UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______.
Commission File No. 0-22088
MONARCH CASINO & RESORT, INC.
(Exact name of registrant as specified in its charter)
-------------------------
NEVADA 88-0300760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1175 W. MOANA LANE, SUITE 200
RENO, NEVADA 89509
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (775) 825-3355
-------------------------
NOT APPLICABLE
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of November 11, 2005,
there were 18,873,478 shares of Monarch Casino & Resort, Inc. $0.01 par value
common stock outstanding.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the
three months and nine months ended September 30, 2005 and 2004
(unaudited).................................................... 3
Condensed Consolidated Balance Sheets at
September 30, 2005 (unaudited) and December 31, 2004........... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2005 and 2004 (unaudited)...... 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 22
Item 4. Controls and Procedures......................................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 24
Item 6. Exhibits........................................................ 24
Signatures...................................................... 25
Exhibit 31.1 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 ..................................... 26
Exhibit 31.2 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 ..................................... 27
Exhibit 32.1 Certification of John Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................... 28
Exhibit 32.2 Certification of Ben Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................... 29
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
Casino................................ $ 25,397,320 $ 22,642,767 $ 70,322,452 $ 63,490,456
Food and beverage..................... 10,164,356 9,689,843 28,595,670 27,956,559
Hotel................................. 7,296,627 7,021,432 18,668,109 18,974,036
Other................................. 1,272,052 1,066,081 3,460,808 2,874,923
------------ ------------ ------------ ------------
Gross revenues..................... 44,130,355 40,420,123 121,047,039 113,295,974
Less promotional allowances........... (5,782,463) (5,359,370) (16,154,058) (15,035,242)
------------ ------------ ------------ ------------
Net revenues....................... 38,347,892 35,060,753 104,892,981 98,260,732
------------ ------------ ------------ ------------
Operating expenses
Casino................................ 8,189,181 7,870,607 23,676,274 22,977,956
Food and beverage..................... 4,862,299 4,912,576 14,030,259 14,122,051
Hotel................................. 2,024,190 1,949,466 5,863,026 6,006,341
Other................................. 354,625 352,855 999,689 1,047,509
Selling, general, and administrative.. 9,640,312 9,117,102 28,222,479 25,972,178
Gaming development expense............ 13,382 - 274,090 -
Depreciation and amortization......... 2,113,060 2,047,706 6,251,172 7,687,196
------------ ------------ ------------ ------------
Total operating expenses........... 27,197,049 26,250,312 79,316,989 77,813,231
------------ ------------ ------------ ------------
Income from operations............. 11,150,843 8,810,441 25,575,992 20,447,501
Other expense
Interest expense...................... (301,629) (333,483) (890,966) (1,125,121)
Stockholder guarantee fee expense..... - - - (136,164)
------------ ------------ ------------ ------------
Total other expense................ (301,629) (333,483) (890,966) (1,261,285)
------------ ------------ ------------ ------------
Income before income taxes......... 10,849,214 8,476,958 24,685,026 19,186,216
Provision for income taxes.............. 3,762,000 2,924,520 8,550,000 6,523,520
------------ ------------ ------------ ------------
Net income......................... $ 7,087,214 $ 5,552,438 $16,135,026 $ 12,662,696
============ ============ ============ ============
Earnings per share of common stock
Net income
Basic............................... $ 0.38 $ 0.30 $ 0.86 $ 0.68
Diluted............................. $ 0.37 $ 0.30 $ 0.85 $ 0.67
Weighted average number of common
shares and potential common
shares outstanding
Basic............................. 18,867,748 18,777,844 18,840,034 18,737,648
Diluted........................... 19,103,711 18,817,744 19,082,667 18,794,422
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-3-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash............................................ $ 10,933,455 $ 11,814,778
Receivables, net................................ 2,985,691 2,959,894
Federal income tax refund receivable............ - 493,797
Inventories..................................... 1,277,645 1,452,696
Prepaid expenses................................ 2,515,396 2,346,242
Deferred income taxes........................... 1,115,719 1,115,719
------------- -------------
Total current assets......................... 18,827,906 20,183,126
------------- -------------
Property and equipment
Land............................................ 10,339,530 10,339,530
Land improvements............................... 3,166,106 3,226,913
Buildings....................................... 78,955,538 78,955,538
Building improvements........................... 10,269,844 7,524,680
Furniture and equipment......................... 66,686,391 65,146,594
Leasehold improvement........................... 1,346,965 1,346,965
------------- -------------
170,764,374 166,540,220
Less accumulated depreciation and amortization.. (74,114,213) (68,791,045)
------------- -------------
Net property and equipment................... 96,650,161 97,749,175
------------- -------------
Other assets, net................................. 269,524 406,620
------------- -------------
Total assets................................. $ 115,747,591 $ 118,338,921
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
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MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt............ $ - $ -
Accounts payable................................ 7,351,459 5,747,775
Accrued expenses................................ 6,782,698 7,918,299
Federal income taxes payable.................... 1,207,203 -
------------- -------------
Total current liabilities.................... 15,341,360 13,666,074
Long-term debt, less current maturities........... 11,900,000 32,400,000
Deferred income taxes............................. 6,035,507 6,509,505
Commitments and contingencies.....................
