form10q.htm
United
States
Securities and Exchange
Commission
Washington,
D.C. 20549
Form
10-Q
T QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended March 31, 2008
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 of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
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's
telephone number, including area code:
___________________
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 T No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, "accelerated filer” and ”smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer £
|
Accelerated
Filer T
|
Non-Accelerated
Filer £
|
Smaller
Reporting Company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
T
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common stock, $0.01 par
value
|
|
17,714,097 shares
|
Class
|
|
Outstanding
at May 5, 2008
|
Item
|
Page
Number
|
PART
I - FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
|
15
|
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
22
|
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
|
|
24
|
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
Condensed
Consolidated Statements of Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
Casino
|
|
$ |
23,755,950 |
|
|
$ |
25,298,272 |
|
Food
and beverage
|
|
|
9,761,220 |
|
|
|
10,504,215 |
|
Hotel
|
|
|
5,830,695 |
|
|
|
6,827,967 |
|
Other
|
|
|
1,232,069 |
|
|
|
1,188,623 |
|
Gross
revenues
|
|
|
40,579,934 |
|
|
|
43,819,077 |
|
Less
promotional allowances
|
|
|
(6,306,541 |
) |
|
|
(6,037,486 |
) |
Net
revenues
|
|
|
34,273,393 |
|
|
|
37,781,591 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
|
8,746,500 |
|
|
|
8,469,337 |
|
Food
and beverage
|
|
|
4,689,365 |
|
|
|
4,968,717 |
|
Hotel
|
|
|
2,105,373 |
|
|
|
2,143,340 |
|
Other
|
|
|
346,654 |
|
|
|
363,620 |
|
Selling,
general and administrative
|
|
|
13,104,100 |
|
|
|
11,530,803 |
|
Depreciation
and amortization
|
|
|
2,006,557 |
|
|
|
2,075,446 |
|
Total
operating expenses
|
|
|
30,998,549 |
|
|
|
29,551,263 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,274,844 |
|
|
|
8,230,328 |
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
251,344 |
|
|
|
343,884 |
|
Interest
expense
|
|
|
(4,157 |
) |
|
|
(149,100 |
) |
Total
other income
|
|
|
247,187 |
|
|
|
194,784 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,522,031 |
|
|
|
8,425,112 |
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(1,220,000 |
) |
|
|
(2,930,000 |
) |
Net
income
|
|
$ |
2,302,031 |
|
|
$ |
5,495,112 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.13 |
|
|
$ |
0.29 |
|
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares and potential common shares
outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,415,836 |
|
|
|
19,070,472 |
|
Diluted
|
|
|
18,545,964 |
|
|
|
19,323,646 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
Monarch Casino & Resort, Inc.
Condensed
Consolidated Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
15,738,077 |
|
|
$ |
38,835,820 |
|
Receivables,
net
|
|
|
3,487,954 |
|
|
|
4,134,099 |
|
Federal
income tax refund receivable
|
|
|
280,000 |
|
|
|
998,123 |
|
Inventories
|
|
|
1,411,596 |
|
|
|
1,496,046 |
|
Prepaid
expenses
|
|
|
3,054,637 |
|
|
|
3,144,374 |
|
Deferred
income taxes
|
|
|
582,407 |
|
|
|
1,084,284 |
|
Total
current assets
|
|
|
24,554,671 |
|
|
|
49,692,746 |
|
Property
and equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
12,162,522 |
|
|
|
10,339,530 |
|
Land
improvements
|
|
|
3,511,484 |
|
|
|
3,166,107 |
|
Buildings
|
|
|
80,655,538 |
|
|
|
78,955,538 |
|
Building
improvements
|
|
|
10,435,062 |
|
|
|
10,435,062 |
|
Furniture
and equipment
|
|
|
72,895,692 |
|
|
|
72,511,165 |
|
Leasehold
