLI, Maxum LLC, and beneficially own limited partnership interests in BLI. The sole manager of Maxum LLC,Monarch. Ben Farahi is one offormerly was the Company’s principal stockholders and, as of May 23, 2006, resigned from his positions as Co-Chairman of the Board, Secretary, Treasurer, and 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 does not have any ownership, options to purchase (except with respect to the driveway discussed below) or first rights of refusal over or control of the Shopping Center. The Company does not have management control over or with respect to the Shopping Center. As of March 27, 2006, based on disclosures in BLI’s Form 10-KSB, there were approximately 1,534 holders of BLI units owning an aggregate of 180,937 units (including units held by affiliates of BLI’s general partner).
The Company currently rents various spaces in the Shopping Center which it uses as office, storage and storageparking lot space and paid rent of approximately $101,200 and $162,600 plus common area expenses for the three and nine months ended September 30, 2007, respectively, and approximately $21,800 and $67,800 plus common area expenses for the three and nine months ended September 30, 2006, respectively, and approximately $14,900 and $43,750 plus common area expenses for the three and nine months ended September 30, 2005, 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 (“CPI”).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 three 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 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 paid approximately $75,000 and $225,000 plus common area maintenance charges for its leased driveway space at the Shopping Center during each of the three and nine-monthsmonths ended September 30, 20062007 and 2005, respectively.2006.
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 for a monthly lease of $1,000 effective January 1, 2006.2006, and subsequently renewed on June 15, 2007 for a monthly lease of $1,060. The Company paid $3,000$3,180 and $9,000$9,240 for the leased sign at the Shopping Center for the three and nine-monthsnine months ended September 30, 2006,2007, respectively, and did not make any paymentspaid $3,000 and $9,000 for the three and nine months ended September 30, 2005.2006, respectively.
The Company is currently leasing billboard advertising space from affiliates of its controlling stockholders and paid $17,500 and $38,500 for a total cost ofthe three and nine months ended September 30, 2007, respectively. The Company paid $0 and $21,000 for the three and nine months ended September 30, 2006, respectively,respectively.
Until December 2006, the Company rented office and $10,500storage space from a company affiliated with Monarch’s principal stockholders. The Company expensed $7,000 and $28,000$21,000 for the three and nine months ended September 30, 2005,2006, respectively.
Additionally, Effective December 2006, Monarch’s principal stockholders sold this building and, through April 15, 2007, the Company is currently renting storage space and, through May 2006, the Company also rented officecontinued to rent space from the new owner who is not a company affiliated with Monarch’s controlling stockholders and expensed approximately $7,000 and $21,000 for such spaces for each of the three and nine-month periods ended September 30, 2006 and expensed approximately $7,000 and $21,000 for the three and nine-month periods ended September 30, 2005.
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.
Four principal stockholders hold 39% beneficial ownership of the Company’s outstanding common shares as of September 30, 2006.
On September 23, 2003, the Company entered into an option agreement with an affiliate of its controlling stockholdersrelated party to purchase property in South Reno for development of a new hotel casino. The Company, through the current property owner, 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 Company’s option to purchase.
NOTE 6. COMMITMENTS AND CONTINGENCIES
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 September 30, 2006, the Company made no purchases pursuant to the Second Plan.Monarch.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our unaudited consolidated financial statements and the accompanying notes. 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. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates,” or other comparable terms. Such forward-looking information involve 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 discussed herein and elsewhere in our Form 10-K for the year ended December 31, 2005 and in our Form 10-Q for the periods ended March 31, 2006 and June 30, 2006.
OVERVIEW
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, 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 derive our revenues by appealing to tourists, conventioneers and middle to upper-middle income Reno residents, emphasizing slot machine play in our casino. 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.
We are currently working on expansion plans for our existing Atlantis facility which will add approximately 116,000 square feet in the form of an expanded casino floor and various additional amenities. We expect to begin construction in early 2007.
Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING RESULTS SUMMARY
During the third quarter of 2006,three months ended September 30, 2007, we exceeded all previously reported Company quarterlythird quarter casino hotelrevenues, food and beverage revenues, net revenue amounts, as well as previously reported record income from operations,revenues, net income and earnings per share amounts. Higher selling, general and administrative expenses; however, pushed the operating margin for the quarter lower than that of the third quarter of 2005.share.
