Table of Contents

United States

Securities and Exchange Commission

Washington, D.C. 20549


Form 10-Q

(Mark One)


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2008


2009

OR


¨oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from             ______to______.


to            .

Commission File No. 0-22088



MONARCH CASINO & RESORT, INC.

(Exact name of registrant as specified in its charter)


Nevada

88-0300760

(State or Other Jurisdiction of


Incorporation or Organization)

(I.R.S. Employer


Identification No.)

3800 S. Virginia St.


Reno, Nevada

89502

(Address of Principal Executive Offices)

(ZIP Code)



(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


(775)  335-4600

(Registrant'sRegistrant’s telephone number, including area code)


Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes


xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definition of "accelerated filer“accelerated filer”, “large accelerated filer” and large accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o


Large Accelerated Filer o                        Accelerated Filer x                         Non-Accelerated Filer o     Smaller Reporting Company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesoNo x



Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date.


Common stock, $0.01 par value

16,122,048

16,125,388 shares

Class

Outstanding at November 4, 2008October 30, 2009


2


TABTable of ContentsLE

TABLE OF CONTENTS


Item

Page
Number

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 20082009 and 20072008 (unaudited)

4

3

Condensed Consolidated Balance Sheets at September 30, 20082009 (unaudited) and December 31, 20072008

5

4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20082009 and 20072008 (unaudited)

6

5

Notes to Condensed Consolidated Financial Statements (unaudited)

7

6

Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

15

11

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

20

Item 4. Controls and Procedures

24

20

PART II - OTHER INFORMATION

24

20

Item 1. Legal Proceedings

24

20

Item 1A. Risk Factors

25

21

Item 6. Exhibits

25

21

Signatures

25

21

Exhibit 31.1 Certification of John Farahi pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

26

22

Exhibit 31.2 Certification of Ronald Rowan pursuant to Section 302 of the Sarbanes- OxleySarbanes-Oxley Act of 2002

27

23

Exhibit 32.1 Certification of John Farahi pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

28

24

Exhibit 32.2 Certification of Ronald Rowan pursuant to Section 906 of the Sarbanes- OxleySarbanes-Oxley Act of 2002

29

25


PartPART I. FinFINANCIAL INFORMATIONancial Information


ITEM 1. FINANCIAL STATEMENTS


MONARCH CASINO

Monarch Casino & RESORT, INC.

Resort, Inc.

Condensed Consolidated Statements of Income

(Unaudited)


  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2008  2007  2008  2007 
             
Revenues            
Casino $27,612,822  $29,936,988  $77,041,679  $84,512,978 
Food and beverage  10,582,809   11,011,808   29,891,424   32,084,196 
Hotel  6,301,547   8,002,564   17,677,248   21,857,687 
Other  1,181,343   1,229,521   3,598,915   3,703,972 
Gross revenues  45,678,521   50,180,881   128,209,266   142,158,833 
Less promotional allowances  (6,891,322)  (6,557,585)  (19,804,909)  (19,192,626)
Net revenues  38,787,199   43,623,296   108,404,357   122,966,207 
Operating expenses                
Casino  9,991,844   9,232,990   28,005,260   26,970,411 
Food and beverage  5,218,032   5,381,681   14,513,679   15,217,367 
Hotel  1,983,818   2,161,564   6,056,911   6,416,669 
Other  338,847   386,056   998,498   1,127,113 
Selling, general and administrative  12,732,367   12,731,275   38,713,980   37,054,086 
Depreciation and amortization  2,353,562   1,982,184   6,388,848   6,122,600 
Total operating expenses  32,618,470   31,875,750   94,677,176   92,908,246 
Income from operations  6,168,729   11,747,546   13,727,181   30,057,961 
Other (expense) income                
Interest income  36,107   568,462   333,689   1,385,883 
Interest expense, net  (82,981)  -   (82,981)  (152,274)
Total other (expense) income  (46,874)  568,462   250,708   1,233,609 
Income before income taxes  6,121,855   12,316,008   13,977,889   31,291,570 
                 
Provision for income taxes  (2,096,160)  (4,280,000)  (4,847,260)  (10,860,000)
                 
Net income $4,025,695  $8,036,008  $9,130,629  $20,431,570 
                 
Earnings per share of common stock                
Net income                
Basic $0.25  $0.42  $0.53  $1.07 
Diluted $0.25  $0.41  $0.53  $1.06 
                 
Weighted average number of common shares and potential common shares outstanding                
Basic  16,122,048   19,079,062   17,238,273   19,080,347 
Diluted  16,141,830   19,366,043   17,314,438   19,352,064 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Casino

 

$

24,385,970

 

$

27,612,822

 

$

71,336,715

 

$

77,041,679

 

Food and beverage

 

9,546,449

 

10,582,809

 

28,965,730

 

29,891,424

 

Hotel

 

6,314,048

 

6,301,547

 

17,578,424

 

17,677,248

 

Other

 

1,005,075

 

1,181,343

 

3,278,663

 

3,598,915

 

Gross revenues

 

41,251,542

 

45,678,521

 

121,159,532

 

128,209,266

 

Less promotional allowances

 

(6,405,742

)

(6,891,322

)

(19,279,190

)

(19,804,909

)

Net revenues

 

34,845,800

 

38,787,199

 

101,880,342

 

108,404,357

 

Operating expenses

 

 

 

 

 

 

 

 

 

Casino

 

8,923,845

 

9,991,844

 

26,686,637

 

28,005,260

 

Food and beverage

 

4,600,471

 

5,218,032

 

13,774,017

 

14,513,679

 

Hotel

 

2,194,823

 

1,983,818

 

6,247,994

 

6,056,911

 

Other

 

303,106

 

338,847

 

908,346

 

998,498

 

Selling, general and administrative

 

12,203,807

 

12,732,367

 

36,133,433

 

38,713,980

 

Depreciation and amortization

 

3,034,674

 

2,353,562

 

9,310,580

 

6,388,848

 

Total operating expenses

 

31,260,726

 

32,618,470

 

93,061,007

 

94,677,176

 

Income from operations

 

3,585,074

 

6,168,729

 

8,819,335

 

13,727,181

 

Other (expense) income

 

 

 

 

 

 

 

 

 

Interest income

 

36,205

 

36,107

 

107,964

 

333,689

 

Interest expense

 

(486,921

)

(82,981

)

(1,608,138

)

(82,981

)

Total other (expense) income

 

(450,716

)

(46,874

)

(1,500,174

)

250,708

 

Income before income taxes

 

3,134,358

 

6,121,855

 

7,319,161

 

13,977,889

 

Provision for income taxes

 

(1,096,500

)

(2,096,160

)

(2,561,225

)

(4,847,260

)

Net income

 

$

2,037,858

 

$

4,025,695

 

$

4,757,936

 

$

9,130,629

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.25

 

$

0.30

 

$

0.53

 

Diluted

 

$

0.13

 

$

0.25

 

$

0.29

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares and potential common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

16,122,593

 

16,122,048

 

16,122,232

 

17,238,273

 

Diluted

 

16,180,168

 

16,141,830

 

16,159,669

 

17,314,438

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.



MONARCH

MONARCH CASINO & RESORT, INC.

Condensed Consolidated Balance Sheets


  September 30,  December 31, 
  2008  2007 
ASSETS (Unaudited)    
Current assets      
Cash and cash equivalents $10,643,000  $38,835,820 
Receivables, net  3,445,614   4,134,099 
Federal income tax refund receivable  -   998,123 
Inventories  1,591,575   1,496,046 
Prepaid expenses  3,544,082   3,144,374 
Deferred income taxes  325,221   1,084,284 
Total current assets  19,549,492   49,692,746 
Property and equipment        
Land  12,162,522   10,339,530 
Land improvements  3,511,484   3,166,107 
Buildings  113,655,538   78,955,538 
Building improvements  10,435,062   10,435,062 
Furniture and equipment  92,373,657   72,511,165 
Leasehold improvements  1,346,965   1,346,965 
   233,485,228   176,754,367 
Less accumulated depreciation and amortization  (98,500,079)  (92,215,149)
   134,985,149   84,539,218 
Construction in progress  15,508,180   17,236,062 
Net property and equipment  150,493,329   101,775,280 
Other assets, net  2,817,842   2,817,842 
Total assets $172,860,663  $154,285,868 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities        
Borrowings under credit facility $42,500,000  $- 
Accounts payable  11,045,878   10,840,318 
Construction payable  2,441,246   1,971,022 
Accrued expenses  9,214,424   9,230,157 
Federal income taxes payable  190,074   - 
Total current liabilities  65,391,622   22,041,497 
Deferred income taxes  2,825,433   2,825,433 
Total liabilities  68,217,055   24,866,930 
Stockholders' equity        
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued  -   - 
Common stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares issued; 16,122,048 outstanding at 9/30/08, 18,566,540 outstanding at 12/31/07  190,963   190,963 
Additional paid-in capital  27,510,467   25,741,972 
Treasury stock, 2,974,252 shares at 9/30/08, 529,760 shares at 12/31/07, at cost  (48,943,359)  (13,268,905)
Retained earnings  125,885,537   116,754,908 
Total stockholders' equity  104,643,608   129,418,938 
Total liability and stockholder's equity $172,860,663  $154,285,868 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