improvements
|
|
|
1,346,965 |
|
|
|
1,346,965 |
|
|
|
|
181,007,263 |
|
|
|
176,754,367 |
|
Less
accumulated depreciation and amortization
|
|
|
(94,139,876 |
) |
|
|
(92,215,149 |
) |
|
|
|
86,867,387 |
|
|
|
84,539,218 |
|
Construction
in progress
|
|
|
31,997,407 |
|
|
|
17,236,062 |
|
Net
property and equipment
|
|
|
118,864,794 |
|
|
|
101,775,280 |
|
Other
assets, net
|
|
|
2,817,842 |
|
|
|
2,817,842 |
|
Total
assets
|
|
$ |
146,237,307 |
|
|
$ |
154,285,868 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
9,617,595 |
|
|
$ |
10,840,318 |
|
Construction
payable
|
|
|
3,955,053 |
|
|
|
1,971,022 |
|
Accrued
expenses
|
|
|
9,460,340 |
|
|
|
9,230,157 |
|
Total
current liabilities
|
|
|
23,032,988 |
|
|
|
22,041,497 |
|
Deferred
income taxes
|
|
|
2,825,433 |
|
|
|
2,825,433 |
|
Total
liabilities
|
|
|
25,858,421 |
|
|
|
24,866,930 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
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; 17,871,144 outstanding at 3/31/08 18,566,540 OUTSTANDING AT
12/31/07
|
|
|
190,963 |
|
|
|
190,963 |
|
Additional
paid-in capital
|
|
|
26,307,043 |
|
|
|
25,741,972 |
|
TREASURY
STOCK, 1,225,156 SHARES AT 3/31/08 529,760 shares at
12/31/07, at
cost
|
|
|
(25,176,059 |
) |
|
|
(13,268,905 |
) |
Retained
earnings
|
|
|
119,056,939 |
|
|
|
116,754,908 |
|
Total
stockholders' equity
|
|
|
120,378,886 |
|
|
|
129,418,938 |
|
Total
liabilities and stockholder's equity
|
|
$ |
146,237,307 |
|
|
$ |
154,285,868 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
Monarch Casino & Resort, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,302,031 |
|
|
$ |
5,495,112 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,006,557 |
|
|
|
2,075,446 |
|
Amortization
of deferred loan costs
|
|
|
- |
|
|
|
148,838 |
|
Share
based compensation
|
|
|
565,071 |
|
|
|
499,884 |
|
Provision
for bad debts
|
|
|
436,419 |
|
|
|
(83,662 |
) |
Gain
on disposal of assets
|
|
|
(8,000 |
) |
|
|
(470 |
) |
Deferred
income taxes
|
|
|
501,877 |
|
|
|
(375,959 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
927,849 |
|
|
|
170,591 |
|
Inventories
|
|
|
84,451 |
|
|
|
62,136 |
|
Prepaid
expenses
|
|
|
89,737 |
|
|
|
(184,026 |
) |
Other
assets
|
|
|
- |
|
|
|
(7,239 |
) |
Accounts
payable
|
|
|
(1,222,723 |
) |
|
|
(539,514 |
) |
Accrued
expenses
|
|
|
230,183 |
|
|
|
(1,315,889 |
) |
Federal
income taxes payable
|
|
|
- |
|
|
|
3,170,594 |
|
Net
cash provided by operating activities
|
|
|
5,913,452 |
|
|
|
9,115,842 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of assets
|
|
|
8,000 |
|
|
|
470 |
|
Acquisition
of property and equipment
|
|
|
(19,096,073 |
) |
|
|
(2,228,274 |
) |
Change
in construction payable
|
|
|
1,984,031 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(17,104,042 |
) |
|
|
(2,227,804 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
230,738 |
|
Tax
benefit of stock option exercise
|
|
|
- |
|
|
|
87,442 |
|
Purchase
of treasury stock
|
|
|
(11,907,153 |
) |
|
|
- |
|
Net
cash (used in) provided by financing activities
|
|
|
(11,907,153 |
) |
|
|
318,180 |
|
Net
(decrease) increase in cash
|
|
|
(23,097,743 |
) |
|
|
7,206,218 |
|
Cash
and cash equivalents at beginning of period
|
|
|
38,835,820 |
|
|
|
36,985,187 |
|
Cash
and cash equivalents at end of period
|
|
$ |
15,738,077 |
|
|
$ |
44,191,405 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
4,157 |
|
|
$ |
263 |
|
Cash
paid for income taxes
|
|
$ |
- |
|
|
$ |
47,923 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
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
condensed consolidated financial statements include the accounts of Monarch and
Golden Road. Intercompany balances and transactions are eliminated.