Amounts in millions, except per share amounts | |
| | | | |
| | Three Months | |
| | Ended September 30, | Percentage |
| | 2007 | 2006 | Increase/(Decrease) |
| Casino revenues | $29.9 | $27.7 | 7.9 |
| Food and beverage revenues | 11.0 | 10.9 | 0.9 |
| Hotel revenues | 8.0 | 8.1 | (1.2) |
| Other revenues | 1.2 | 1.3 | (7.7) |
| Net revenues | 43.6 | 41.7 | 4.6 |
| Sales, general and admin exp | 12.7 | 11.7 | 8.5 |
| Income from operations | 11.7 | 11.2 | 4.5 |
| | | | |
| Net Income | 8.0 | 7.4 | 8.1 |
| | | | |
| Earnings per share - diluted | 0.41 | 0.38 | 7.9 |
| | | | |
| Operating margin | 26.9% | 26.8% | 0.1 pts. |
| (in millions, except per share and margin amounts) | | Three Months Ended September 30, | | Percentage Increase (Decrease) |
| | | 2006 | | 2005 | | Third Quarter ’06 vs. ‘05 |
| Casino revenues | | $27.7 | | $25.4 | | 9.1% |
| Food and beverage revenues | | 10.9 | | 10.2 | | 6.9% |
| Hotel revenues | | 8.1 | | 7.3 | | 11.0% |
| Other revenues | | 1.4 | | 1.3 | | 7.7% |
| | | | | | | |
| Net revenues | | 41.9 | | 38.5 | | 8.8% |
| Income from operations | | 11.4 | | 11.2 | | 1.8% |
| | | | | | | |
| Net income | | $7.4 | | $7.1 | | 4.2% |
| | | | | | | |
| Earnings per share - Diluted | | $0.38 | | $0.37 | | 2.7% |
| | | | | | | |
| Operating margin | | 27.1% | | 29.1% | | (2.0) pts. |
| (in millions, except per share and margin amounts) | | Nine Months Ended September 30, | | Percentage Increase (Decrease) | |
| | | Nine Months | |
| | | Ended September 30, | Percentage |
| | | 2006 | | 2005 | | First Nine Months ’06 vs. ‘05 | 2007 | 2006 | Increase |
| Casino revenues | | $77.6 | | $70.3 | | 10.4% | $84.5 | $77.6 | 8.9 |
| Food and beverage revenues | | 30.8 | | 28.6 | | 7.7% | 32.1 | 30.8 | 4.2 |
| Hotel revenues | | 20.6 | | 18.7 | | 10.2% | 21.9 | 20.6 | 6.3 |
| Other revenues | | 3.8 | | 3.5 | | 8.6% | 3.7 | 3.6 | 2.8 |
| | | | | | | | |
| Net revenues | | 115.2 | | 104.9 | | 9.8% | 123.0 | 115.0 | 7.0 |
| Sales, general and admin exp | | 37.1 | 35.2 | 5.4 |
| Income from operations | | 26.0 | | 25.6 | | 1.6% | 30.1 | 25.8 | 16.7 |
| | | | | | | | | |
| Net income | | $17.0 | | $16.1 | | 5.6% | |
| Net Income | | 20.4 | 17.0 | 20.0 |
| | | | | | | | | |
| Earnings per share - Diluted | | $0.88 | | $0.85 | | 3.5% | |
| Earnings per share - diluted | | 1.06 | 0.88 | 20.5 |
| | | | | | | | | |
| Operating margin | | 22.6% | | 24.4% | | (1.8) pts. | 24.4% | 22.5% | 1.9 pts. |
Some significant items that affected our third quarter results in 20062007 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.
| · | Increases in all our revenue centers, including 9.1%of 7.9% and 0.9% in our casino 6.9% in ourand food and beverage 11.0%revenues, respectively, partially offset by decreases of 1.2% and 7.7% in our hotel and 7.7% in our other revenue centers,revenues, led to an increase of 9.0%4.6% in our gross revenues. This increase, partially offset by a 7.5% increase in promotional allowances, led to a net 8.8% increase in our net revenues. |
| · | Effective January 1, 2006, we began recognizing expense relatedOur operating margin remained relatively unchanged as compared to the issuance of stock options in accordance with SFAS 123R. For the third quarter, the Company recorded $489,000 of stock option expense (pre-tax) with no corresponding charge in the priorsame period last year. Of this total, $467,000 was reported as SG&A 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 option benefit. |
| · | The Company recognizedOur selling, general and administrative (“SG&A”) expenses increased by 8.5%, primarily due to increased legal expense, payroll and benefit costs and marketing costs. |
| · | Net interest income increased approximately $15,000 of expense during the quarter related$430,000 as compared to amortization of fees related to its New Credit Facility (see "THE CREDIT FACILITY" below). We did not incur any other interest expense during the quarter as all bank related debt was paid off in the first quarter of 2006. We incurred approximately $302,000 in interest expense during the third quarter of 2005.2006. |
CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $4.2 million$10.2 and $5.2$4.2 million during the first nine months of 20062007 and 2005,2006, respectively. During the nine months ended September 30, 2007, our capital expenditures consisted primarily of construction costs associated with the current expansion phase of the Atlantis that commenced in June 2007, and the acquisition of gaming equipment to upgrade and replace existing gaming equipment. During the first nine months of 2006, our capital expenditures consisted primarily of acquisitions 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 ourthe Atlantis expansion, and ongoing property public area renovations and upgrades. During last year's first nine months, capital expenditures consisted primarily of the replacement of and upgrade to a more energy efficient ventilation and cooling system, acquisitions of gaming and computer systems equipment and continued renovations to the facility.