11,186,772

 

$

11,756,900

 

Receivables, net

 

2,699,250

 

3,344,441

 

Federal income tax refund receivable

 

446,372

 

—

 

Inventories

 

1,514,146

 

1,564,347

 

Prepaid expenses

 

3,062,464

 

2,851,872

 

Deferred income taxes

 

429,300

 

429,300

 

Total current assets

 

19,338,304

 

19,946,860

 

Property and equipment

 

 

 

 

 

Land

 

12,712,522

 

12,162,522

 

Land improvements

 

3,511,484

 

3,511,484

 

Buildings

 

136,374,918

 

133,332,232

 

Building improvements

 

10,435,062

 

10,435,062

 

Furniture and equipment

 

105,808,017

 

96,767,076

 

Leasehold improvements

 

1,346,965

 

1,346,965

 

 

 

270,188,968

 

257,555,341

 

Less accumulated depreciation and amortization

 

(110,347,678

)

(101,825,190

)

 

 

159,841,290

 

155,730,151

 

Construction in progress

 

—

 

4,026,536

 

Net property and equipment

 

159,841,290

 

159,756,687

 

Other assets, net

 

3,369,450

 

2,797,949

 

Total assets

 

$

182,549,044

 

$

182,501,496

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Borrowings under credit facility

 

$

—

 

$

2,500,000

 

Accounts payable

 

7,140,764

 

10,213,418

 

Construction payable

 

—

 

5,404,372

 

Accrued expenses

 

10,180,192

 

8,940,110

 

Federal income taxes payable

 

—

 

233,736

 

Total current liabilities

 

17,320,956

 

27,291,636

 

Long-term debt, less current maturities

 

48,650,000

 

47,500,000

 

Deferred income taxes

 

4,610,031

 

2,115,371

 

Total Liabilities

 

70,580,987

 

76,907,007

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued

 

—

 

—

 

Common stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares issued; 16,125,388 outstanding at 9/30/09 16,122,048 outstanding at 12/31/08

 

190,963

 

190,963

 

Additional paid-in capital

 

29,588,261

 

28,051,009

 

Treasury stock, 2,970,912 shares at 9/30/09 2,974,252 shares at 12/31/08, at cost

 

(48,864,979

)

(48,943,359

)

Retained earnings

 

131,053,812

 

126,295,876

 

Total stockholders’ equity

 

111,968,057

 

105,594,489

 

Total liability and stockholder’s equity

 

$

182,549,044

 

$

182,501,496

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.


MONARCH

MONARCH CASINO & RESORT, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



  Nine Months Ended September 30, 
  2008  2007 
       
Cash flows from operating activities:      
Net income $9,130,629  $20,431,570 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  6,388,848   6,122,600 
Amortization of deferred loan costs  -   148,838 
Share based compensation  1,768,495   1,663,197 
Provision for bad debts  818,696   242,126 
Gain on disposal of assets  (10,200)  (6,969)
Deferred income taxes  759,063   (1,122,118)
Changes in operating assets and liabilities        
Receivables, net  867,912   (1,563,378)
Inventories  (95,529)  (6,875)
Prepaid expenses  (399,708)  (739,056)
Other assets  -   (2,413)
Accounts payable  205,560   (537,412)
Accrued expenses  (15,733)  (1,108,250)
Federal income taxes payable  190,074   1,355,290 
Net cash provided by operating activities  19,608,107   24,877,150 
Cash flows from investing activities:        
Proceeds from sale of assets  10,200   6,969 
Acquisition of property and equipment  (55,106,897)  (10,209,214)
Changes in payable construction  470,224   1,525,987 
         
Net cash used in investing activities  (54,626,473)  (8,676,258)
Cash flows from financing activities:        
Proceeds from exercise of stock options  -   340,682 
Tax benefit of stock option exercise  -   178,904 
Borrowings under credit facility  42,500,000   - 
Purchase of treasury stock  (35,674,454)  (756,311)
         
Net cash provided by (used in) financing activities  6,825,546   (236,725)
Net (decrease) increase in cash  (28,192,820)  15,964,167 
Cash and cash equivalents at beginning of period  38,835,820   36,985,187 
Cash and cash equivalents at end of period $10,643,000  $52,949,354 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest net of $452,019 and $0 capitalized, respectively $82,981  $3,437 
Cash paid for income taxes $2,900,000  $10,447,923 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

4,757,936

 

$

9,130,629

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,310,580

 

6,388,848

 

Amortization of deferred loan costs

 

201,235

 

—

 

Share based compensation

 

1,595,949

 

1,768,495

 

Provision for bad debts

 

1,048,626

 

818,696

 

Gain on disposal of assets

 

(63,948

)

(10,200

)

Deferred income taxes

 

2,494,660

 

759,063

 

Changes in operating assets and liabilities

 

 

 

 

 

Receivables, net

 

(1,296,179

)

867,912

 

Inventories

 

50,201

 

(95,529

)

Prepaid expenses

 

(210,593

)

(399,708

)

Other assets

 

(772,736

)

—

 

Accounts payable

 

(3,072,654

)

205,560

 

Accrued expenses

 

1,240,083

 

(15,733

)

Federal income taxes

 

212,636

 

190,074

 

Net cash provided by operating activities

 

15,495,796

 

19,608,107

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of assets

 

83,425

 

10,200

 

Acquisition of property and equipment

 

(9,414,659

)

(55,106,897

)

Changes in payable construction

 

(5,404,372

)

470,224

 

Net cash used in investing activities

 

(14,735,606

)

(54,626,473

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

13,009

 

—

 

Tax benefit of stock option exercise

 

6,673

 

—

 

Borrowings under credit facility

 

9,750,000

 

42,500,000

 

Principal payments on long-term debt

 

(11,100,000

)

—

 

Purchase of treasury stock

 

—

 

(35,674,454

)

Net cash (used in) provided by financing activities

 

(1,330,318

)

6,825,546

 

Net decrease in cash

 

(570,128

)

(28,192,820

)

Cash and cash equivalents at beginning of period

 

11,756,900

 

38,835,820

 

Cash and cash equivalents at end of period

 

$

11,186,772

 

$

10,643,000

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

1,526,077

 

$

82,981

 

Cash paid for income taxes

 

$

740,000

 

$

2,900,000

 

The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.


MONARCH

MONARCH CASINO & RESORT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation:


Monarch Casino & Resort, Inc. ("Monarch"(“Monarch”), a Nevada corporation, was incorporated in 1993.  Monarch'sMonarch’s wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("(“Golden Road"Road”), operates the Atlantis Casino Resort Spa (the "Atlantis"“Atlantis”), a hotel/casino facility in Reno, Nevada.  Monarch’s other wholly owned subsidiary, High Desert Sunshine, Inc. (“High Desert”), owns a parcel of land located adjacent to the Atlantis.  Unless stated otherwise, the "Company"“Company” refers collectively to Monarch and its Golden Road subsidiary.


subsidiaries.

The condensed consolidated financial statements include the accounts of Monarch, Golden Road and Golden Road.High Desert. Intercompany balances and transactions are eliminated.


We have evaluated subsequent events through November 6, 2009, which is the date these condensed consolidated financial statements were issued.

Interim Financial Statements:


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principlesU.S. GAAP for complete financial statements.  In the opinion of management of the Company, all adjustments considered necessary for a fair presentation are included.  Operating results for the three months and nine months ended September 30, 20082009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.


2009.

The balance sheet at December 31, 20072008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principlesGAAP for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.


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 respective periods. 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 third party plan administrators for any significant unpaid claims. The reserve is accrued at an amount needed to pay both reported and unreported claims as of the balance sheet dates, 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.


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.

For assets to be disposed of, the Company recognizes the asset to be sold at the lower of carrying value or fair market value less costs of disposal.  Fair market value for assets to be disposed of is generally estimated based on comparable asset sales, solicited offers or a discounted cash flow model.

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.

2008.

Promotional Allowances:


The Company’s frequent player program, Club Paradise, allows members, through the frequency of their play at the casino, to earn and accumulate point values, which may be redeemed for a variety of goods and services at the Atlantis Casino Resort. Point values may be applied toward room stays at the hotel, food and beverage consumption at any of the food outlets, gift shop items as well as goods and services at the spa and beauty salon. Point values earned may also be applied toward off-property events such as concerts, shows and sporting events. Point values may not be redeemed for cash.


Awards

Prior to October 6, 2009, awards under the Company’s frequent player program arewere recognized as promotional expenses at the time of redemption.  On October 6, 2009, the Company modified several aspects of its frequent player program which resulted in a change in the timing of expense recognition.  Under the new program, the Company recognizes promotional expense at the time points are earned which occurs commensurate with casino patron play.

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Table of Contents


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 cost associated with complimentary food, beverage, rooms and merchandise redeemed under the program is recorded in casino costs and expenses.



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.