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000
shares authorized; none issued................. - -
Common stock, $.005 par value, 30,000,000
shares authorized; 19,072,550 shares issued;
18,868,146 outstanding at 09/30/2005,
18,812,448 outstanding at 12/31/2004........... 95,363 95,363
Additional paid-in capital...................... 17,831,307 17,463,272
Treasury stock,
204,404 shares at 09/30/2005, 260,102 shares
at 12/31/2004, at cost......................... (749,831) (954,152)
Retained earnings............................... 65,293,885 49,158,859
------------- -------------
Total stockholders' equity................... 82,470,724 65,763,342
------------- -------------
Total liabilities and stockholders' equity... $ 115,747,591 $ 118,338,921
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
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MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
----------------------------
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income.................................. $ 16,135,026 $ 12,662,696
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 6,251,172 7,687,196
Amortization of deferred loan costs....... 137,096 150,834
Provision for bad debts................... 143,352 338,560
(Gain) Loss on disposal of assets......... (32,600) 191,203
Deferred income taxes..................... (473,998) 255,840
Changes in assets and liabilities
Receivables, net.......................... 324,648 525,113
Inventories............................... 175,052 18,654
Prepaid expenses.......................... (169,154) (506,404)
Other assets.............................. - (452,066)
Accounts payable.......................... 1,603,684 (2,173,205)
Accrued expenses and federal income
taxes payable........................... 344,601 493,990
------------ ------------
Net cash provided by
operating activities.................... 24,438,879 19,192,411
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets................ 32,600 9,929
Acquisition of property and equipment....... (5,152,158) (7,898,717)
------------ ------------
Net cash used in investing activities.... (5,119,558) (7,888,788)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options..... 299,356 262,867
Proceeds from long-term borrowings.......... - 46,960,304
Principal payments on long-term debt........ (20,500,000) (61,344,895)
------------ ------------
Net cash used in
financing activities.................... (20,200,644) (14,121,724)
------------ ------------
Net decrease in cash..................... (881,323) (2,818,101)
Cash at beginning of period................... 11,814,778 9,711,310
------------ ------------
Cash at end of period......................... $ 10,933,455 $ 6,893,209
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest...................... $ 803,372 $ 1,215,110
Cash paid for income taxes.................. $ 7,050,000 $ 4,120,000
Supplemental schedule of non-cash
investing and financing activities:
The Company financed the purchase
of property and equipment in the
following amounts........................... $ - $ 560,304
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-6-
MONARCH CASINO & RESORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Monarch Casino & Resort, Inc. ("Monarch"), a Nevada corporation, was
incorporated in 1993. Monarch's wholly-owned subsidiary, Golden Road Motor
Inn, Inc. ("Golden Road"), operates the Atlantis Casino Resort (the
"Atlantis"), a hotel/casino facility in Reno, Nevada. Unless stated
otherwise, the "Company" refers collectively to Monarch and its Golden Road
subsidiary.
The consolidated financial statements include the accounts of Monarch and
Golden Road. Intercompany balances and transactions are eliminated.
Interim Financial Statements
The accompanying condensed consolidated financial statements for the
three and nine-month periods ended September 30, 2005 and 2004 are unaudited.
In the opinion of management, all adjustments, (which include normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position and results of operations for such periods, have been included. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements included
in its Annual Report on Form 10-K for the year ended December 31, 2004. The
results for the three and nine-month periods ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005, or for any other period.
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 that approximates amounts needed to pay both reported and
unreported claims as of the balance sheet dates, which management believes are
adequate.
Stockholder Guarantee Fees
All of the Company's bank debt was personally guaranteed by the Company's
three largest stockholders since the inception of our original loan agreement
on December 29, 1997. Effective January 1, 2001, until February 20, 2004, the
Company compensated the guarantors at the rate of 2% per annum of the
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quarterly average outstanding bank debt amount. During the nine months ended
September 30, 2004, the Company recorded interest expense in the amount of
approximately $136,000 in guarantee fees. No guarantee fees were paid during
the nine months ended September 30, 2005, because the individuals who
guaranteed the Original Credit Facility (as defined below) were not required
to do so for the New Credit Facility.
Inventories
Inventories, consisting primarily of food, beverages, and retail
merchandise, are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Since inception, property and equipment have been
depreciated principally on a straight line basis over the estimated service
lives as follows:
Land improvements ........... 15-40 years
Buildings ................... 30-40 years
Building improvements ....... 15-40 years
Furniture ................... 5-10 years
Equipment ................... 5-20 years
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets,"
the Company evaluates the carrying value of its long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable from
related future undiscounted cash flows. Indicators which could trigger an
impairment review include legal and regulatory factors, market conditions and
operational performance. Any resulting impairment loss, measured as the
difference between the carrying amount and the fair value of the assets, could
have a material adverse impact on the Company's financial condition and
results of operations.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the
difference between wins and losses. Additionally, net win is reduced by a
provision for anticipated payouts on slot participation fees, progressive
jackpots and any pre-arranged marker discounts.
Promotional Allowances
Our frequent player program, Club Paradise, allows members, through the
frequency of their play at our casino, to earn and accumulate point values
which may be redeemed for a variety of goods and services at our Atlantis
Casino Resort. Point values may be applied toward room stays at our hotel,
food and beverage consumption at any of our food outlets, gift shop items as
well as goods and services at our spa and beauty salon. 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.
-8-
Awards under our frequent player program are recognized as promotional
expenses at the time of redemption.
The retail value of hotel, food and beverage services provided to
customers without charge is included in gross revenue and deducted as
promotional allowances. The 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.
Allowance for Doubtful Accounts
The Company extends short-term credit to its gaming customers. Such
credit is non-interest bearing and due on demand. In addition, the Company
also has receivables due from hotel guests which are primarily secured with a
credit card at the time a customer checks in. An allowance for doubtful
accounts is set up for all Company receivables based upon the Company's
historical collection and write-off experience, unless situations warrant a
specific identification of a necessary reserve related to certain receivables.
The Company charges off its uncollectible receivables once all efforts have
been made to collect such receivables. The book value of receivables
approximates fair value due to the short-term nature of the receivables.