Future cash needed to finance ongoing maintenance capital spending is expected to be made available from our current cash balance, operating cash flow, the New Credit Facility (see "THE CREDIT FACILITY" below) and, if necessary, additional borrowings.
STATEMENT ON FORWARD-LOOKING INFORMATION
When used in this report and elsewhere by management from time to time, the words “believes”, “anticipates” and “expects” and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and our business including our expansion, development activities, legal proceedings and employee matters. Certain important factors, including but not limited to, competition from other gaming operations, factors affecting our ability to compete, acquisitions of gaming properties, leverage, construction risks, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, and licensing and other regulatory risks, could cause our actual results to differ materially from those expressed in our forward-looking statements. Further information on potential factors which could affect our financial condition, results of operations and business including, without limitation, our expansion, development activities, legal proceedings and employee matters are included in our filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statement to reflect events or circumstances after the date hereof.
RESULTS OF OPERATIONS
Comparison of Operating Results for the three-month periods endedThree-Month Periods Ended September 30, 20062007 and 2005.2006
For the three-month periodthree months ended September 30, 2006, the Company’s2007, our net income was $8.0 million, or $0.41 per diluted share, on net revenues of $43.6 million, an increase from net income of $7.4 million, or $0.38 per diluted share, on net revenues of $41.9 million, an increase over net income of $7.1 million, or $0.37 per diluted share, on net revenues of $38.3$41.7 million for the three months ended September 30, 2005.2006. Income from operations for the three months ended September 30, 20062007 totaled $11.4$11.7 million, a 1.8%4.5% increase over thewhen compared to $11.2 million for the same period in 2005. Net income,2006. Both net revenues and net income from operations for the third quarter of 20062007 represent new all-time quarterlythird quarter records for the Company. ComparedNet revenues increased 4.6%, and net income increased 8.1% when compared to last year's third quarter net income increased 4.2%, net revenues increased 8.8% and income from operations increased 1.8%.quarter.
Casino revenues totaled $29.9 million in the third quarter of 2007, a 7.9% increase from $27.7 million in the third quarter of 2006, a 9.1% increase over the $25.4 million in the third quarter of 2005, which was primarily due to increases in slot poker and keno revenues combined with increased table games revenue driven by a higher table game win percentage in the third quarter of 2006 as compared to the same quarter in 2005.revenues. Casino operating expenses amounted to 32.4%30.8% of casino revenues in the third quarter of 2006,2007, compared to 32.2%32.4% in the third quarter of 2005, with2006; the slight difference representing slightlyimprovement was due primarily to strong increased direct operating costs,casino revenue partially offset by increased payroll and benefit expenses and increased complimentary expense as a percentage of casino revenues.expenses.
Food and beverage revenues totaled $11.0 million in the third quarter of 2007, a 0.9% increase from $10.9 million in the third quarter of 2006, a 6.9% increase from $10.2 million in the third quarter of 2005, due primarily to a 3.6%5.6% increase in the average revenue per food cover combined with an approximate 4.0% increasepartially offset by a 4.2% decrease in the number of food covers served during the quarter.served. Food and beverage operating expenses amounted to 47.2%48.9% of food and beverage revenues during the third quarter of 2006,2007 as compared with 47.8% into 47.2% for the 2005 third quarter. The slight margin improvement is due to generally lower costsquarter of sales,2006. This increase was primarily the result of higher payroll and benefit expenses and other direct operating costs as a percentage of food and beverage revenues and the effects of menu pricing increases implemented by the Company.departmental expenses.
Hotel revenues were $8.1$8.0 million for the third quarter of 2006, an increase2007, a decrease of 11.0%1.2% from the $7.3$8.1 million reported in the 20052006 third quarter. This increasedecrease was the result of increaseslower hotel occupancy partially offset by an increase in both the average daily room rate (“ADR”). Both 2007 and hotel occupancy. Both the 2006 and 2005 third quarter revenues included a $3 per occupied room energy surcharge. During the third quarter of 2006,2007, the Atlantis experienced a 99.9%97.9% occupancy rate, as compared to 97.4%99.9% during the same period in 2005.2006. The Atlantis' ADR was $81.11 in the third quarter of 2007 compared to $80.79 in the third quarter of 2006 compared to $74.69 in the third quarter of 2005.2006. Hotel operating expenses as a percent of hotel revenues decreased slightlyremained relatively unchanged at 27.0% in the 2007 third quarter as compared to 27.2% in the 2006 third quarter, compared to 27.7% in the 2005 third quarter. The improved margin is primarily due to the increased ADR combined with lower payroll and benefit expenses partially offset by increased direct operating expense as a percentage of hotel revenues.