Interim
Financial Statements:
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles 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 principles
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 ended March 31, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.
The
balance sheet at December 31, 2007 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 principles 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.
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
under the Company’s 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.
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. Implementation has resulted
in no material impact on the Company’s financial position or results of
operations.
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 secured primarily 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:
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.
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 Reno-area 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 three months ended
March 31, 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
|
|
|
49,991 |
|
|
|
19.15 |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(10,000 |
) |
|
|
25.12 |
|
|
|
- |
|
|
|
- |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at end of period
|
|
|
1,335,417 |
|
|
$ |
18.99 |
|
|
7.7 yrs.
|
|
|
$ |
(1,698,010 |
) |
Exercisable
at end of period
|
|
|
536,077 |
|
|
$ |
12.76 |
|
|
6.4 yrs.
|
|
|
$ |
2,391,189 |
|
A summary
of the status of the Company’s nonvested shares as of March 31, 2008, and for
the three months ended March 31, 2008, is presented below:
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair
Value
|
|
Nonvested
at January 1, 2008
|
|
|
782,676 |
|
|
$ |
10.43 |
|
Granted
|
|
|
49,991 |
|
|
|
7.35 |
|
Vested
|
|
|
(23,327 |
) |
|
|
6.77 |
|
Forfeited
|
|
|
(10,000 |
) |
|
|
9.61 |
|
Nonvested
at March 31, 2008
|
|
|
799,340 |
|
|
$ |
10.31 |
|
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 three months ended March 31,
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. 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 March 31,
2008 is approximately $4.6 million and is expected to be recognized over a
weighted average period of 1.39 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 first quarter of 2008 were as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Expected
volatility
|
|
|
52.7 |
% |
|
|
36.9 |
% |
Expected
dividends
|
|
|
- |
|
|
|
- |
|
Expected
life (in years)
|
|
|
|
|
|
|
|
|
Directors’
Plan
|
|
|
- |
|
|
|
2.5 |
|
Executive
Plan
|
|
|
- |
|
|
|
4.5 |
|
Employee
Plan
|
|
|
3.7 |
|
|
|
3.0 |
|
Weighted
average risk free rate
|
|
|
2.9 |
% |
|
|
4.7 |
% |
Weighted
average grant date fair value per share of options granted
|
|
$ |
7.35 |
|
|
$ |
7.70 |
|
Total
intrinsic value of options exercised
|
|
|
- |
|
|
$ |
257,991 |
|
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
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Casino
|
|
$ |
20,480 |
|
|
$ |
14,689 |
|
Food
and beverage
|
|
|
16,767 |
|
|
|
11,619 |
|
Hotel
|
|
|
10,597 |
|
|
|
8,906 |
|
Selling,
general and administrative
|
|
|
517,227 |
|
|
|
464,670 |
|
Total
stock-based compensation, before taxes
|
|
|
565,071 |
|
|
|
499,884 |
|
Tax
benefit
|
|
|
(197,775 |
) |
|
|
(174,959 |
) |
Total
stock-based compensation, net of tax
|
|
$ |
367,296 |
|
|
$ |
324,925 |
|
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 March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Per Share Amount
|
|
|
Shares
|
|
|
Per Share Amount
|
|
Basic
|
|
|
18,416 |
|
|
$ |
0.13 |
|
|
|
19,070 |
|
|
$ |
0.29 |
|
Effect
of dilutive stock options
|
|
|
130 |
|
|
|
(0.01 |
) |
|
|
254 |
|
|
|
(0.01 |
) |
Diluted
|
|
|
18,546 |
|
|
$ |
0.12 |
|
|
|
19,324 |
|
|
$ |
0.28 |
|
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
September 2006, the Financial Accounting Standards Board (the “FASB”) issued
SFAS 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This statement applies under other accounting pronouncements that require or
permit fair value measurements, accordingly, this statement does not require any
new fair value measurements. However, for some entities, the application of this
statement will change current practice. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008, the
FASB issued FASB Staff Position (“FSP) FAS 157-2, which defers the effective
date of SFAS 157 for nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the entity’s financial statements on a recurring
basis to fiscal years beginning November 15, 2008, and interim periods within
those fiscal years. We are evaluating SFAS 157 as it relates to
nonfinancial assets and have not yet determined the impact the adoption will
have on the consolidated financial statements. The adoption of SFAS No. 157
for financial assets did not have a material impact on the Company’s financial
position, results of operations or cash flows