Stock Based Compensation
The Company maintains three stock option plans. The Company accounts for
these plans under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations in accounting for its
plans. No stock-based compensation costs are reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. If the Company
had elected to recognize compensation cost on the fair market value at the
grant dates for awards under the stock option plans, consistent with the
method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
(and as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure"), net income and income per share would have been
changed to the pro forma amounts indicated below:
-9-
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ----------- -----------
Net income, as reported $7,087,214 $5,552,438 $16,135,026 $12,662,696
Stock-based employee compensation
expensed determined under the fair
value based method for all awards,
net of related income tax effects (258,930) (19,113) (771,010) (30,189)
---------- ---------- ----------- -----------
Pro forma net income $6,828,284 $5,533,325 $15,364,016 $12,632,507
========== ========== =========== ===========
Basic earnings per share
As reported $ 0.38 $ 0.30 $ 0.86 $ 0.68
Pro forma $ 0.36 $ 0.29 $ 0.82 $ 0.67
Diluted earnings per share
As reported $ 0.37 $ 0.30 $ 0.85 $ 0.67
Pro forma $ 0.36 $ 0.29 $ 0.81 $ 0.67
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 our 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 addition, the Company relies on non-conventioneer visitors partially
comprised of individuals flying into the Reno area. The "War on Terrorism,"
combined with the ongoing situation in Iraq and the threat of further
terrorist attacks could have an adverse effect on the Company's revenues from
this segment. The terrorist attacks that took place in the United States on
September 11, 2001, were unprecedented events that created economic and
business uncertainties, especially for the travel and tourism industry.
The potential for future terrorist attacks, the national and international
-10-
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 heavily to Reno-area residents. Recently, a
major casino-hotel operator that successfully focuses on local resident
business in Las Vegas has 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. 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. On March 31, 2005, the Company
split its common stock on a 2 for 1 basis. 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,
-----------------------------------
2005 2004
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Basic..................... 18,868 $ 0.38 18,778 $ 0.30
Effect of dilutive
stock options............ 236 (0.01) 40 -
------ ------- ------ -------
Diluted................... 19,104 $ 0.37 18,818 $ 0.30
====== ======= ====== =======
Nine Months Ended September 30,
-----------------------------------
2005 2004
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Basic..................... 18,840 $ 0.86 18,738 $ 0.68
Effect of dilutive
stock options............ 243 (0.01) 56 (0.01)
------ ------- ------ -------
Diluted................... 19,083 $ 0.85 18,794 $ 0.67
====== ======= ====== =======
-11-
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.
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R (Revised 2004), "Share-Based Payment ("SFAS No.123R"),
which requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements based on alternative fair
value models. The share-based compensation cost will be measured based on
fair value models of the equity or liability instruments issued. We currently
disclose pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and
disclosing the impact on net income and net income per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will
no longer be an alternative. SFAS No.123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. The Company will
begin to apply SFAS No.123R using an appropriate fair value model beginning
January 1, 2006. We are currently evaluating the provisions of SFAS No.
123(R) to determine its impact on our future financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We are currently evaluating the provisions of
SFAS No. 151 to determine its impact on our future financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets." This statement is based on the principle that exchanges
of nonmonetary assets should be measured based on fair value of the assets
exchanged. This statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. We are currently
evaluating the provisions of SFAS No. 153 to determine its impact on our
future financial statements.
NOTE 5. RELATED PARTY TRANSACTIONS
Four affiliated principal stockholders potentially control the Company
through their 50.7% beneficial ownership of the Company's outstanding common
shares as of September 30, 2005.
Three of the principal stockholders of the Company, through their
affiliates, control the ownership and management of a shopping center directly
adjacent to the Atlantis (the "Shopping Center"). The Shopping Center
occupies 18.7 acres and consists of approximately 213,000 square feet of
retail space. The Company currently rents various spaces totaling
approximately 7,000 square feet in the Shopping Center which it uses as office
space, and paid rent of approximately $14,900 plus common area expenses for
the three months ended September 30, 2005, and approximately $15,400 for the
three months ended September 30, 2004.
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,
-12-
in January 2004, the Company leased a 37,368 square-foot corner section of the
Shopping Center for a minimum lease term of 15 years at an annual rent of
$300,000, subject to increase every 60 months based on the Consumer Price
Index. The Company began paying rent to the Shopping Center on September 30,
2004. The Company also uses part of the common area of the Shopping Center
and pays its proportional share of the common area expense of the Shopping
Center. The Company has the option to renew the lease for 3 five-year terms,
and at the end of the extension periods, the Company has the option to
purchase the leased section of the Shopping Center at a price to be determined
based on an MAI Appraisal. The leased space is being used by the Company for
pedestrian and vehicle access to the Atlantis, and the Company may use a
portion of the parking spaces at the Shopping Center. The total cost of the
project was $2.0 million; the Company was responsible for two thirds of the
total cost, or $1.35 million. The 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 for its leased driveway space at the Shopping
Center during the three months ended September 30, 2005.
The Company accounts for its rental expense using the straight-line
method over the original lease term. Rental increases based on the change in
the CPI are contingent and accounted for prospectively.
On September 23, 2003, the Company entered into an option agreement with
an affiliate of its controlling stockholders to purchase property in South
Reno for development of a new hotel casino. The Company, through the current
property owner, filed an application with the City of Reno for both master
plan and zoning changes for 13 acres of the property. On January 20, 2005, the
City of Reno Planning Commission approved the application for zoning change on
the property; the Reno City Council would next have to approve the
application. On April 13, 2005, the Reno City Council rejected the application
for master plan and zoning change. As a result of the City Council's decision,
the Company expensed in the first nine months of 2005 a charge of
approximately $274,000 in gaming development costs related to the potential
new hotel casino. The option agreement was set to expire on September 15,
2005, and the Company's Board of Directors voted to let the agreement expire
on such date without exercising the Company's option to purchase.