Promotional allowances increased to $6.6 million in the third quarter of 2007 compared to $6.2 million in the third quarter of 2006 compared to $5.8 million in the third quarter of 2005.2006. The dollar increase is attributable to continued promotional efforts to generate additional revenues. Promotional allowances as a percentage of gross revenues decreased slightly to 12.9%remained relatively constant at 13.1% during the third quarter of 2006, from 13.1%2007 as compared to 13.0% in the third quarter of 2005.2006.
Other revenues increased 7.7%decreased slightly to $1.4$1.2 million in the 20062007 third quarter as compared to $1.3 million in the same period last year.third quarter of 2006.
Depreciation and amortization expense was $2.1 million in each of the 2006 and 2005 third quarters, respectively. Depreciation expense relates primarily to property and equipment purchased in the ordinary course of business to replace old and obsolete equipment with newer, more current equipment.
SG&A expenses amounted to $11.7$2.0 million in the third quarter of 2006, a 21.9% increase from $9.62007 as compared to $2.1 million in the third quarter of 2005. The increase was the result of expenses related to stock options expense under the provisions of SFAS 123R, increased marketing and promotional expenditures, increased payroll and benefit costs, increased energy costs, increased bad debt expense and increased legal and accounting fees. Of the $2.1 million increase in SG&A expense, approximately $467,000 was from recurring stock option expense for which there was no comparable charge in 2005 as the requirements of SFAS 123R were implemented on January 1, 2006. As a percentage of net revenues, SG&A expenses increased to 27.8% in the third quarter of 2006 from 25.1% in the third quarter of 2005.
The Company did not have any outstanding debt during the 2006 third quarter and, as a result, did not incur any interest expense related to debt during the period. The Company did however, recognize approximately $15,000 of expense related to the amortization of fees related to the New Credit Facility (see "THE CREDIT FACILITY" below). Interest expense for the third quarter of 2005 was $302,000.
Comparison of Operating Results for the nine-month periods ended September 30, 2006 and 2005.
For the nine months ended September 30, 2006, the Company earned net income of $17.0 million, or $0.88 per diluted share, on net revenues of $115.2 million, an increase from net income of $16.1 million, or $0.85 per diluted share, on net revenues of $104.9 million during the nine months ended September 30, 2005. Income from operations for the 2006 nine-month period totaled $26.0 million, compared to $25.6 million for the same period in 2005. Net revenues increased 9.8%, and net income increased 5.6% when compared to the nine-month period ended September 30, 2005.
Casino revenues for the first nine months of 2006 totaled $77.6 million, a 10.4% increase from $70.3 million for the first nine months of 2005, reflecting increases in all gaming revenue areas. Casino operating expenses amounted to 32.8% of casino revenues for the nine months ended September 30, 2006, compared to 33.7% for the same period in 2005, primarily due to reduced complimentary expense and reduced direct operating costs as a percentage of casino revenues, partially offset by a slight increase in payroll and benefit costs as a percentage of casino revenues.
Food and beverage revenues totaled $30.8 million for the nine months ended September 30, 2006, an increase of 7.7% from the $28.6 million for the nine months ended September 30, 2005, due to an approximate 2.1% increase in the number of covers served combined with a 6.2% increase in the average revenue per cover. Food and beverage operating expenses decreased to 47.6% of food and beverage revenues during the 2006 nine-month period, when compared to 49.1% for the same period in 2005. The improvement is due to higher average revenue per cover, reduced costs of sales, reduced payroll and benefit costs and reduced direct operating costs as a percentage of food and beverage revenues.
Hotel revenues for the first nine months of 2006 increased 10.2% to $20.6 million from $18.7 million for the first nine months of 2005, primarily due to increased ADR. Hotel revenues for the first nine months of 2006 and 2005 also include a $3 per occupied room energy surcharge. The Atlantis experienced an increase in the ADR during the 2006 nine-month period to $71.20, compared to $65.27 for the same period in 2005. The occupancy rate increased slightly to 95.4% for the nine-month period in 2006, from 94.5% for the same period in 2005. Hotel operating expenses in the first nine months of 2006 were 30.7% of hotel revenues, an improvement when compared to 31.4% for the same period in 2005. The improved margin was due to the increased ADR and reduced payroll and benefit costs as a percentage of hotel revenues, partially offset by a slight increase in direct operating costs as a percentage of hotel revenue.
Promotional allowances increased to $17.7 million in the first nine months of 2006 compared to $16.2 million in the same period of 2005. The increase is attributable to continued efforts to generate additional revenues. However, promotional allowances as a percentage of gross revenues remained flat at 13.3% during the nine months ended September 30, 2006 and 2005, respectively.
Other revenues were $3.8 million for the nine months ended September 30, 2006, an 8.6% increase from $3.5 million in the same period in 2005.
Depreciation and amortization expense was $6.4 million in the first nine months of 2006, an increase of 1.6% compared to $6.3 million in the same period last year. This depreciation expense primarily relates to property and equipment acquired in the ordinary course of business as part of the Company’s ongoing capital expenditures to replace old and obsolete equipment with newer, more current equipment.