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, with unrealized
gains and losses related to these financial instruments reported in earnings at
each subsequent reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 159 did
not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141 (revised) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, noncontrolling interest
in the acquiree and the goodwill acquired. The revision is intended to simplify
existing guidance and converge rulemaking under U.S. GAAP with international
accounting rules. This statement applies prospectively to business combinations
where the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We will adopt FAS 141
(revised) in the first quarter of 2009. We cannot determine the
impact FAS 141 (revised) will have on our financial position, results of
operation or cash flows for future business combinations once
adopted.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51.” This statement
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. 160
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 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 statement is effective for fiscal years
beginning on or after December 15, 2008. The adoption of SFAS No. 160 is 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, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133”. SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Under SFAS 161, 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 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. We will
adopt SFAS 161 in the first quarter of 2009. The adoption of SFAS No. 161 is not
expected to have a material impact on the Company’s financial position, results
of operations or cash flows.
NOTE 5.
RELATED PARTY TRANSACTIONS
On July
26, 2006, the Company submitted a formal offer to Biggest Little Investments,
L.P. (“BLI”), formulated and delivered by a committee comprised of the Company’s
independent directors (the “Committee”), to purchase the 18.95-acre shopping
center (the “Shopping Center”) adjacent to the Atlantis Casino Resort
Spa. On October 16, 2006, the Committee received a letter from
counsel to BLI advising the Company that BLI, through its general partner,
Maxum, L.L.C., had “decided that such offer is not in the best interest of the
Partnership’s limited partners and, therefore, will not be entering into
negotiations with Monarch.” While there have been subsequent
communications between BLI and the Company from time to time regarding our
interest in the Shopping Center, nothing has resulted. The Board of Directors
continues to consider expansion alternatives.
Although
there is currently a dispute as to how the units are held, collectively, John
Farahi, Bob Farahi and Ben Farahi own a controlling interest in
BLI. 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, storage space and guest parking and paid rent of approximately $100,700
and $29,700 plus common area expenses in during the first three months of 2008
and 2007, respectively.
In
addition, a driveway that is being shared between the Atlantis and the Shopping
Center was completed on September 30, 2004. As part of this project,
in January 2004, the Company leased a 37,368 square-foot corner section of the
Shopping Center for a minimum lease term of 15 years at an annual rent of
$300,000, subject to increase every 60 months based on the Consumer Price Index.
The Company began paying rent to the Shopping Center on September 30, 2004. The
Company also uses part of the common area of the Shopping Center and pays its
proportional share of the common area expense of the Shopping Center. The
Company has the option to renew the lease for 3 five-year terms, and at the end
of the extension periods, the Company has the option to purchase the leased
driveway section of the Shopping Center at a price to be determined based on an
MAI Appraisal. The leased space is being used by the Company for pedestrian and
vehicle access to the Atlantis, and the Company may use a portion of the parking
spaces at the Shopping Center. The total cost of the project was $2.0 million;
the Company was responsible for two thirds of the total cost, or $1.35 million.
The Company paid approximately $75,000 plus common area charges for each of the
three months ended March 31, 2008 and 2007 for its leased driveway space at the
Shopping Center.
The
Company is currently leasing sign space from the Shopping Center. The lease took
effect in March 2005 for a monthly cost of $1. The lease was renewed for another
year with a monthly lease of $1,000 effective January 1, 2006. The
Company paid $3,200 and $3,000 for the three months ended March 31, 2008 and
2007, respectively, for the leased sign space.
The
Company is currently leasing billboard advertising space from affiliates of its
controlling stockholders and paid nothing for the three months ended March
31, 2008, and did not pay anything for the three months ended March 31,
2007.