The Company also applies the requirements of FIN 48 which prescribes minimum recognition thresholds 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.  

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.

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 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. On September 10, 1999, California lawmakers approved a constitutional amendment that gave Indian tribes the right to offer slot machines and a range of house-banked card games. On March 7, 2000, California voters approved the constitutional amendment. Several Native American casinos have opened in Northern California since passage of the constitutional amendment. A large Native American casino facility opened in the Sacramento area, one of the Company’s primary feeder markets, in June of 2003. Other new Native American casinos are under construction in the northern California market, as well as other markets the Company currently serves, that could have an impact on the Company's financial position and results of operations.  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.  In February 2008, the voters of the State of California approved compacts with four tribes located in Southern California that increase the limit of Native American operated slot machines in the State of California.


In addition, the Company relies on non-conventioneer visitors partially comprised of individuals flying into the Reno area. The threat of 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.

The Company also markets to northern Nevada residents. A major casino-hotel operator that successfully focuses on local resident business in Las Vegas announced plans to develop hotel-casino properties in Reno. The competition for this market segment is likely to increase and could impact the Company’s business.


NOTE 2. STOCK-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"), collectively provide for the granting of options to purchase up to 3,250,000 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’s 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 nine months ended September 30, 2008 is presented below:

     Weighted Average    
Options Shares�� 
Exercise
Price
  
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
 
Outstanding at beginning of period  1,295,426  $19.04   -   - 
Granted  85,957   16.67   -   - 
Exercised  -   -   -   - 
Forfeited  (20,000)  24.04   -   - 
Expired  -   -   -   - 
Outstanding at end of period  1,361,383  $18.81  7.3 yrs.  $(10,088,341)
Exercisable at end of period  542,750  $12.60  5.9 yrs.  $( 1,005,315)



A summary of the status of the Company’s nonvested shares as of September 30, 2008, and for the nine months ended September 30, 2008, is presented below:
Nonvested Shares Shares  
Weighted-Average
Grant Date Fair
Value
 
Nonvested at January 1, 2008  782,676  $10.43 
Granted  85,957   6.42 
Vested  (30,000)  6.54 
Forfeited  (20,000)  9.23 
Nonvested at September 30, 2008  818,633  $10.14 

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 nine months ended September 30, 2008 and 2007, 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.  With the adoption of SFAS 123R, the Company changed its 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 September 30, 2008 is approximately $3.3 million and is expected to be recognized over a weighted average period of 1.28 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 the third quarter of 2008 were as follows (there were no option grants during the third quarter of 2007):

  
Three Months
Ended September 30,
 
  2008  2007 
Expected volatility  65.9%  - 
Expected dividends  -   - 
Expected life (in years)        
Directors’ Plan  2.5   - 
Executive Plan  4.5   - 
Employee Plan  3.1   - 
Weighted average risk free rate  2.9%  - 
Weighted average grant date fair value per share of options granted $5.94   - 
Total intrinsic value of options exercised  -  $105,239 

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.  Upon implementation of SFAS 123R, 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:


  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2008  2007  2008  2007 
Casino $19,550  $17,865  $60,519  $53,839 
Food and beverage  19,512   14,424   55,095   38,015 
Hotel  5,748   9,676   25,865   27,734 
Selling, general and administrative  573,786   549,214   1,627,016   1,543,609 
Total stock-based compensation, before taxes  618,596   591,179   1,768,495   1,663,197 
Tax benefit  (216,509)  (206,913)  (618,973)  (582,119)
Total stock-based compensation, net of tax $402,087  $384,266  $1,149,522  $1,081,078 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Casino

 

$

 14,606

 

$

 19,550

 

$

 43,976

 

$

 60,519

 

Food and beverage

 

14,425

 

19,512

 

43,665

 

55,095

 

Hotel

 

5,991

 

5,748

 

18,338

 

25,865

 

Selling, general and administrative

 

507,390

 

573,786

 

1,489,970

 

1,627,016

 

Total stock-based compensation, before taxes

 

542,412

 

618,596

 

1,595,949

 

1,768,495

 

Tax benefit

 

(189,844

)

(216,509

)

(558,582

)

(618,973

)

Total stock-based compensation, net of tax

 

$

 352,568

 

$

 402,087

 

$

 1,037,367

 

$

1,149,522

 

NOTE 3. 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):


  Three Months Ended September 30, 
  2008  2007 
  Shares  Per Share Amount  Shares  Per Share Amount 
Basic  16,122  $0.25   19,079  $0.42 
Effect of dilutive stock options  20   -   287   (0.01)
Diluted  16,142  $0.25   19,366  $0.41 


  Nine Months Ended September 30, 
  2008  2007 
  Shares  Per Share Amount  Shares  Per Share Amount 
Basic  17,238  $0.53   19,080  $1.07 
Effect of dilutive stock options  76   -   272   (0.01)
Diluted  17,314  $0.53   19,352  $1.06 

 

 

Three Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

Shares

 

Per Share
Amount

 

Shares

 

Per Share
Amount

 

Basic

 

16,123

 

$

0.13

 

16,122

 

$

0.25

 

Effect of dilutive stock options

 

57

 

—

 

20

 

—

 

Diluted

 

16,180

 

$

0.13

 

16,142

 

$

0.25

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

Shares

 

Per Share
Amount

 

Shares

 

Per Share
Amount

 

Basic

 

16,122

 

$

0.30

 

17,238

 

$

0.53

 

Effect of dilutive stock options

 

38

 

(.01

)

76

 

—

 

Diluted

 

16,160

 

$

0.29

 

17,314

 

$

0.53

 

Excluded from the computation of diluted earnings per share are options where the exercise prices are greater than the market price as their effects would be anti-dilutive in the computation of diluted earnings per share.


12
  For the calculation of earnings per share for the three months ended September 30, 2009 and 2008, 1,330,606 and 893,519, respectively, were excluded.  For the calculation of earnings per share for the nine months ended September 30, 2009 and 2008, 1,333,938 and 857,553, respectively were excluded.

7



NOTE 4. RECENTLY ISSUEDNEW ACCOUNTING STANDARDS


PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 — Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards Codification TM (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued guidance on fair value measurements. The guidance defines fair value, establishes a framework for measuring fair value, and expands the disclosure requirements about fair value measurements. The guidance clarifies the principle that fair value should be based on the assumptions market participants would use when pricing assets or liabilities and establishes a hierarchy that prioritizes the information used to develop those assumptions. The guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of SFAS 157 (“FSP FAS 157-2”).  The FSP amends SFAS 157,amended the guidance to delay the effective date of SFAS 157the guidance to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities except those that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The FSP defersCompany implemented the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scopeprovisions of the FSP.guidance as of January 1, 2008 for those assets and liabilities not subject to the deferral described above. The Company hasimplementation of the guidance as of January 1, 2009 for assets and liabilities previously subject to the deferral described above did not yet determined the effecthave a material impact on the Company’s consolidatedresults of operations, financial statements that adoption of SFAS 157 will have for those items within the scope of the FSP.


position or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” SFAS No. 141 (revised) establishes principlesguidance on business combinations. The primary requirements of the guidance are as follows: (i.) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and requirements for how anassumed liabilities, with only limited exceptions even if the acquirer recognizeshas not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (ii.) Contingent consideration arrangements will be fair valued at the acquisition date and measures in its financial statements the identifiable assets acquired, the liabilities assumed, noncontrolling interestincluded on that basis in the acquiree andpurchase price consideration. The concept of recognizing contingent consideration at a later date when the goodwill acquired. The revisionamount of that consideration is intended to simplify existingdeterminable beyond a reasonable doubt, will no longer be applicable. (iii.) All transaction costs will be expensed as incurred.  Implementation of the guidance and converge rulemaking under U.S. GAAP with international accounting rules. This statement applieswould have required treatment prospectively to business combinations where the acquisition date iscompleted on or after January 1, 2009. Because the beginningCompany had no business combinations during that time, the adoption did not have a material impact on our financial position or results of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt FAS 141 (revised) in the first quarter of 2009.  The adoption of SFAS No. 141 (revised) is prospective and early adoption is not permitted.


operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interestguidance on noncontrolling interests in Consolidated Financial Statements, an amendment of ARB No. 51.”consolidated financial statements. This statementguidance establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160The guidance changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amount attributable to both the parent and the noncontrolling interests. The

8


Table of Contents

statement also establishes reporting requirements that provide sufficient disclosure that clearly identify and distinguish between the interest of the parent and those of the noncontrolling owners. This statementThe guidance is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 isthe guidance did not expected to have a material impact on the Company’s financial position, results of operations or cash flows.


In March 2008, the FASB issued SFAS 161, “Disclosuresguidance on disclosures about Derivative Instrumentsderivative instruments and Hedging Activities – an amendment of FASB Statement No. 133”. SFAS 161hedging activities. The guidance changes the disclosure requirements for derivative instruments and hedging activities. Under SFAS 161,the guidance, entities are required to provide enhanced disclosures about how and why they use derivative instruments, how derivative instruments and related hedged items are accounted for and the affect of derivative instruments on the entity’s financial position, financial performance and cash flows.  SFAS 161The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS 161adoption of the guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2008, the FASB issued guidance that provides clarification on the application of the guidance on fair value measurements in a market that is not active and provides an example that illustrates key considerations when applying the principles in the first quarter of 2009.guidance to financial assets when the market for these instruments is not active. The adoption of SFAS No. 161the guidance is not expectedanticipated to have a material impact on the Company’s financial position, results of operations or cash flows.