Selling, generalSG&A expenses amounted to $12.7 million in the third quarter of 2007, an 8.5% increase from $11.7 million in the third quarter of 2006. The increase was primarily due to increased payroll and administrativebenefit expenses, increased 24.5%legal, accounting and rental expenses as well as increased marketing expenses. These increases were partially offset by lower bad debt expense. As a percentage of net revenue, SG&A expenses increased to $35.129.2% in the third quarter of 2007 from 28.0% in the same period in 2006.
Net interest income increased to $568,000 for the third quarter of 2007 from $139,000 for the third quarter of 2006. This increase was driven by a greater balance of interest bearing cash and cash equivalents at September 30, 2007 as compared to September 30, 2006. During the second quarter of 2006, we paid off the $8.1 million December 31, 2005 bank debt balance and began investing our surplus cash in stable, short-term investments. Our cash and cash equivalents balance increased throughout the subsequent quarters such that we had cash and cash equivalents of $52.9 million at September 30, 2007 as compared to $28.7 million at September 30, 2006.
Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2007 and 2006.
For the nine months ended September 30, 2007, our net income was $20.4 million, or $1.06 per diluted share, on net revenues of $123.0 million, an increase from net income of $17.0 million, or $0.88 per diluted share, on net revenues of $115.0 million during the nine months ended September 30, 2006. Income from operations for the 2007 nine-month period totaled $30.1 million, compared to $25.8 million for the same period in 2006. Net revenues increased 7.0%, and net income increased 20.0% when compared to the nine-month period ended September 30, 2006.
Casino revenues for the nine months ended September 30, 2007 totaled $84.5 million, an 8.9% increase from $77.6 million for the nine months ended September 30, 2006. Casino operating expenses amounted to 31.9% of casino revenues for the nine months ended September 30, 2007, compared to 32.8% for the same period in 2006, primarily due to the increased casino revenue partially offset by increased payroll and benefit expenses and other direct departmental expenses.
Food and beverage revenues totaled $32.1 million for the nine months ended September 30, 2007, an increase of 4.2% from the $30.8 million for the nine months ended September 30, 2006, due to an approximate 4.6% increase in the average revenue per cover while the number of covers served remained virtually unchanged. Food and beverage operating expenses amounted to 47.4% of food and beverage revenues during the 2007 nine-month period, relatively unchanged when compared to 47.6% for the same period in 2006.
Hotel revenues for the nine months ended September 30, 2007 increased 6.3% to $21.9 million from $20.6 million for the nine months ended September 30, 2006, primarily due to increases in the occupancy and ADR at the Atlantis. Hotel revenues for the nine months of 2007 and 2006 include a $3 per occupied room energy surcharge. The Atlantis experienced an increase in the ADR during the 2007 nine-month period to $75.20, compared to $71.20 for the same period in 2006. The occupancy rate increased to 96.8% for the nine-month period in 2007, from 95.4% for the same period in 2006. Hotel operating expenses in the first nine months of 2007 were 29.4% of hotel revenues, an improvement when compared to 30.7% for the same period in 2006. The improved margin was due to the increased occupancy and ADR, which were partially offset by increased payroll and benefit costs.
Promotional allowances increased to $19.2 million in the first nine months of 2007 compared to $17.6 million in the same period of 2006. The increase is attributable to continued efforts to generate additional revenues through promotional efforts. Promotional allowances as a percentage of gross revenues increased slightly to 13.5% for the first nine months of 2007 compared to 13.3% for the same period in 2006.
Other revenues were $3.7 million for the nine months ended September 30, 2007, a 2.8% increase from $3.6 million in the same period in 2006.
Depreciation and amortization expense was $6.1 million in the first nine months of 2007, a decrease of 4.8% compared to $6.4 million in the same period last year. This decrease is primarily attributable to assets that became fully depreciated during the period.
SG&A expenses increased 5.4% to $37.1 million in the first nine months of 2007, compared to $35.2 million in the first nine months of 2006, compared to $28.2 million in the first nine months of 2005, primarily as a result of expenses related to stock options under the requirements of SFAS 123R,increased payroll and benefit costs, increased legal, and increased marketing and promotional expenditures, increasedexpense all partially offset by decreased bad debt expense increased energy costs and increased legal and accounting expenses. Included in the $6.9 million increase in SG&Aelimination of the one-time expense wasof approximately $1.4 million from recurring stock option expense and an additional approximate $1.2 million related to the accelerated vesting of stock options from the departure of a former company executive officer.during the second quarter of 2006. As a percentage of net revenue, SG&A expenses increaseddecreased to 30.4%30.1% in the 20062007 nine-month period from 26.9%30.6% in the same period in 2005.2006.
Interest expenseNet interest income for the first nine months of 20062007 totaled $75,000, a decrease of 91.6%,$1.2 million, compared to $891,000net interest income of $116,000 for the same period one year earlier. The decreasedifference reflects the Company'sour reduction in debt outstanding (see "THE CREDIT FACILITY" below). and the increase in interest bearing cash and cash equivalents during the first nine months of 2007 as compared to same period in 2006.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with net cash provided by operating activities.