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 plans to
utilize for administrative staff offices. 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. Commensurate with
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.
NOTE 6.
FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued statement No. 157, “Fair Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosures about fair value measurements. The
Company has adopted the provisions of SFAS 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS 157 did not materially
impact its financial condition, results of operations, or cash flow, the Company
is now required to provide additional disclosures as part of its financial
statements.
SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions. As of March 31, 2008, the Company had no assets that
are required to be measured at fair value on a recurring basis.
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.
Our sole
operating asset, the Atlantis, is a hotel/casino resort located in Reno, Nevada.
Our business strategy is to maximize the Atlantis' revenues, operating income
and cash flow primarily through our casino, our food and beverage operations and
our hotel operations. We derive our revenues by appealing to tourists,
conventioneers and middle to upper-middle income northern Nevada residents,
emphasizing slot machine play in our casino. We capitalize on the Atlantis'
location for northern Nevada residents, 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
Below is
a summary of our first quarter results for 2008 and 2007:
Amounts in millions,
except per share amounts
|
|
|
|
|
|
|
|
Three
Months
|
|
|
Percentage
|
|
|
|
Ended March 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs 07
|
|
Casino
revenues
|
|
$ |
23.8 |
|
|
$ |
25.3 |
|
|
|
(5.9 |
) |
Food
and beverage revenues
|
|
|
9.8 |
|
|
|
10.5 |
|
|
|
(6.7 |
) |
Hotel
revenues
|
|
|
5.8 |
|
|
|
6.8 |
|
|
|
(14.7 |
) |
Other
revenues
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
- |
|
Net
revenues
|
|
|
34.3 |
|
|
|
37.8 |
|
|
|
(9.3 |
) |
Sales,
general and administrative expense
|
|
|
13.1 |
|
|
|
11.5 |
|
|
|
13.9 |
|
Income
from operations
|
|
|
3.3 |
|
|
|
8.2 |
|
|
|
(59.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
2.3 |
|
|
|
5.5 |
|
|
|
(58.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted
|
|
|
0.12 |
|
|
|
0.28 |
|
|
|
(57.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
9.6 |
% |
|
|
21.8 |
% |
|
12.2
points
|
|
Our
results for the three months ended March 31, 2008 reflect the effects of the
challenging operating environment that we also experienced in the three month
period ended December 31, 2007. As in many other areas around the
country, the economic slowdown in Reno in the fourth quarter of 2007 accelerated
in the first quarter of 2008. Other factors causing negative
financial impact that continued from the fourth quarter were disruption from
construction related to our on-going $50 million expansion project (see
“COMMITMENTS AND CONTINGENCIES” below) and aggressive marketing programs by our
competitors. Consistent with the fourth quarter of 2007, we increased
marketing and promotional expenditures to attract and retain guests in response
to these challenges and we incurred greater bad debt expense. We also
had higher legal expenses associated with the ongoing and previously disclosed
Kerzner litigation (see “LEGAL PROCEEDINGS” below). We anticipate
that downward pressure on profits will persist as long as we continue to
experience the adverse effects of the negative macroeconomic environment,
construction disruption, the aggressive marketing programs of our competitors
and the legal defense costs associated with the Kerzner lawsuit.
These
factors were the primary drivers of:
|
·
|
Decreases
of 5.9%, 6.7% and 14.7% in our casino, food and beverage and hotel
revenues, respectively, resulting in a net revenue decrease of
9.3%.
|
|
·
|
An
increase in sales, general and administrative expense by
13.9%
|
|
·
|
A
decrease in our operating margin by 12.2 points or
56%.
|
CAPITAL SPENDING AND
DEVELOPMENT
Capital
expenditures at the Atlantis totaled approximately $19.1 and $2.2 million
during the first three months of 2008 and 2007, respectively. During
the three months ended March 31, 2008, our capital expenditures consisted
primarily of construction costs associated with our ongoing $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 during the quarter ended
March 31, 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 first three months of 2007, capital expenditures consisted primarily of
acquisitions of gaming equipment and the preliminary engineering and design
costs associated with the current expansion phase of the Atlantis.