The Company is currently leasing billboard advertising space from
affiliates of its controlling stockholders for a total cost of $10,500 for the
three months ended September 30, 2005, and $16,500 for the three months ended
September 30, 2004.
The Company is currently renting office and storage space from a company
affiliated with Monarch's controlling stockholders and expensed approximately
$7,000 for these spaces for each of the three month periods ended September
30, 2005 and 2004.
ITEM 2. MANAGEMENT'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"), owns and operates the tropically-
themed Atlantis Casino Resort, a hotel/casino facility in Reno, Nevada (the
"Atlantis"). Monarch was incorporated in 1993 under Nevada law for the purpose
of acquiring all of the stock of Golden Road. The principal asset of Monarch
is the stock of Golden Road, which holds all of the assets of the Atlantis.
-13-
Our sole operating asset, the Atlantis, is a hotel/casino resort located
in Reno, Nevada. Our business strategy is to maximize the Atlantis' revenues,
operating income and cash flow primarily through our casino, our food and
beverage operations and our hotel operations. We derive our revenues by
appealing to middle to upper-middle income Reno residents, emphasizing slot
machine play in our casino. We capitalize on the Atlantis' location for
locals, tour and travel visitors and conventioneers by offering exceptional
service, value and an appealing theme to our guests. Our hands-on management
style focuses on customer service and cost efficiencies.
Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us"
refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING RESULTS SUMMARY
During the third quarter of 2005, we exceeded all previously reported
Company third quarter casino revenues, hotel revenues, net revenues, net
income and earnings per share.
Three Months Percentage
ended September 30, Increase / (Decrease)
------------------- -------------------------
2005 2004 Third Quarter '05 vs '04
-------- -------- -------------------------
(In millions, except earnings per share
and percentages)
Casino revenues......................... $ 25.4 $ 22.6 12.2%
Food and beverage revenues.............. 10.2 9.7 4.9%
Hotel revenues.......................... 7.3 7.0 3.9%
Other revenues.......................... 1.3 1.1 19.3%
Net revenues............................ 38.3 35.1 9.4%
Income from operations.................. 11.2 8.8 26.6%
Net income.............................. 7.1 5.6 27.6%
Earnings per share - diluted............ 0.37 0.30 23.3%
Operating margin........................ 29.1% 25.1% 4.0 pts
Nine Months Percentage
ended September 30, Increase / (Decrease)
------------------- ------------------------------
2005 2004 January - September '05 vs '04
-------- -------- ------------------------------
(In millions, except earnings per share and percentages)
Casino revenues......................... $ 70.3 $ 63.5 10.8%
Food and beverage revenues.............. 28.6 28.0 2.3%
Hotel revenues.......................... 18.7 19.0 (1.6%)
Other revenues.......................... 3.5 2.9 20.4%
Net revenues............................ 104.9 98.3 6.8%
Income from operations.................. 25.6 20.4 25.1%
Net income.............................. 16.1 12.7 27.4%
Earnings per share - diluted............ 0.85 0.67 26.9%
Operating margin........................ 24.4% 20.8% 3.6 pts
-14-
Some significant items that affected our third quarter results in 2005
are listed below. These items are discussed in greater detail elsewhere in
our discussion of operating results and in the Liquidity and Capital Resources
section.
- Increases in all our revenue centers including 12.2% in our casino,
4.9% in our food and beverage, 3.9% in our hotel and 19.3% in our other
revenue centers, combined with a slight improvement in our promotional
allowances as a percentage of gross revenues, led to a 9.4% increase in
our net revenues.
- Our operating expenses increased only 3.6% during the quarter, which
combined with the 9.4% increase in net revenues, led to a 26.6%
increase in income from operations.
CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $5.2 million
and $8.5 million during the first nine months of 2005 and 2004, respectively.
During the nine months ended September 30, 2005, our capital expenditures
consisted primarily of the replacement of and upgrade to a more energy
efficient ventilation and cooling system, acquisitions of gaming and computer
systems equipment, and continued renovations to the facility. During last
year's first nine months, capital expenditures consisted primarily of
renovations to our second tower hotel rooms and suites, the installation of a
new slot player tracking system, $1.2 million in leased driveway improvements
and continued acquisitions of and upgrades to gaming equipment.
Future cash needed to finance ongoing maintenance capital spending is
expected to be made available from operating cash flow, the Credit Facility
(see "Liquidity and Capital Resources - THE CREDIT FACILITY" below) and, if
necessary, additional borrowings.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that may be
considered forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as statements relating to anticipated expenses, capital spending and
financing sources. Such forward-looking information involves important risks
and uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made herein. These risks and uncertainties
include, but are not limited to, those relating to competitive industry
conditions, expansion of Indian casinos in California, Reno-area tourism and
convention business conditions, the scheduling of major Reno area bowling
tournaments, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), the regulation of
the gaming industry (including actions affecting licensing), outcome of
litigation, domestic or global economic conditions including those affected by
the events of September 11, 2001 and the ongoing situation in Iraq, and
changes in federal or state tax laws or the administration of such laws.