In May 2008,April 2009, the FASB issued SFAS 162, “The Hierarchyamended guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The amended guidance addresses application issues  for assets and liabilities arising from contingencies in a business combination. The amended guidance is effective January 1, 2009, and requires pre-acquisition contingencies to be recognized at fair value, if fair value can be reasonably determined during the measurement period. If fair value cannot be reasonably determined, the amended guidance requires measurement based on the recognition and measurement criteria of Generally Accepted Accounting Principles”, which identifies the sources ofguidance for accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 will become effective sixty days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.contingencies.  The adoption of the provisions of SFAS 162 isamended guidance did not anticipated to materiallyhave a material impact on the Company’s financial position, results of operations or cash flows.


13

In January 2009, the FASB issued amendments to the impairment guidance which aligns the impairment guidance with that in the guidance for accounting for certain investments in debt and equity securities.  It changes how companies determine whether an other-than-temporary impairment exists for certain beneficial interests by allowing management to exercise more judgment.  The adoption of the guidance did not have a material impact on our financial position, results of operations or cash flows.

In April 2009, the FASB issued additional requirements regarding disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  The adoption of the new requirements did not have a material impact on our financial position, results of operations or cash flows.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments.  The guidance amends the other-than-temporary impairment guidance relating to certain debt securities and will require a company to assess the likelihood of selling the security prior to recovering its cost basis.  Additionally, when a company meets the criteria for impairment, the impairment charges related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income.  The adoption of the guidance did not have a material impact on our financial position, results of operations or cash flows.

In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance provides additional guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets.  The adoption of the guidance did not

9



have a material impact on our financial position, results of operations or cash flows.

In April 2009, the FASB issued amended guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The amended guidance requires that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period.  The Company adopted the amended guidance on January 1, 2009.  The adoption of the amended guidance did not have a material impact on our financial position, results of operations or cash flows.

NOTE 5. RELATED PARTY TRANSACTIONS


 On July 26, 2006, the

The Company submittedcurrently rents various spaces in 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, 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 in the Shopping Center which it uses as office and storage space.   John and parking lot spaceBob Farahi, the Company’s Chief Executive Officer and President, respectively, each have an ownership interest in the Shopping Center. The Company paid rent of approximately $57,900 and $114,500, plus common area expenses, for the three and nine months ended September 30, 2009, respectively, and approximately $13,100 and $181,700 plus common area expenses for the three and nine months ended September 30, 2008, respectively, and approximately $101,200 and $162,600 plus common area expenses for the three and nine months ended September 30, 2007, respectively.  The Company intends to vacate these spaces by December 31, 2008.

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 monthsyear beginning in the 61st month 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 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 months ended September 30, 2008 and 2007 and paid $225,000 plus common area maintenance for each of the nine months ended September 30, 2009 and 2008, and 2007.


respectively.

The Company leased sign space from the Shopping Center until August 1,through July 2008. 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, and subsequently renewed on June 15, 2007 for a monthly lease of $1,060. The Company paid $1,060 and $7,460 for the leased sign at the Shopping Center$7,420 for the three and nine months ended September 30, 2008, respectively,respectively.

The Company occasionally leases billboard advertising space from affiliates of its controlling stockholders and paid $3,180$10,500 and $9,240$28,000 for the three and nine months ended September 30, 2007, respectively.


The Company is currently leasing billboard advertising space from affiliates of its controlling stockholders2009, respectively, and paid $7,000 and $28,000 for the three and nine months ended September 30, 2008, respectively. The Company paid $17,500 and $38,500 for the three and nine months ended September 30, 2007, respectively.


On December 24, 2007, the Company entered into a lease with Triple “J” Plus, LLC (“Triple J”) for the use of a facility on 2.3 acres of land (jointly the “Property”) across Virginia Street from the Atlantis that the Company currently utilizes for storage.  The managing partner of Triple J is a first-cousin of John and Bob Farahi, the Company’s Chief Executive Officer and President, respectively.  The term of the lease is two years requiring monthly rental payments of $20,256.  CommensurateContemporaneously with

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execution of the lease, the Company entered into an agreement that provides the Company with a purchase option on the Property at the expiration of the lease period while also providing Triple J with a put option to cause the Company to purchase the Property during the lease period.  The purchase price of the Property has been established by a third party appraisal company.  Lastly, as a condition of the lease and purchase option, the Company entered into a promissory note (the “Note”) with Triple J whereby the Company advanced a $2.7 million loan to Triple J.  The Note requires interest only payments at 5.25% and matures on the earlier of i) the date the Company acquires the Property or ii) January 1, 2010.


  Triple J notified the Company that it intends to exercise its put option to cause the purchase transaction to close prior to December 31, 2009.  Should Triple J not exercise its put option in December 2009, the Company intends to exercise its purchase option which would cause the purchase transaction to close in January 2010.

ITEMITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Monarch Casino & Resort, Inc., through its wholly-owned subsidiary, Golden Road Motor Inn, Inc. ("(“Golden Road"Road”), owns and operates the tropically-themed Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the "Atlantis"“Atlantis”).  Monarch’s other wholly owned subsidiary, High Desert Sunshine, Inc., owns a parcel of land located adjacent to 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'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'Atlantis’ location for locals, tour and travel visitors, conventioneers and conventioneerslocal residents 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"“Monarch”, “Company”, “we”, “our” and "us"“us” refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.


and High Desert Sunshine, Inc. subsidiaries.

OPERATING RESULTS SUMMARY


Below is a summary of our third quarter results for 20082009 and 2007:2008:

Amounts in millions, except per share amounts


Amounts in millions, except per share amounts    
          
  
Three Months
Ended September 30,
  Percentage 
  2008  2007  Increase/(Decrease)        
Casino revenues $27.6  $29.9   (7.7)
Food and beverage revenues  10.6   11.0   (3.6)
Hotel revenues  6.3   8.0   (21.3)
Other revenues  1.2   1.2   - 
Net revenues  38.8   43.6   (11.0)
Sales, general and admin exp  12.7   12.7   - 
Income from operations  6.2   11.7   (47.0)
Net Income  4.0   8.0   (50.0)
             
Earnings per share - diluted  0.25   0.41   (39.0)
             
Operating margin  15.9%  26.9% (11.0) pts.

15

 

 

Three Months

 

 

 

 

 

Ended September
30,

 

Percentage

 

 

 

2009

 

2008

 

Increase/(Decrease)

 

Casino revenues

 

$

24.4

 

$

27.6

 

(11.6

)

Food and beverage revenues

 

9.5

 

10.6

 

(10.4

)

Hotel revenues

 

6.3

 

6.3

 

—

 

Other revenues

 

1.0

 

1.2

 

(16.7

)

Net revenues

 

34.8

 

38.8

 

(10.3

)

Sales, general and admin exp

 

12.2

 

12.7

 

(3.9

)

Income from operations

 

3.6

 

6.2

 

(41.9

)

Net income

 

2.0

 

4.0

 

(50.0

)

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

0.13

 

0.25

 

(48.0

)

Operating margin

 

10.3

%

15.9

%

(5.6

)pts.

11


  
Nine Months
Ended September30,
  Percentage 
  2008  2007  Increase/(Decrease)        
Casino revenues $77.0  $84.5   (8.9)
Food and beverage revenues  29.9   32.1   (6.9)
Hotel revenues  17.7   21.9   (19.2)
Other revenues  3.6   3.7   (2.7)
Net revenues  108.4   123.0   (11.9)
Sales, general and admin exp  38.7   37.1   4.3 
Income from operations  13.7   30.1   (54.5)
Net Income  9.1   20.4   (55.4)
             
Earnings per share - diluted  0.53   1.06   (50.0)
             
Operating margin  12.7%  24.4% (11.7) pts.

Our results

 

 

Nine Months

 

 

 

 

 

Ended September
30,

 

Percentage

 

 

 

2009

 

2008

 

Increase/(Decrease)

 

Casino revenues

 

$71.3

 

$77.0

 

(7.4

)

Food and beverage revenues

 

29.0

 

29.9

 

(3.0

)

Hotel revenues

 

17.6

 

17.7

 

(0.6

)

Other revenues

 

3.3

 

3.6

 

(8.3

)

Net revenues

 

101.9

 

108.4

 

(6.0

)

Sales, general and admin exp

 

36.1

 

38.7

 

(6.7

)

Income from operations

 

8.8

 

13.7

 

(35.8

)

Net income

 

4.8

 

9.1

 

(47.3

)

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

0.29

 

0.53

 

(45.3

)

Operating margin

 

8.6

%

12.7

%

(4.1

)pts.