For the nine months ended September 30, 2006,2007, net cash provided by operating activities totaled $25.3$24.9 million, an increasea decrease of 3.6%1.7% compared to the same period last year. Net cash used in investing activities totaled $4.2$8.7 million and $5.1$4.2 million in the nine months ended September 30, 20062007 and 2005,2006, respectively. During the first nine months of 20062007, net cash used in investing activities consisted primarily of construction costs associated with the current expansion phase of the Atlantis that commenced in June 2007, and 2005,the acquisition of property and equipment. During the first nine months of 2006, net cash used in investing activities was used primarily in the purchase of property and equipment and continued property renovations and upgrades. Net cash used in financing activities totaled $236,725for the first nine months of 2007 compared to $5.3 million for the same period in 2006. Net cash used in financing activities for the first nine months of 2006 compared2007 was due to $20.2 million forour purchase of Monarch common stock pursuant to the same period last year. Net cash used in financing activities was primarily for debt reduction in both periods.Repurchase Plan (see below) partially offset by proceeds from the exercise of stock options and the tax benefits associated with such stock option exercises. During the first nine months of 2006, the Companywe paid off itsthe $8.1 million December 31, 2005 bank debt balance. As a result, at September 30, 2006, the Company increased its cash balance to $28.7 million compared to $10.9 million at September 30, 2005, and $12.9 million at December 31, 2005. As a result of paying off our debt, we began investing our surplus cash in stable, short-term investments, such as certificates of deposit. These investments may be subjectAt September 30, 2007, we had a cash balance of $52.9 million compared to market risk.$37.0 million at December 31, 2006.
The Company hasWe have a reducing revolving credit facility with a group of banks (see "THE CREDIT FACILITY" below). At September 30, 2006, the Company2007, we had no balance outstanding on the New Credit Facility (as defined below). At September 30, 2006, we and had $24$5 million available to be drawn down under the New Credit Facility should we require such funds.Facility.
OFF BALANCE SHEET ARRANGEMENTS
A driveway was completed and opened on September 30, 2004, that is being shared between the Atlantis and a shopping center (the “Shopping Center”) directly adjacent to the Atlantis. The shopping centerShopping Center is controlled by an entity whose owners include our controlling stockholders (the "Shopping Center").stockholders. As part of this project, in January 2004, the Companywe 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 CompanyWe also usesuse part of the common area of the Shopping Center and pays itspay our proportional share of the common area expense of the Shopping Center. The Company hasWe have the option to renew the lease for three five-year terms, and at the end of the extension periods, the Company haswe have 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 Companyus for pedestrian and vehicle access to the Atlantis, and the Companywe may use 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 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 CompanyWe paid approximately $75,000$225,000 in lease payments for itsthe leased driveway space at the Shopping Center during the threenine months ended September 30, 2006.2007.
On September 23, 2003, the Company entered into an option agreement with an affiliate of its controlling stockholders to purchase property in South Reno for development of a new hotel casino. The Company, through the current property owner, 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 during 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 Company’s option to purchase.
CRITICAL ACCOUNTING POLICIESCritical Accounting Policies
A description of our critical accounting policies and estimates can be found in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 20052006 (“20052006 Form 10-K”). For a more extensive discussion of our accounting policies, see Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements in our 20052006 Form 10-K filed on March 16, 2006.14, 2007.
14
On January 1, 2006, we adopted the provisions of SFAS 123R requiring the measurement and recognition of all share-based compensation under the fair value method. We implemented SFAS 123R using the modified prospective transition method.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the provisions of SFAS No. 157 to determine its impact on our future financial statements.
OTHER FACTORS AFFECTING CURRENT AND FUTURE 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 the Company believes that the impact on the Company 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 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.
The CompanyWe also believesbelieve that unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis' key non-Reno marketing areas, such as San Francisco or Sacramento, could have a material adverse effect on itsour business.
In the past few years, a number ofJune 2004, five California Indian tribes have signed compacts with the state that have resultedallow the tribes to increase the number of slot machines beyond the previous 2,000-per-tribe limit in significant expansionexchange for higher fees from each of Indian gaming operations.the five tribes. The State of California ishas approved compacts with primarily Southern California located Native American tribes that increases the total number of Native American operated slot machines in the processState of negotiating similarCalifornia. Opponents to the compacts with additional Indian tribes.are working on a referendum to overturn the new gaming compacts to be voted on at the February 5 presidential primaries. Certain tribes in favor of the compacts have sued to block the February referendum, claiming that signatures obtained by opponents were not gathered within the required time frame.
The economy in Reno and our feeder markets, like many other areas around the country, are experiencing the effects of several negative macroeconomic trends, including higher fuel prices, home mortgage defaults, higher mortgage interest rates and declining residential real estate values. These negative trends could adversely impact discretionary incomes of our target customers which, in turn could adversely impact our business. Management continues to monitor these trends and intends, as appropriate, to adopt operating strategies to attempt to mitigate the effects of such adverse conditions. We can make no assurances that such strategies will be effective.