-15-
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month
Periods Ended September 30, 2005 and 2004
For the three-month period ended September 30, 2005, the Company's net
income was $7.1 million, or $0.37 per diluted share, on net revenues of $38.3
million, an increase from net income of $5.6 million, or $0.30 per diluted
share, on net revenues of $35.1 million for the three months ended September
30, 2004. Income from operations for the three months ended September 30,
2005 totaled $11.2 million, a 26.6% increase when compared to $8.8 million for
the same period in 2004. Both net revenues and net income for the third
quarter of 2005 represent new third quarter records for the Company. Net
revenues increased 9.4%, and net income increased 27.6% when compared to last
year's third quarter.
Casino revenues totaled $25.4 million in the third quarter of 2005, a
12.2% increase from $22.6 million in the third quarter of 2004, which was
primarily due to increases in slots and table games revenues during the
quarter, partially offset by decreases in Keno and poker room revenues.
Casino operating expenses amounted to 32.2% of casino revenues in the third
quarter of 2005, compared to 34.8% in the third quarter of 2004, with the
difference due primarily to reduced payroll and benefit expenses and reduced
direct operating costs and complimentaries, each as a percentage of casino
revenues.
Food and beverage revenues totaled $10.2 million in the third quarter of
2005, a 4.9% increase from the third quarter of 2004. Food and beverage
operating expenses amounted to 47.8% of food and beverage revenues during the
third quarter of 2005, an improvement from 50.7% in the third quarter of 2004.
The improvement is primarily due to more efficient operations with reduced
payroll and benefit costs as a percentage of revenues and a lower cost of
sales.
Hotel revenues were $7.3 million for the third quarter of 2005, a 3.9%
increase from the $7.0 million reported in the 2004 third quarter. This
increase was the result of a higher average daily room rate ("ADR")
partially offset by a lower room occupancy. Both third quarters' 2005 and
2004 revenues also included a $3 per occupied room energy surcharge. During
the third quarter of 2005, the Atlantis experienced a 97.4% occupancy rate, as
compared to 98.2% during the same period in 2004. The Atlantis' ADR was
$74.69 in the third quarter of 2005 compared to $71.22 in the third quarter of
2004. Hotel operating expenses as a percent of hotel revenues remained
relatively unchanged at 27.7% in the 2005 third quarter compared to the 2004
third quarter.
Promotional allowances increased to $5.8 million in the third quarter of
2005 compared to $5.4 million in the third quarter of 2004. The increase is
attributable to continued promotional efforts to generate additional revenues.
Promotional allowances as a percentage of gross revenues decreased slightly to
13.1% during the third quarter of 2005, from 13.3% in the third quarter of
2004.
Other revenues increased 19.3% to $1.3 million in the 2005 third quarter
compared to $1.1 million in the same period last year. The increase is due
-16-
primarily to increased gift and sundries retail shops revenues, entertainment
fun center revenues and increased collection of receivables previously written
off as bad debts. Other expenses in the 2005 third quarter decreased to 27.9%
of other revenues, from 33.1% of the revenues in the 2004 third quarter.
Depreciation and amortization expense was $2.1 million in the third
quarter of 2005, up 3.2% compared to $2.0 million in the same period last
year. The Company, in its ordinary course of business and as part of its
ongoing capital expenditures, intends to replace old and obsolete equipment
with newer, more current equipment.
Selling, general and administrative (SG&A) expenses amounted to $9.6
million in the third quarter of 2005, a 5.7% increase from $9.1 million in the
third quarter of 2004. The increase was primarily a result of increased
payroll and benefit costs, increased rental expense, increased marketing and
promotional expenditures and increased energy costs. As a percentage of net
revenues, SG&A expenses decreased to 25.1% in the third quarter of 2005 from
26.0% in the third quarter of 2004.
Interest expense for the 2005 third quarter totaled $302,000, a decrease
of 9.6%, from $333,000 in the 2004 third quarter. The decrease reflects the
Company's reduction in debt outstanding partially offset by an increase in
interest rates.
Comparison of Operating Results for the Nine-month Periods Ended September 30,
2005 and 2004
For the nine months ended September 30, 2005, the Company earned net
income of $16.1 million, or $0.85 per diluted share, on net revenues of $104.9
million, an increase from net income of $12.7 million, or $0.67 per diluted
share, on net revenues of $98.3 million during the nine months ended September
30, 2004. Income from operations for the 2005 nine-month period totaled $25.6
million, compared to $20.4 million for the same period in 2004. Net revenues
increased 6.8%, and net income increased 27.4% when compared to the nine-month
period ended September 30, 2004.
Casino revenues for the first nine months of 2005 totaled $70.3 million,
a 10.8% increase from $63.5 million for the first nine months of 2004,
reflecting mainly an increase in slot revenue. Casino operating expenses
decreased to 33.7% of casino revenues for the nine months ended September 30,
2005, compared to 36.2% for the same period in 2004, primarily due to reduced
payroll and benefit expenses and reduced direct operating costs and
complimentaries as a percentage of casino revenues.
Food and beverage revenues totaled $28.6 million for the nine months
ended September 30, 2005, an increase of 2.3% from the $28.0 million for the
nine months ended September 30, 2004, due to an approximate 4.6% decrease in
the number of covers served offset by a 6.4% increase in the average revenue
per cover. Food and beverage operating expenses amounted to 49.1% of food and
beverage revenues during the 2005 nine-month period, a decrease when compared
to 50.5% for the same period in 2004. The improvement is due to higher
average revenue per cover and reduced cost of sales partially offset by a
slight increase in direct department expenses and payroll and benefit costs as
a percentage of revenues.
Hotel revenues for the first nine months of 2005 decreased 1.6% to $18.7
million from $19.0 million for the first nine months of 2004, primarily due to
the lack of a major bowling tournament in Reno in 2005 and slower than
expected business at the Reno-Sparks Convention Center adjacent to the
Atlantis during the second quarter. Hotel revenues for the entire first nine
months of 2005 and 2004 also include a $3 per occupied room energy surcharge.