The decline in revenues for the three months ended September 30, 20082009 compared to the same period of the prior year reflect the effects of thea challenging operating environment that we have experienced beginning in the three month period ended December 31, 2007.environment.  As in many other areas around the country, the economic downturnslowdown in northern NevadaReno in the fourth quarter of 2007 deepened throughout 2008 and has deepenedcontinued through the third quarterfirst nine-months of 2008.  Other factors causing negative financial impact that continued from the fourth quarter of 2007 were disruption from construction related to capital projects (see “COMMITMENTS AND CONTINGENCIES” below) and2009.  Additionally, aggressive marketing programs by our competitors.  In responsecompetitors that began in 2008 have continued through the first nine-months of 2009.  Income from operations was impacted by an increase in depreciation expense of $681 thousand for the quarter ended September 30, 2009 compared to these challenges, we increased marketingthe same prior year period.  This increase in depreciation expense was due to the completion and promotional expendituresplacing into service of our expansion, remodel and Atlantis Convention Center Skybridge capital projects (see “CAPITAL SPENDING AND DEVELOPMENT” below).  These adverse effects were mitigated somewhat by our ability to attractreduce sales, general and retain guests.  We also continued to incur legal expenses associated with the ongoing and previously disclosed Kerzner litigation (see “LEGAL PROCEEDINGS” below).administrative expense.   We anticipate that downward pressure on profitsrevenue will persist as long as we continue to experience the adverse effects of the negative macroeconomic environment construction disruption,and the aggressive marketing programs of our competitors and the legal defense costs associated with the Kerzner lawsuit.


competitors.

These factors were the primary drivers of:

·


·Decreases of 7.7%, 3.6% and 21.3% in our casino, food and beverage and hotel revenues, respectively, resulting in a net revenue decrease of 11.0%.

·A decrease in our third quarter 2008 operating margin by 11.0 points or 40.9%.

Decreases of 11.6% in our casino revenue and 10.4% in our food and beverage revenue resulting in a net revenue decline of 10.3%;

·A decrease in income from operations and diluted earnings per share of 41.9% and 48.0%, respectively;

·A decrease in our operating margin by 5.6 points or 35.2%.

CAPITAL SPENDING AND DEVELOPMENT

We seek to continuously upgrade and maintain the Atlantis facility in order to present a fresh, high quality product to our guests.

In June 2007, we broke ground on an expansion project several phases of which we completed and opened in the second half of 2008.  New space was added to the first floor casino level, the second and third floors and the basement level totaling approximately 116,000 square feet.  The existing casino floor was expanded by over 10,000 square feet, or approximately 20%.  The first floor casino expansion included a redesigned, updated and expanded race and sports book of approximately 4,000 square feet and an enlarged poker room.   The expansion also included the new Manhattan deli, a New York deli-

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style restaurant.  The second floor expansion created additional ballroom and convention space of approximately 27,000 square feet, doubling the existing facilities.  We constructed and opened a pedestrian skywalk over Peckham Lane that connects the Reno-Sparks Convention Center directly to the Atlantis.  In January 2009, we opened the final phase of the expansion project, the new Spa Atlantis featuring an atmosphere, amenities and treatments that are unique from any other offering in our market.  Additionally, many of the pre-expansion areas of the Atlantis were remodeled to be consistent with the upgraded look and feel of the new facilities.  The total cost of these capital projects (the “Capital Projects”) was approximately $73 million.

With the opening of the new skywalk, the Atlantis became the only hotel-casino to be physically connected to the Reno-Sparks Convention Center.  The Reno-Sparks Convention Center offers approximately 500,000 square feet of leasable exhibition, meeting room, ballroom and lobby space.

Capital expenditures at the Atlantis totaled approximately $55.1$9.4 and $10.2$55.1 million during the first nine months of 20082009 and 2007,2008, respectively.  During the nine monthsmonth periods ended September 30, 2009 and 2008, our capital expenditures consisted primarily of construction costs associated with our $50 million expansion project and the Atlantis Convention Center Skybridge project (see additional discussion of these projects under “COMMITMENTS AND CONTINGENCIES” below).  Additional capital expenditures duringCapital Projects, the nine months ended September 30, 2008 were for acquisition of land to be used for administrative offices, acquisition of gaming equipment to upgrade and replace existing equipment and continued renovation and upgrades to the Atlantis facility.  During the nine months ended September 30, 2007, our capital expenditures consisted primarilythird quarter of construction costs associated with2009, the Company acquired 5.3 acres of land for $3.25 million financed by a draw down from the Credit Facility. The land is located on the eastern perimeter of the current expansion phaseAtlantis footprint immediately across Coliseum Way. A portion of the Atlantisparcel includes a 14,376-square-foot building that commenced in June 2007 andhas been leased back to the acquisition of gaming equipment to upgrade and replace existing gaming equipment.



Future cash needed to finance ongoing maintenance capital spendingseller, but the leased portion is expectedintended to be made available from operatingfor future alternative parking or other facilities as the Company’s development needs require.

We believe that our existing cash balances, cash flow from operations and borrowings available under the Credit Facility (see "THE“THE CREDIT FACILITY"FACILITY” below) will provide us with sufficient resources to fund our operations, meet our debt obligations, and if necessary,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 borrowings.


equity capital.

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, deteriorating macroeconomic trends, financial market risks, 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, legislative and regulation changes, 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.

13



RESULTS OF OPERATIONS


Comparison of Operating Results for the Three-Month Periods Ended September 30, 20082009 and 2007


2008

For the three months ended September 30, 2008,2009, our net income was $2.0 million, or $0.13 per diluted share, on net revenues of $34.8 million, a decrease from net income of $4.0 million, or $0.25 per diluted share, on net revenues of $38.8 million a decrease from net income of $8.0 million, or $0.41 per diluted share, on net revenues of $43.6 million for the three months ended September 30, 2007.2008.  Income from operations for the three months ended September 30, 20082009 totaled $6.2$3.6 million when compared to $11.7$6.2 million for the same period in 2007.2008.  Net revenues decreased 11.0%10.3%, and net income decreased 50.0%, when compared to last year'syear’s third quarter.


Casino revenues totaled $27.6$24.4 million in the third quarter of 2008, a 7.7%2009, an 11.6% decrease from the $29.9$27.6 million reported in the third quarter of 2007,2008, which was primarily due to decreased slot revenue. Casino operating expenses amounted to 36.2%36.6% of casino revenues in the third quarter of 2008,2009, compared to 30.8%36.2% in the third quarter of 2007.2008.  The increase was due primarily due to the decreased casino revenue combined with increased complimentary expenses.


Food and beverage revenues totaled $9.5 million in the third quarter of 2009, a 10.4% decrease from $10.6 million in the third quarter of 2008, a 3.6% decrease from $11.0 million in the third quarter of 2007, due primarily to a 6.3%an 11.1% decrease in the number of covers served partially offset by a 2.7%0.6% increase in the average revenue per cover.  Food and beverage operating expenses amounted to 49.3%48.2% of food and beverage revenues during the third quarter of 20082009 as compared to 48.9%49.3% for the third quarter of 2007.2008.  This increasedecrease was primarily the result of increasedlower food and other commodity and labor costs.


Hotel revenues were $6.3 million for each of the third quarterquarters of 2009 and 2008, a decreaserespectively.  The effects of 21.3%increased revenue from the $8.0 million reportedour new spa, which opened in the 2007 third quarter.  This decrease was the result of lower hotel occupancy combined with a decrease in theJanuary 2009, higher average daily room rate (“ADR”). Both 2008 and 2007 third quarter revenues includedrevenue from a $3$10 per occupied room energy surcharge.day resort fee paid by our guests effective June 1, 2009, were all offset by lower hotel occupancy.  During the third quarter of 2008,2009, the Atlantis experienced a 91.6%an 85.5% occupancy rate, as compared to 97.9%91.6% during the same period in 2007.2008. The Atlantis'Atlantis’ ADR was $67.76 in the third quarter of 2009 compared to $68.68 in the third quarter of 2008 compared to $81.11 in the third quarter of 2007.2008.  Hotel operating expenses as a percent of hotel revenues increased to 34.8% in the 2009 third quarter, compared to 31.5% duringin the 2008 third quarter. This decrease is primarily due to the effect of the increased operating expenses of our new spa.

Promotional allowances decreased to $6.4 million in the third quarter of 2008 as2009 compared to 27.0% in the 2007 third quarter.  This increase was primarily the result of the decreased hotel revenues.



Promotional allowances increased to $6.9 million in the third quarter of 2008 compared to $6.6 million in the third quarter of 2007. The increase is attributable to continued promotional efforts to generate additional revenues.2008.  Promotional allowances as a percentage of gross revenues increased to 15.5% during the third quarter of 2009 as compared to 15.1% during the third quarter of 2008 as compared2008.  The increase is attributable to 13.1% duringcontinued efforts to generate additional revenues through promotional efforts and in response to aggressive marketing programs by our competitors.

Other revenues decreased slightly to $1.0 million in the third quarter of 2007.