Other factors that may impact current and future results are set forth hereinin detail in Part II - Item 1A “Risk Factors” of this Form 10-Q and in our quarterly reports onItem 1A “Risk Factors” of the 2006 Form 10-Q for the periods ended March 31, 2006 and June 30, 2006 and our annual report on Form 10-K for the year ended December 31, 2005.10-K.
COMMITMENTS AND CONTINGENCIES
ContractualOur contractual cash obligations for the Company as of September 30, 2006 over2007 and the next five years and thereafter are as follows:follow:
| | | Payments Due by Period |
| Contractual Cash Obligations | | Total | | Less Than 1 Year | | 1 to 3 Years | | 4 to 5 Years | | More Than 5 Years |
| Long-Term Debt | | $ - | | $ - | | $ - | | $ - | | $ - |
| Operating Leases (1) | | 4,810,000 | | 370,000 | | 740,000 | | 740,000 | | 2,960,000 |
| Purchase Obligations (2) | | 1,993,000 | | 1,993,000 | | - | | - | | - |
| Total Contractual Cash Obligations | | $6,803,000 | | $2,363,000 | | $740,000 | | $740,000 | | $2,960,000 |
| | | Payments Due by Period |
| | | | | Less Than | | 1 to 3 | | 4 to 5 | | More Than |
| | | Total | | 1 Year | | Years | | Years | | 5 Years |
| Operating leases (1) | | $ 4,440,000 | | $ 370,000 | | $740,000 | | $740,000 | | $2,590,000 |
| Purchase obligations (2) | | 31,416,000 | | 31,416,000 | | - | | - | | - |
| Total contractual cash obligations | | $35,856,000 | | $31,786,000 | | $740,000 | | $740,000 | | $2,590,000 |
(1) Operating leases include $370,000 per year in lease and common area expense payments to the shopping center adjacent to the Atlantis (see “OFF BALANCE SHEET ARRANGEMENTS”)Note 5. Related Party Transactions, in the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q).
(2) Our open purchase order and construction commitments total approximately $2.0$31.4 million. Of the total purchase order and construction commitments, approximately $1.8$2.0 million are cancelable by the Companyus upon providing a 30-day notice.
On September 28, 2006, our Board of Directors authorized a stock repurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, our Board of Directors authorized a program to repurchase up to 1,000,000 shares of our 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 Company believesRepurchase Plan does not obligate us to acquire any particular amount of common stock and the plan may be suspended at any time at our discretion. In August 2007, we acquired 32,112 shares pursuant to the Repurchase Plan at an average price of $23.55 per share. No other shares have been purchased pursuant to the Repurchase Plan.
We began 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 working with the Reno-Sparks Convention and Visitors’ Authority to design and build a pedestrian skywalk over Peckham Lane that itswill connect the Reno-Sparks Convention Center (RSCVA) directly to the Atlantis. Upon completion of, and agreement on, design plans with the RSCVA, 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, reducing revolving credit facility and availability of equipment financing, if necessary,and borrowings available under the Credit Facility will provide the Companyus with sufficient resources to fund itsour operations, meet its existingour debt obligations, and fulfill itsour capital expenditure requirements; however, the Company'sour operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond itsour control.
We currently expect to fund expansions of the Atlantis expected to begin in early 2007 from cash flows from operations.
If the Company iswe are unable to generate sufficient cash flow, itwe 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
THE CREDIT FACILITY
In 1997 we entered into an $80 million reducing revolving term loan credit facility with a consortium of banks that was to expire on June 30, 2004 (the "Original Credit Facility").
On February 20, 2004, the Original Credit Facilitya previous credit facility was refinanced (the "New Credit"Credit Facility") for $50 million, which included a $46 million payoff of the unpaid balance of the Original Credit Facility. The amount of the New Credit Facility, which is also a reducing revolving facility, could have been increased by up to $30 million on a one-time basis, if requested by us before the second anniversary of the closing date of the New Credit Facility. We did not make this request, and, therefore, the $30 million increase is currently not available to us.million. At our option, borrowings under the New Credit Facility willwould 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 includeincluded 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 canwould 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,LIBOR. In February 2007, this margin varied betweenwas further reduced to 0.00 percent and 2.000.75 percent above the Base Rate and between 1.501.00 percent and 3.501.75 percent above LIBOR).LIBOR. At September 30, 2006, the Company2007, we had no borrowings under the Credit Facility; however, our leverage ratio was such that the pricing for borrowings would have been the Base Rate loans outstanding and had noplus 0.00 percent or LIBOR loans outstanding. At September 30, 2006, we had $24 million available to be drawn down under the New Credit Facility.plus 1.00 percent.