-17-
The Atlantis experienced a slight decrease in the ADR during the 2005 nine-
month period to $65.27, compared to $65.53 for the same period in 2004. The
occupancy rate decreased to 94.5% for the nine-month period in 2005, from
95.9% for the same period in 2004. Hotel operating expenses in the first nine
months of 2005 were 31.4% of hotel revenues, a slight decrease when compared
to 31.7% for the same period in 2004.
Promotional allowances increased to $16.2 million in the first nine
months of 2005 compared to $15.0 million in the same period of 2004. The
increase is attributable to continued efforts to generate additional revenues.
Promotional allowances as a percentage of gross revenues increased slightly to
13.4% of gross revenues during the first nine months of 2005, from 13.3% in
the first nine months of 2004.
Other revenues were $3.5 million for the nine months ended September 30,
2005, a 20.4% increase from $2.9 million in the same period in 2004, which is
primarily the result of the approximate $191,000 loss on disposal of assets
recorded during the first nine months of 2004, as compared to a $33,000 gain
during the first nine months of 2005. The increase also reflects an 8.0%
increase in gift and sundries retail shops and a 1.3% increase in the
entertainment fun center revenue. Other expenses as a percentage of revenue
decreased to 28.9% for the nine months ended September 30, 2005, as compared
to 36.4% for the same period in 2004.
Depreciation and amortization expense was $6.3 million in the first nine
months of 2005, down 18.7% compared to $7.7 million in the same period last
year. The decrease in depreciation expense was mainly due to the fact that
previously capitalized assets have become fully depreciated. The Company, in
its ordinary course of business and as part of its ongoing capital
expenditures, intends to replace old and obsolete equipment with newer, more
current equipment.
Selling, general and administrative expenses increased 8.7% to $28.2
million in the first nine months of 2005, compared to $26.0 million in the
first nine months of 2004, primarily as a result of increased payroll and
benefit costs, increased rental expense, increased marketing and promotional
expenditures, and increased energy costs. As a percentage of net revenue,
SG&A expenses increased slightly to 26.9% in the 2005 nine-month period from
26.4% in the same period in 2004.
Interest expense for the first nine months of 2005 totaled $891,000, a
decrease of 29.4%, compared to $1.3 million for the same period one year
earlier. The decrease reflects the Company's reduction in debt outstanding
and reduced stockholder guarantee fee expense. Interest expense for the nine-
month period ended September 30, 2004, included approximately $136,000 in
guarantee fees paid to the Company's three principal shareholders. Effective
January 2001, until February 2004, the Company compensated the three principal
stockholders of the Company for their personal guarantees of the Company's
outstanding bank debt at the rate of 2% per annum of the quarterly average
outstanding bank debt. There were no guarantee fee expenses during the first
nine months of 2005. The individuals who guaranteed the Company's Original
Credit Facility (defined in "The Credit Facility" below) were not required to
provide such guarantees for the New Credit Facility (also defined in "The
Credit Facility" below) and, therefore, the Company will no longer be required
to pay such fees in the future.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with
net cash provided by operating activities.
-18-
For the nine months ended September 30, 2005, net cash provided by
operating activities totaled $24.4 million, an increase of 27.3% compared to
the same period last year. Net cash used in investing activities totaled $5.1
million and $7.9 million in the nine months ended September 30, 2005 and 2004,
respectively. During the first nine months of 2005 and 2004, net cash used in
investing activities was used primarily in the purchase of property and
equipment and continued property renovations and upgrades. Net cash used in
financing activities totaled $20.2 million for the first nine months of 2005
primarily for debt reduction, compared to $14.1 million for the same period
last year, as the Company refinanced its credit facility during the first
three months of 2004, simultaneously paying off old debt and acquiring new
debt. During the first nine months of 2005, the Company reduced its long-term
debt by $20.5 million. As a result, at September 30, 2005, the Company had a
cash balance of $10.9 million compared to $6.9 million at September 30, 2004,
and $11.8 million at December 31, 2004.
The Company has a reducing revolving credit facility with a group of
banks (see "THE CREDIT FACILITY" below). At September 30, 2005, the total
balance outstanding on the Credit Facility was $11.9 million.
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 directly adjacent to
the Atlantis. The shopping center is controlled by our controlling
stockholders (the "Shopping Center"). As part of this project, in January
2004, the Company leased a 37,368 square-foot corner section of the Shopping
Center for a minimum lease term of 15 years at an annual rent of $300,000,
subject to increase every 60 months based on the Consumer Price Index. The
Company also uses part of the common area of the Shopping Center and pays its
proportional share of the common area expense of the Shopping Center. The
Company has the option to renew the lease for 3 five-year terms, and at the
end of the extension periods, the Company has the option to purchase the
leased section of the Shopping Center at a price to be determined based on an
MAI Appraisal. The leased space is being used by the Company for pedestrian
and vehicle access to the Atlantis, and the Company may use a portion of the
parking spaces at the Shopping Center. The total cost of the project was $2.0
million; we were responsible for two thirds of the total cost, or $1.35
million. The cost of the new driveway is being depreciated over the initial
15-year lease term; some components of the new driveway are being depreciated
over a shorter period of time. The Company paid approximately $75,000 for its
leased driveway space at the Shopping Center during the three months ended
September 30, 2005.