Other revenues remained flat at2009 compared to $1.2 million in both the 2008 third quarter and the third quarter of 2007.

2008.

Depreciation and amortization expense was $3.0 million in the third quarter of 2009 as compared to $2.4 million in the third quarter of 2008 as compared to $2.0 million in the third quarter of 2007.2008.  The increase in depreciation expense is primarily related to depreciation expense of the portion on the Expansion assetsCapital Projects (see “COMMITMENTS AND CONTINGENCIES” below) that opened in July 2008.


SG&A expense remained flat at $12.7 million in boththroughout the third quarterssecond half of 2008 and 2007.  Increased marketingin January 2009.

SG&A expense decreased to $12.2 million in the third quarter of 2009 from $12.7 million in the third quarter of 2008 was offset primarily by lower payroll and benefit expenses.due to reductions in marketing expense.  As a percentage of net revenue, SG&A expenses increased to 32.8%35.0% in the third quarter of 20082009 from 29.2%32.8% in the same period in 2007.2008.

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Through

During the three month period ended September 30, 2008,2009, we drew $42.5paid down $3.45 million, net, from our $50$60 million credit facility which reduced the outstanding balance at September 30, 2009 to pay for share repurchases and to fund ongoing capital projects.  As$48.65 million.  Because of a result of thishigher average borrowing activity, we incurred interest expense of $83 thousand during the current quarter, as compared to no interest expense forbalance in the third quarter of 2007.  We used our invested cash reserves2009 as compared to the third quarter of 2008, interest expense increased during the first and second quartersthird quarter of 20082009 to $487 thousand from $83 thousand in the third quarter of 2008.  The higher borrowing balance was attributable to borrowing to fund the $50 million expansion project and share repurchases resulting in a decrease in interest income from the $568 thousand reported in the second quarter of 2007 to $36 thousand in the current quarter.  Current quarter interest income represents interest earned on the Note with Triple J (see NOTE 5. RELATED PARTY TRANSACTIONS  to the Company’s consolidated financial statements).


Capital Projects.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 20082009 and 2007.


2008.

For the nine months ended September 30, 2008,2009, our net income was $4.8 million, or $0.29 per diluted share, on net revenues of $101.9 million, a decrease from net income of $9.1 million, or $.53$0.53 per diluted share, on net revenues of $108.4 million a decrease from net income of $20.4 million, or $1.06 per diluted share, on net revenues of $123.0 million during the nine months endeden ded September 30, 2007.2008. Income from operations for the 20082009 nine-month period totaled $13.7$8.8 million, compared to $30.1$13.7 million for the same period in 2007.2008. Net revenues decreased 11.9%6.0%, and net income decreased 55.4%47.3% when compared to the nine-month period ended September 30, 2007.


2008.

Casino revenues for the nine months ended September 30, 20082009 totaled $77.0$71.3 million, an 8.9%a 7.4% decrease from $84.5$77.0 million for the nine months ended September 30, 2007.2009.  Casino operating expenses amountedincreased to 36.4%37.4% of casino revenues for the nine months ended September 30, 2008, compared to 31.9%36.4% for the same period in 2007,2008, primarily due to the decreased casino revenue combined with decreased payroll and benefit expenses offset by increased complimentary expenses.


Food and beverage revenues totaled $29.0 million for the nine months ended September 30, 2009, a decrease of 3.0% from the $29.9 million for the nine months ended September 30, 2008, a decrease of 6.9% from the $32.1 million for the nine months ended September 30, 2007, due to an approximate 11.0%4.4% decrease in the number of covers served partially offset by an approximate 4.9%0.4% increase in the average revenue per cover. Food and beverage operating expenses amounted to 48.6%47.6% of food and beverage revenues during the 20082009 nine-month period as compared to 47.4%48.6% for the same period in 2007.2008.  This increasedecrease was primarily the result of increaseddecreased food commodity and laborother costs.



Hotel revenues for the nine months ended September 30, 2008 decreased 19.2% to $17.7 million from $21.92009 remained relatively flat at $17.6 million for the nine months ended September 30, 2007, primarily due2009 compared to decreases$17.7 million for the nine months ended September 30, 2008.  Decreases in thehotel occupancy and ADR at the Atlantis.average daily room rate (“ADR”) were offset by higher revenue from our new spa which opened in January 2009 and revenue from a $10 per day resort fee, paid by our hotel guests, which we implemented on June 1, 2009.  Hotel revenues for the ninefirst six months of 2009, and all of 2008, and 2007also include a $3 per occupied room energy surcharge. The Atlantis experienced a slight decrease in the ADR during the 20082009 nine-month period to $67.15,$66.83, compared to $75.20$67.15 for the s ame period in 2008.  The occupancy rate decreased to 83.2% for the nine-month period in 2009, from 87.9% for the same period in 2007.  The occupancy rate decreased to 87.9% for the nine-month period in 2008, from 96.8% for the same period in 2007.2008.  Hotel operating expenses as a percentage of hotel revenues in the first nine months of 20082009 were 35.5%, slightly higher than the 34.3% as compared to 29.4% for the same period in 2007.2008. The increase was primarily due to the decreased revenues.


increased operating costs of the new spa.

Promotional allowances increaseddecreased to $19.8$19.3 million in the first nine months of 20082009 compared to $19.2$19.8 million in the same period of 2007.2008.  Promotional allowances as a percentage of gross revenues increased to 15.9% for the first nine months of 2009 compared to 15.4% for the same period in 2008. The increase is attributable to continued efforts to generate additional revenues through promotional efforts. Promotional allowances as a percentage of gross revenues increased to 15.5% for the first nine months of 2008 compared to 13.5% for the same period in 2007.


pr omotional efforts

Other revenues were $3.6$3.3 million for the nine months ended September 30, 2008, a 2.7%2009, an 8.3% decrease from $3.7$3.6 million in the same period in 2007.


2008.

Depreciation and amortization expense was $6.4$9.3 million in the first nine months of 2008,2009, an increase of 4.9%45.3% compared to $6.1$6.4 million in the same period last year.  The increase in depreciation expense is primarily related to depreciation expense on the portion of the Expansion assets (see “COMMITMENTS

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“COMMITMENTS AND CONTINGENCIES” below) that opened throughout the back half of 2008 and in July 2008.


January 2009.

SG&A expenses increased 4.3%decreased 6.7% to $36.1 million in the first nine months of 2009, compared to $38.7 million in the first nine months of 2008, compareddue primarily to $37.1reductions in marketing expense of approximately $2.6 million, in the first nine monthspayroll and benefi ts expense of 2007, primarily as a resultapproximately $700 thousand and miscellaneous expense reductions of approximately $100 thousand all partially offset by increased marketingutilities expense of approximately $600 thousand related to our expanded facilities and higher bad debt expense.expense of approximately $200 thousand.  As a percentage of net revenue, SG&A expenses increaseddecreased slightly to 35.7%35.5% in the 20082009 nine-month period from 30.1%35.7% in the same period in 2007.


2008.

Net interestInterest income for the first nine months of 20082009 totaled $251$108 thousand, compared to $1.2 million$334 thousand for the same period of the prior year. The difference reflects our reduction in interest bearing cash and cash equivalents combined with increased debt outstanding (see "THE“THE CREDIT FACILITY"FACILITY” below), during the first nine months of 20082009 as compared to same period in 2007.2008.  During the first nine months of 2008, interest bearing cash and cash equivalents were used to purchase Monarch common stock pursuant to a stock repurchase plan that was in place in the prior year.


Because of a higher average borrowing balance in the first nine months of 2009 as compared to the same period of 2008, interest expense increased during the first nine months of 2009 to $1.6 million from $83 thousand in same period of 2008.  The higher borrowing balance was attributable to borrowing to fund the Capital Projects.

LIQUIDITY AND CAPITAL RESOURCES


For the nine months ended September 30, 2008,2009, net cash provided by operating activities totaled $19.6$15.5 million, a decrease of 21.2%$4.1 million or 21.0% compared to the same period last year.  This decrease was primarily related to lower net income, higher depreciation and amortization and higher deferred income taxes during the first nine months of 2009 combined with the timing of the payment of a greater amount of accounts payable during the first nine months of 2009 and the collection of a greater amount of accounts receivable during the first nine months of the prior year.

Net cash used in investing activities totaled $54.6$14.7 million and $8.7$54.6 million in the nine months ended September 30, 20082009 and 2007,2008, respectively.  During the first nine months of 2009 and 2008, net cash used in investing activities consisted primarily of construction costs associated with the currentrecent expansion phase of the Atlantis that commenced(see further discussion of the Capital Projects in June 2007the “CAPITAL SPENDING AND DEVELOPMENT” section above) and the acquisition of property and equipment.  DuringBecause the firstconstruction was completed in January 2009, we used $39.9 million, or 73.0%, less net cash in investing activities during the nine months of 2008, netended September 30, 2009 compared same period in the prior year.