WeSubject 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, and general corporate purposes relating to the Atlantis 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 restrictingthat 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 currently meet such ratio requirements.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 willwas 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 re-borrowedreborrowed 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 also 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 also benefited from a reduced loan amortization schedule, from $3 million per quarter under the Original Credit Facility to $1.625 million per quarter under the New Credit Facility.
As of September 30, 2006, our Leverage Ratio had been equal to or less than one-to-one for the third consecutive quarter. Per the New Credit Facility, if we achieve a Leverage Ratio equal to or less than one-to-one for two consecutive quarters, our scheduled reduction for the next consecutive fiscal quarter is waived. Management has assumed that we will maintain a leverage ratio equal to or less than one-to-one for the remaining term of the New Credit Facility and, therefore, no principal reductions would be due on any new amounts the Company may borrow on the New Credit Facility until the New Credit Facility matures in 2009.
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.
SHORT-TERM DEBT
At September 30, 2006, we had no short-term debt outstanding.
ITEM 3 -3. 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 September 30, 2006,2007, that are subject to market risks. In
A one-point increase in interest rates would have had no impact on interest expense in the secondthird quarter of 2006, we began investing excess cash in stable, short-term investments qualifying as cash equivalents with original maturities of 30 days or less, such as certificates of deposit, which may be subject to market risk; however, we do not believe such market risks to be material.2007.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, (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 arewere effective to ensure that information required to be disclosedas of the end of the period covered by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. this report.
We also evaluatedManagement’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 September 30, 2007. 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, occurredas of September 30, 2007, the Company’s internal control over financial reporting is effective based on those criteria. 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 ourthe last fiscal quarter that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. This evaluation was carried out under the supervision, and with the participation, of our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that there have been no significant changes in internal controls or in other factors that have materially affected, or would be reasonably likely to materially affect, our internal control over financial reporting.
Our management does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. Because the design of a control system is based upon certain assumptions about the likelihood of future events, there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MonarchAs previously has disclosed, litigation was filed against itMonarch 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, Case No. 2:06-cv-00102, seekingNevada. 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. On April 17, 2006 the court issued an order granting Monarch's motion to transfer venue of the lawsuit to the unofficial Northern District of Nevada. The new case number assigned to the matter is 3:06-cv-00232-ECR(RAM). Litigation currently 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 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 quarterly report on Form 10-Q. The risks described below are not the only ones facing us. Other risk factors are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. Furthermore, additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO DILUTION OF OUR ISSUED AND OUTSTANDING COMMON STOCK
The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing stockholders’ equity interests in us. Our Board of Directors has the authority to issue, without vote or action of stockholders, preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders’ interest.
WE DO NOT INTEND TO PAY CASH DIVIDENDS. AS A RESULT, STOCKHOLDERS WILL BENEFIT FROM AN INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE
We have never paid a cash dividend on our common stock, and we do not plan to pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance our operations and further expansion and growth of our business, including acquisitions. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. We cannot guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No.NoDescription
31.1 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of John Farahi, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification of Ronald Rowan, pursuant to
32.2 | Certification of Ronald Rowan, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MONARCH CASINO & RESORT, INC.
(Registrant)
Date: November 8, 2006
2007By: /s/ RONALD ROWAN
------------------------------------
Ronald Rowan,
Chief Financial Officer
(Principaland Treasurer (Principal Financial
Officer and Duly Authorized Officer)
14
EXHIBIT INDEX
Exhibit31.1 Page
NumberDescription Number
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 200228
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley |
Act of 2002 29
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted |
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 30
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31
EXHIBIT 31.1
CERTIFICATIONS- CERTIFICATION OF JOHN FARAHI 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 quarterly report on Form 10-Q of Monarch Casino & Resort, Inc., a Nevada Corporation;corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) 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
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's firstmost recent 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 andover financial 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 controlcontrols over financial reporting.
Date: November 8, 20062007
By: /s/ John Farahi
John Farahi, Chief Executive Officer
14
/S/ JOHN FARAHI
John Farahi
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS- CERTIFICATION OF RONALD ROWAN 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 quarterly report on Form 10-Q of Monarch Casino & Resort, Inc., a Nevada Corporation;corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) 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
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's firstmost recent 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 andover financial 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 controlcontrols over financial reporting.
Date: November 8, 20062007
By: /s/ Ronald Rowan
Ronald Rowan, Chief Financial Officer
14
/S/ RONALD ROWAN
Ronald Rowan
Chief Financial Officer
EXHIBIT 32.1
MONARCH CASINO & RESORT, INC.
CERTIFICATION OF JOHN FARAHI PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2006,2007, 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 8, 20062007
/S/By: /s/ JOHN FARAHI
John Farahi,
Chief Executive Officer
EXHIBIT 32.2
MONARCH CASINO & RESORT, INC.
CERTIFICATION OF RONALD ROWAN PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2006,2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald Rowan, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 8, 20062007
/S/ RONALD ROWANBy: /s/ Ronald Rowan
Ronald Rowan,
Chief Financial Officer