On September 23, 2003, the Company entered into an option agreement with
an affiliate of its controlling stockholders to purchase property in South
Reno for development of a new hotel casino. The Company, through the current
property owner, filed an application with the City of Reno for both master
plan and zoning changes for 13 acres of the property. On January 20, 2005, the
City of Reno Planning Commission approved the application for zoning change on
the property; the Reno City Council would next have to approve the
application. On April 13, 2005, the Reno City Council rejected the application
for master plan and zoning change. As a result of the City Council's decision,
the Company expensed during the first nine months of 2005, a charge of
approximately $274,000 in gaming development costs related to the potential
new hotel casino. The option agreement was set to expire on September 15,
2005, and the Company's Board of Directors voted to let the agreement expire
on such date without exercising the Company's option to purchase.
-19-
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, 2004 ("2004 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 2004 Form 10-K
filed on March 15, 2005.
OTHER FACTORS AFFECTING CURRENT AND FUTURE RESULTS
The constitutional amendment approved by California voters in 1999
allowing the expansion of Indian casinos in California has had an impact on
casino revenues in Nevada in general, and many analysts have continued to
predict the impact will be more significant on the Reno-Lake Tahoe market.
The extent of this continued impact is difficult to predict, but the Company
believes that the impact on the Company will continue to be mitigated to some
extent due to the Atlantis' emphasis on Reno-area residents as a significant
base of its business, as well as its proximity to the Reno-Sparks Convention
Center. However, if other Reno-area casinos continue to suffer business
losses due to increased pressure from California Indian casinos, they may
intensify their marketing efforts to Reno-area residents as well.
The Company also believes that unlimited land-based casino gaming in or
near any major metropolitan area in the Atlantis' key non-Reno marketing
areas, such as San Francisco or Sacramento, could have a material adverse
effect on its business.
In June 2004, five California Indian tribes signed compacts with the
state that allows the tribes to increase the number of slot machines beyond
the previous 2,000-per-tribe limit in exchange for higher fees from each of
the five tribes. The State of California hopes to sign similar compacts with
more Indian tribes.
COMMITMENTS AND CONTINGENCIES
Contractual cash obligations for the Company as of September 30, 2005
over the next five years are as follows:
Payments Due by Period
---------------------------------------------------------------
Contractual Cash Less than 1 to 3 4 to 5 More than
Obligations Total 1 year years years 5 years
---------------------------------------------------------------
Long-Term debt $11,900,000 $ - $ - $11,900,000 $ -
Operating Leases (1) 5,180,000 370,000 740,000 740,000 3,330,000
Purchase Obligations (2) 1,884,000 1,884,000 - - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash $18,964,000 $ 2,254,000 $ 740,000 $12,640,000 $3,330,000
Obligations
(1) Operating leases include $370,000 per year in lease and common expense
payments to the shopping center adjacent to the Atlantis (see Off Balance
Sheet Arrangements).
-20-
(2) Our open purchase order commitments total approximately $1.9 million. Of
the total purchase order commitments, approximately $1.6 million are
cancelable by the Company upon providing a 30-day notice.
The Company believes that its existing cash balances, cash flow from
operations, reducing revolving credit facility and availability of equipment
financing, if necessary, will provide the Company with sufficient resources to
fund its operations, meet its existing debt obligations, and fulfill its
capital expenditure requirements; however, the Company's operations are
subject to financial, economic, competitive, regulatory, and other factors,
many of which are beyond its control. If the Company is unable to generate
sufficient cash flow, it could be required to adopt one or more alternatives,
such as reducing, delaying, or eliminating planned capital expenditures,
selling assets, restructuring debt, or obtaining additional equity capital.
THE CREDIT FACILITY
Until February 20, 2004, we had a reducing revolving term loan credit
facility with a consortium of banks that was to expire on June 30, 2004, and
in the original amount of $80 million but that had been reduced to $46 million
at payoff (the "Original Credit Facility").
On February 20, 2004, the Original Credit Facility was refinanced (the
"New Credit Facility") for $50 million, which included the $46 million payoff
of the unpaid balance of the Original Credit Facility. The amount of the New
Credit Facility, which is also a reducing revolving facility, may be increased
by up to $30 million on a one-time basis and, if requested by us, before the
second anniversary of the closing date, as defined. At our option, borrowings
under the New Credit Facility will accrue interest at a rate designated by the
agent bank at its base rate (the "Base Rate") or at the London Interbank
Offered Rate ("LIBOR") for one, two, three or six month periods. The rate of
interest paid by us will include a margin added to either the Base Rate or to
LIBOR that is tied to our ratio of funded debt to EBITDA (the "Leverage
Ratio"). Depending on our Leverage Ratio, this margin can vary between 0.25
percent and 1.25 percent above the Base Rate, and between 1.50 percent and
2.50 percent above LIBOR (under the Original Credit Facility, this margin
varied between 0.00 percent and 2.00 percent above the Base Rate, and between
1.50 percent and 3.50 percent above LIBOR). At September 30, 2005, the
applicable margin was the Base Rate plus 0.25%, and the applicable LIBOR
margin was LIBOR plus 1.50%. At September 30, 2005, the Base Rate was 5.50%
and the LIBOR rate was 3.85%. At September 30, 2005, the Company had no Base
Rate loans outstanding and had one LIBOR loan outstanding totaling $11.9
million, for a total obligation of $11.9 million.
We may utilize proceeds from the New Credit Facility for working capital
needs and general corporate purposes relating to the Atlantis and for ongoing
capital expenditure requirements at the Atlantis.
The New Credit Facility is secured by liens on substantially all of the
real and personal property of the Atlantis, and is guaranteed by Monarch. The
Original Credit Facility was guaranteed individually by certain controlling
stockholders of the Company. These individuals were not required to provide
any personal guarantees for the New Credit Facility and, therefore, going
forward, we will no longer incur guarantee fee expenses.