Net cash used in investingfinancing activities consisted primarily of construction costs associated with$1.3 million during the current expansionnine months ended September 30, 2009 represents net payments of our Credit Facility (see “THE CREDIT FACILITY” below).  During the Atlantis and the acquisition of gaming equipment to upgrade and replace existing gaming equipment. Netnine months ended September 30, 2008, net cash provided by financing activities totaled $6.8 million for the first nine monthswhich consisted of 2008 compared to net cash used in financing activities of $237,000 for the same period in 2007. Net cash used in financing activities for the first nine months of 2008 was due to our $35.7 million to purchase of Monarch common stock pursuant to a stock repurchase plan that was in place in the Repurchase Planprior year offset by borrowings under our Credit Facility of $42.5 million in credit line drawsmillion.

We believe that our existing cash balances, cash flow from operations and borrowings available under the Credit Facility (see “COMMITMENTS AND CONTINGENCIES” below).  Net cash provided by financing activities for the first nine months of 2007 was due to proceeds from the exercise of stock options and the tax benefits associatedwill provide us with such stock option exercises.  At September 30, 2008, we had cash and cash equivalents balance of $10.6 million compared to $38.8 million at December 31, 2007.



We have historically funded our daily hotel and casino activities with net cash provided by operating activities. However, to provide the flexibility to execute the share Repurchase Plan,sufficient resources to fund construction costs associated with our $50 million expansion projectoperations, meet our debt obligations, and the Atlantis Convention Center Skybridge project (see Commitments and Contingencies section below) andfulfill our capital expenditure plans; however, our operations are subject to provide for other capital needs should they arise, we entered into an agreement to amend our Credit Facility (see "THE CREDIT FACILITY" below) on April 14, 2008.  The amendment increased the available borrowings under the facility from $5 million to $50 million and extended the maturity date from February 23, 2009 to April 18, 2009.  At September 30, 2008, we had $42.5 million outstanding on the Credit Facility and had $7.5 million available to be drawn under the Credit Facility.  We plan to amend the Credit Facility to extend its maturity beyond April 18, 2009.  Such an amendment will likely result in the amendment of other material provisions of the Credit Facility, such as the interest rate chargedfinancial, economic, competitive, regulatory, and other material covenants.  In the event that wefactors, many of which are not able to come to mutually acceptable terms with the Credit Facility lender, we believe that the strength ofbeyond our balance sheet, combined with our operating cash flow, will provide the basis for a successful refinancing of the Credit Facility with an alternative lender.  However, there is no assurance that we will be able to reach acceptable terms for a Credit Facility amendment or refinancing.control. If we are unable to amendgenerate sufficient cash flow, we could be required to adopt one or refinance the Credit Facility, we may seekmore alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or obtaining additional equity or other financing to repay the outstanding principalcapital.

16



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 Center is controlled by an entity whose owners include our controlling stockholders. As part of this project, in January 2004, we 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 monthsyear beginning in the 61st month 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 three five-year terms, and at the end of the extension periods, we 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 us for pedestrian and vehicle access to the Atlantis, and we 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. We paid approximately $225,000 in lease payments for the leased driveway space at the Shopping Center during the nine months ended September 30, 2008.


2009.

Critical 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, 20072008 (“20072008 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 20072008 Form 10-K filed on March 17, 2008.


13, 2009.

OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS


The economy in northern Nevada and our feeder markets, like many other areas around the country, are experiencing the effects of several negative macroeconomic trends, including a possible broad economic recession, higher fuel prices,unemployment rates, higher 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.  We believe that as recessionary pressures increase or continue for an extended period of time, target customers may further curtail discretionary spending for leisure activities and businesses may reduce spending for conventions and meetings, both of which would 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.



As discussed below in “COMMITMENTS AND CONTINGENCIES” we commenced construction on an expansion project to the Atlantis, and Skybridge to the Reno-Sparks Convention Center, in the second quarter of 2007.  While most of the expansion was completed in July 2008, construction of the Skybridge is expected to continue into the fourth quarter of 2008, construction of the spa facilities is expected to continue into the first quarter of 2009 and various remodeling of the pre-expansion facilities are expected to continue into the first half of 2009.  During the construction period, there could be disruption to our operations from various construction activities.  In addition, the construction activity may make it inconvenient for our patrons to access certain locations and amenities at the Atlantis which may in turn cause certain patrons to patronize other Reno area casinos rather than deal with construction-related inconveniences.  As a result, our business and our results of operations may be adversely impacted so long as we are experiencing construction related operational disruption.

The constitutional amendment approved by California voters in 1999 allowing the expansion of Native American 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.  In addition, in August 2009, a federal district court ruled that more than 10,000 additional slot machines could be added to California tribal casinos.  If other Reno-area casinos continue to suffer business losses due to increased pressure from California Native American casinos, such casinos may intensify their marketing efforts to northern Nevada residents as well, greatly increasing competitive activities for our local customers.


Higher fuel costs may deter California and other drive-in customers from coming to the Atlantis.

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We also believe that unlimited land-based casino gaming in or near any major metropolitan area in the Atlantis'Atlantis’ key feeder market areas, such as San Francisco or Sacramento, could have a material adverse effect on our business.


Other factors that may impact current and future results are set forth in detail in Part II - Item 1A “Risk Factors” of this Form 10-Q and in Item 1A “Risk Factors” of our 20072008 Form 10-K.


COMMITMENTS AND CONTINGENCIES


Our contractual cash obligations as of September 30, 20082009 and the next five years and thereafter are as follow:


  Payments Due by Period 
  Total  
Less Than
1 Year
  
1 to 3
Years
  
4 to 5
Years
  
More Than
5 Years
 
                
Operating leases (1) $4,374,000  $613,000  $801,000  $740,000  $2,220,000 
Current maturities of borrowings under credit facility (2)  42,500,000   42,500,000   -   -   - 
Purchase obligations (3)  16,154,000   16,154,000   -   -   - 
Total contractual cash obligations $63,028,000  $59,267,000  $801,000  $740,000  $2,220,000 

21

 

 

Payments Due by Period (4)

 

Contractual Cash

 

 

 

less than

 

1 to 3

 

4 to 5

 

more than

 

Obligations

 

Total

 

1 year

 

years

 

years

 

5 years

 

Operating Leases(1)

 

$

3,761,000

 

$

431,000

 

$

740,000

 

$

740,000

 

$

1,850,000

 

Maturities of Borrowings Under Credit Facility (2)

 

48,650,000

 

—

 

48,650,000

 

—

 

—

 

Purchase Obligations(3)

 

3,561,000

 

3,561,000

 

—

 

—

 

—

 

Total Contractual Cash Obligations

 

$

55,972,000

 

$

3,992,000

 

$

49,390,000

 

$

740,000

 

$

1,850,000

 

(1) Operating leases include $370,000 per year in lease and common area expense payments to the shopping center adjacent to the Atlantis and $243,000 per year$61,000 in lease payments to Triple J for the last three months of 2009 (see Note 5. Related Party Transactions, in the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q).


(2) The amount represents outstanding draws against theour Credit Facility (see “THE CREDIT FACILITY” below) as of September 30, 2008.


2009.

(3) Our open purchase orderPurchase obligations represent approximately $1.6 million of commitments related to the Capital Projects and construction commitments total approximately $16.2 million.$2.0 million of materials and supplies used in the normal operation of our business.  Of the total purchase order and constructioncapital project commitments, approximately $1.9$2.0 million are cancelable by us upon providing a 30-day notice.


On September 28, 2006,

(4) Because interest payments under our BoardCredit Facility are subject to factors that in our judgment vary materially, the amount of Directors (our “Board”) authorizedfuture interest payments is not presently determinable.  These factors include: 1) future short-term interest rates; 2) our future leverage ratio which varies with EBITDA and our borrowing levels and 3) the speed with which we deploy capital and other spending which in turn impacts the level of future borrowings.  The interest rate under our Credit Facility is LIBOR, or a stock repurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, our Board authorized a program to repurchase up to 1,000,000 shares of our common stockbase rate (as defined in the open market or in privately negotiated transactionsCredit Facility agreement), plus an interest rate margin ranging from time2.00% to time, in compliance with Rule 10b-183.375% depending on our leverage ratio.  The interest rate is adjusted quarterly based on our leverage ratio which is calculated using operating results over the previous four quarters and borrowings at the end of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors.  The Repurchase Plan did not obligate us to acquire any particular amount of common stock.


On March 11, 2008, our Board increased its initial authorization by 1 million shares and on April 22, 2008, the Board increased its authorization a third time by 1 million shares which increased the shares authorized to be repurchased to a total of three million shares.  During the first and second quarters of 2008, we purchased 2,444,492 shares of the Company’s common stock pursuant to the Repurchase Plan at a weighted average purchase price of $14.59 per share, which increased the total number of shares purchased pursuant to the Repurchase Plan to 3,000,000 at a weighted average purchase price of $16.52 per share.  As of June 30, 2008, the Company had purchased all shares under the three million share Repurchase Plan authorization.