-21-
The New Credit Facility contains covenants customary and typical for a
facility of this nature, including, but not limited to, covenants requiring
the preservation and maintenance of our assets and covenants restricting our
ability to merge, transfer ownership of Monarch, incur additional
indebtedness, encumber assets, and make certain investments. The New Credit
Facility also contains covenants requiring us to maintain certain financial
ratios and provisions restricting transfers between Monarch and its
affiliates. The New Credit Facility also contains provisions requiring the
achievement of certain financial ratios before we can repurchase our common
stock. We currently meet such ratio requirements.
The maturity date of the New Credit Facility is February 23, 2009.
Beginning June 30, 2004, the maximum principal available under the Credit
Facility will be reduced over five years by an aggregate of $30.875 million in
equal increments of $1.625 million per quarter with the remaining balance due
at the maturity date. We may prepay borrowings under the New Credit Facility
without penalty (subject to certain charges applicable to the prepayment of
LIBOR borrowings prior to the end of the applicable interest period). Amounts
prepaid under the New Credit Facility may be re-borrowed so long as the total
borrowings outstanding do not exceed the maximum principal available. We may
also permanently reduce the maximum principal available under the New Credit
Facility at any time so long as the amount of such reduction is at least
$500,000 and a multiple of $50,000. We also benefited from a reduced
loan amortization schedule, from $3 million per quarter under the Original
Credit Facility to $1.625 million per quarter under the New Credit Facility.
As of September 30, 2005, our Leverage Ratio had been equal to or less
than one-to-one for the second consecutive quarter. Per the New Credit
Facility, if we achieve a Leverage Ratio equal to or less than one-to-one for
two consecutive quarters, our scheduled reduction of the next consecutive
fiscal quarter is waived. Management has assumed that we will maintain a
leverage ratio equal to or less than one-to-one for the remaining term of the
New Credit Facility and, therefore, no principal reductions will be due until
the New Credit Facility matures in 2009.
We paid various one-time fees and other loan costs upon the closing of
the refinancing of the New Credit Facility that will be amortized over the
term of the New Credit Facility using the straight-line method.
SHORT-TERM DEBT. At September 30, 2005, we had no short-term debt.
ITEM 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, 2005, that are subject to market risks.
We have substantial variable interest rate debt in the amount of
approximately $11.9 million as of September 30, 2005, and $32.8 million as of
September 30, 2004, which is subject to market risks.
A one-point increase in interest rates would have resulted in an increase
in interest expense of approximately $41,000 in the third quarter of 2005 and
$92,000 in the third quarter of 2004.
-22-
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As of the end of the period covered by this report (the "Evaluation
Date"), we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective at the
reasonable assurance level.
Our management does not expect that our disclosure controls and
procedures or our internal controls over financial reporting will prevent all
error and all fraud. In designing and evaluating disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
a control. The design of a control system is also based upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and
may not be detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Monarch has made previous disclosure of class action litigation cases:
William Poulos v. Caesar's World, Inc. et. al., Case No. 94-478-Civ-Orl-22;
William H Ahern v. Caesars World, Inc. et. al., Case No. 94-478-Civ-Orl-22;
and Larry Schrier v. Caesars World Inc., et. al, Case No. 95-923-LDG (RJJ)
which were consolidated for purposes of litigation, and in which Monarch is
one of numerous named defendants. The Complaints allege that manufacturers,
distributors and casino operators of video poker and electronic slot machines,
including Monarch, have engaged in a course of conduct intended to induce
persons to play such games based on a false belief concerning how the gaming
machines operate, as well as the extent to which there is an opportunity to
win on a given play. The Complaints charge Defendants with violations of the
Racketeer Influenced and Corrupt Organizations Act, as well as claims of
common law fraud, unjust enrichment and negligent misrepresentation, and seek
damages in excess of $1 billion without any substantiation of that amount. On
September 7, 2005, U.S. District Judge Roger L. Hunt granted the Defendants'
Motion for Summary Judgment on all claims made by Plaintiffs, and dismissed
Plaintiffs' claims in their entirety. On October 14, 2005, Plaintiffs William
Poulos and Brenda McElmore lodged a Notice of Appeal with the U.S. Court of
Appeals for the Ninth Circuit, seeking to appeal from the District Court's
order of summary judgment in favor of defendants and two discovery orders also
issued by the district court. Monarch intends to vigorously respond to the
appeal jointly with its co-defendants/co-respondents. Monarch does not expect
its share of the costs and attorneys fees arising out of the appeal to be
material.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Description
----------- -----------
31.1 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of John Farahi, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Ben Farahi, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONARCH CASINO & RESORT, INC.
(Registrant)
Date: November 14, 2005 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer, and Chief
Financial Officer(Principal Financial
Officer and Duly Authorized Officer)
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EXHIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Farahi, Chief Executive Officer of Monarch Casino & Resort, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino &
Resort, Inc., a Nevada Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
second fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control and reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2005
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ben Farahi, Chief Financial Officer of Monarch Casino & Resort, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monarch Casino &
Resort, Inc., a Nevada Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
second fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control and reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: Novemober 14, 2005
By: /s/ Ben Farahi
---------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
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EXHIBIT 32.1
MONARCH CASINO & RESORT, INC.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc.
(the "Company") on Form 10-Q for the quarterly period ended September 30,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, John Farahi, Chief Executive Officer of the Company
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 14, 2005
By: /s/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
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EXHIBIT 32.2
MONARCH CASINO & RESORT, INC.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Monarch Casino & Resort, Inc.
(the "Company") on Form 10-Q for the quarterly period ended September 30,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Ben Farahi, Chief Financial Officer of the Company certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 14, 2005
By: /s/ BEN FARAHI
---------------
Ben Farahi
Chief Financial Officer
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