We began construction in the second quarter of 2007 on the next expansion phase of the Atlantis (the “Expansion”).  The Expansion impacts the first floor casino level, the second and third floors and the basement level by adding approximately 116,000 square feet. The project adds over 10,000 square feet to the existing casino, or approximately 20%.   The Expansion includes a redesigned, updated and expanded race and sports book of approximately 4,000 square feet, an enlarged poker room and a Manhattan deli restaurant.  The second floor expansion creates additional ballroom and convention space of approximately 27,000 square feet.  The spa and fitness center will be remodeled and expanded to create an ultra-modern spa and fitness center facility.  We opened the Expansion in July 2008 with the exception of the spa facilities which we expect to open in the first quarter of 2009.  We have also begun construction of a pedestrian Skybridge over Peckham Lane that will connect the Reno-Sparks Convention Center directly to the Atlantis.  Construction of the Skybridge is expected to be completed in the fourth quarter of 2008.  The Expansion is estimated to cost approximately $50 million and the Atlantis Convention Center Skybridge project is estimated to cost an additional $12.5 million.  We also plan to remodel the pre-expansion portions of the facility at an estimated cost of $10 million.  Throughmost recent quarter.  At September 30, 2008,2009 our leverage ratio was such that pricing for borrowings was LIBOR plus 2.875%.  At September 30, 2009, the Company paid approximately $60.4 million of the estimated Expansion, skybridge and remodel costs.

one-month LIBOR rate was 0.25%.

We believe that our existing cash balances, cash flow from operations and borrowings available under the 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

18


Table of Contents

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.



On March 27, 2008, in the matter captioned Sparks Nugget, Inc. vs. State ex rel. Department of Taxation, the Nevada Supreme Court (the “Court”) ruled that complimentary meals provided to employees and patrons are not subject to Nevada use tax.  On April 15, 2008, the Department of Taxation filed a motion for rehearing of the Supreme Court’s decision.  On July 17, 2008, the Court denied the petition of the Department of Taxation.  The Governor’s office of the State of Nevada has indicated that it intends to work with the Nevada legislature to change the law to require that such meals are subject to Nevada use tax and to prevent the refund of any use tax paid on complimentary meals prior to the effective date of this new law.  The Company is evaluating the Court’s ruling and pending action by the Governor’s office.  Accordingly, we have not recorded a receivable for a refund for previously paid use tax on complimentary employee and patron meals in the accompanying consolidated balance sheet at  September 30, 2008.  

THE CREDIT FACILITY

Until February 20, 2004, we had a reducing revolving term loan credit facility with a consortium of banks (the “First Credit Facility”).  On February 20, 2004, our previous credit facilitythe Original Credit Facility was refinanced (the “Second Credit Facility”) for $50 million (the "Credit Facility"). At our option, borrowings undermillion. The maturity date of the Second Credit Facility would accrue interest at a rate designated bywas to be April 18, 2009; however, on January 20, 2009, the agent bank at its base rateSecond Credit Facility was amended and refinanced (the "Base Rate") or at the London Interbank Offered Rate ("LIBOR"“New Credit Facility”) for one, two, three or six month periods.$60 million.  The rate of interest included a margin added to either the Base Rate or to LIBOR tied to our ratio of funded debt to EBITDA (the "Leverage Ratio").  Depending on our Leverage Ratio, this margin would vary between 0.25 percentNew Credit Facility may be utilized by us for working capital needs, general corporate purposes and 1.25 percent above the Base Rate, and between 1.50 percent and 2.50 percent above LIBOR.  In February 2007, this margin was further reduced to 0.00 percent and 0.75 percent above the Base Rate and between 1.00 percent and 1.75 percent above LIBOR.  Our leverage ratio during the three months ended September 30, 2008 was such that the pricing for borrowings was the Base Rate plus 0.25 percent or LIBOR plus 1.25 percent.  We selected the LIBOR plus 1.25 option for allongoing capital expenditure requirements.

The maturity date of the borrowings during the three months ended September 30, 2008. We paid various one-time fees and other loan costs upon the closing of the refinancing of the Credit Facility that will be amortized over the term of the Credit Facility using the straight-line method.


TheNew Credit Facility is January 20, 2012.  Borrowings are secured by liens on substantially all of the real and personal property of the Atlantis and isare guaranteed by Monarch.

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 tothat we maintain certain financial ratios and achieve a minimum level of Earnings-Before-Interest-Taxes-Depreciation and Amortization (EBITDA) on a two-quarter rolling basis.  It also contains provisions that restrict cash transfers between Monarch and its affiliates. The Credit Facility alsoaffiliates and contains provisions requiring the achievement of certain financial ratios before we can repurchase our common stock. We dostock or pay dividends. Management does not consider the covenants to restrict ournormal functioning of day-to-day operations.


The maximum principal available under the New Credit Facility is reduced by $2.5 million per quarter beginning on December 31, 2009.  We may permanently reduce the maximum principal available at any time so long as the amount of such reduction is at least $500,000 and a multiple of $50,000.

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 Credit Facility may be reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

We may reducepaid 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 facility’s term using the straight-line method.

At September 30, 2009, we had $48.65 million outstanding under the New Credit Facility, none of which was classified as short-term debt.  Short-term debt represents the difference between the amount outstanding at September 30, 2009 and the maximum principal availableallowed under the New Credit Facility on September 30, 2010.  The interest rate under our Credit Facility is LIBOR, or a base rate (as defined in the Credit Facility agreement), plus an interest rate margin ranging from 2.00% to 3.375% depending on our leverage ratio.  The interest rate is adjusted quarterly based on our leverage ratio calculated using operating results over the previous four quarters and borrowings at any time so long as the amountend of such reduction is at least $500,000 and a multiple of $50,000.


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.  On April 14, 2008, we entered into an agreement to amend the Credit Facility to increase the available borrowings from $5 million to $50 million and to extend the maturity date from February 23, 2009 to April 18, 2009.most recent quarter.  At September 30, 2008, $42.5 million2009 our leverage ratio was outstanding onsuch that pricing for borrowings was LIBOR plus 2.875%.  At September 30, 2009, the Credit Facility, and $7.5 millionone-month LIBOR rate was available to be drawn under the Credit Facility.  We intend to renegotiate or refinance the Credit Facility to extend its maturity beyond April 18, 2009, which will likely result in the amendment of other material provisions of the Credit Facility, such as the interest rate charged and other material covenants.  There is no assurance that we will be able to reach acceptable terms for a Credit Facility amendment or refinancing.


ITEMITEM 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, 2008,2009 that are subject to market risks.


Therisk.  As of September 30, 2009 we had $48.65 million of outstanding debt under our New Credit Facility that was subject to credit risk.  A 1% increase in the interest rate on borrowingsthe balance outstanding under ourthe New Credit Facility at September 30, 2008 is LIBOR plus 1.25%.  A one-point increase2009 would result in interest rates would have increaseda change in our annual interest cost for the three months ended September 30, 2008 by $37,000.


of approximately $486,500.

ITEMITEM 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 were effective as of the end of the period covered by this report.


Changes in Internal Control over Financial Reporting


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.



PARTPART II –— OTHER INFORMATION



ITEMITEM 1. LEGAL PROCEEDINGS


Litigation was filed against Monarch on January 27, 2006, by Kerzner International Limited (“Kerzner ")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"“Atlantis” in connection with offering casino services other than at Monarch'sMonarch’s Atlantis Casino Resort Spa located in Reno, Nevada, and particularly prohibiting Monarch from using the "Atlantis"“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'sKerzner’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'sKerzner’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.  LitigationDiscovery has concluded and the period for filing motions prior to trial has closed.  Numerous motions, some potentially dispositive of the lawsuit, were filed by both parties.  On October 21, 2009, the Court issued an Order granting summary judgment in favor of Monarch on Kerzner’s Third, Fifth and Sixth claims for relief.  Thus, only three causes of action against Monarch remain viable, along with Monarch’s counterclaims against Kerzner.  The Court is inscheduled to hear oral argument on the discovery phase.


24
pending motions on November 12, 2009.

20



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.



ITEMITEM 1A. RISK FACTORS


A description of our risk factors can be found in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.  The following information represents2008 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.  There were no material changes to those risk factors during the ninethree months ended September 30, 2008.


LIMITATIONS OR RESTRICTIONS ON THE CREDIT FACILITY COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR LIQUIDITY

We intend to renegotiate or refinance the Credit Facility to extend its maturity beyond April 18, 2009.  Any such renegotiation or refinancing will likely result in the amendment of other material provisions of the Credit Agreement, such as the interest rate charged and other material covenants.  The Credit Facility is an important component of our liquidity.  Any material restriction on our ability to use the Credit Facility, or the failure to obtain a new credit facility upon the maturity of the existing Credit Facility could adversely impact our operations and future growth options.


ITEMITEM 6. EXHIBITS


(a) Exhibits


Exhibit No

Description

31.1

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002*.

31.2

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002*.

32.1

Certification of John Farahi, pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002*

32.2

Certification of Ronald Rowan, pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002*



* Filed herewith

SIGNSIGNATURESATURES


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 7, 20086, 2009

By: /s/ RONALD ROWAN

Ronald Rowan, Chief Financial Officer

and Treasurer (Principal Financial

Officer and Duly Authorized Officer)

25

21