Future
cash needed to finance ongoing maintenance capital spending is expected to be
made available from our current cash balance, operating cash flow, the Credit
Facility (see "THE CREDIT FACILITY" below) and, if necessary, additional
borrowings.
STATEMENT ON FORWARD-LOOKING
INFORMATION
When used
in this report and elsewhere by management from time to time, the words
“believes”, “anticipates” and “expects” and similar expressions are intended to
identify forward-looking statements with respect to our financial condition,
results of operations and our business including our expansion, development
activities, legal proceedings and employee matters. Certain important
factors, including but not limited to, competition from other gaming operations,
factors affecting our ability to compete, acquisitions of gaming properties,
leverage, construction risks, the inherent uncertainty and costs associated with
litigation and governmental and regulatory investigations, and licensing and
other regulatory risks, could cause our actual results to differ materially from
those expressed in our forward-looking statements. Further
information on potential factors which could affect our financial condition,
results of operations and business including, without limitation, our expansion,
development activities, legal proceedings and employee matters are included in
our filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on any forward-looking statements, which
speak only as of the date thereof. We undertake no obligation to
publicly release any revisions to such forward-looking statement to reflect
events or circumstances after the date hereof.
RESULTS OF
OPERATIONS
Comparison of Operating
Results for the Three-Month Periods Ended March 31, 2008 and 2007
For the
three months ended March 31, 2008, our net income was $2.3 million, or $0.12 per
diluted share, on net revenues of $34.3 million, a decrease from net income of
$5.5 million, or $0.28 per diluted share, on net revenues of $37.8 million for
the three months ended March 31, 2007. Income from operations for the three
months ended March 31, 2008 totaled $3.3 million, a 59.8% decrease when compared
to $8.2 million for the same period in 2007. Net revenues and net
income decreased 9.3% and 58.2%, respectively, when compared to last year's
first quarter.
Casino
revenues totaled $23.8 million in the first quarter of 2008, a 5.9% decrease
from $25.3 million in the first quarter of 2007, which was primarily due to
decreased slot revenues. Casino operating expenses amounted to 36.8% of casino
revenues in the first quarter of 2008, compared to 33.5% in the first quarter of
2007; the increase was due primarily due to the decreased casino
revenue.
Food and
beverage revenues totaled $9.8 million in the first quarter of 2008, a 6.7%
decrease from $10.5 million in the first quarter of 2007, due primarily to a
6.2% increase in the average revenue per food cover partially offset by a 11.5%
decrease in the number of covers served. Food and beverage operating
expenses amounted to 48.0% of food and beverage revenues during the first
quarter of 2008 as compared to 47.3% for the first quarter of
2007. This increase was primarily the result of the lower revenue
combined with increased food commodity costs.
Hotel
revenues were $5.8 million for the first quarter of 2008, a decrease of 14.7%
from the $6.8 million reported in the 2007 first quarter. This
decrease was the result of lower hotel occupancy and a decrease in the average
daily room rate (“ADR”). Both 2008 and 2007 first quarter revenues included a $3
per occupied room energy surcharge. During the first quarter of 2008, the
Atlantis experienced an 85.7% occupancy rate, as compared to 95.5% during the
same period in 2007. The Atlantis' ADR was $68.55 in the first quarter of
2008 compared to $71.89 in the first quarter of 2007. Hotel operating expenses
as a percent of hotel revenues increased to 36.1% for the first quarter of 2008
from 31.4% for the first quarter of 2007 primarily due to the decreased
revenue.
Promotional
allowances increased to $6.3 million in the first quarter of 2008 compared to
$6.0 million in the first quarter of 2007. The increase is attributable to
continued promotional efforts to generate additional revenues. Promotional
allowances as a percentage of gross revenues increased to 15.5% during the first
quarter of 2008 as compared to 13.8% in the first quarter of 2007.
Other
revenues remained flat at $1.2 million in the 2008 first quarter as compared to
the first quarter of 2007.
Depreciation
and amortization expense was $2.0 million in the first quarter of 2008 as
compared to $2.1 million in the first quarter of 2007. This depreciation expense
primarily relates to property and equipment acquired in the ordinary course of
business as part of the Company’s ongoing capital expenditures to replace old
and obsolete equipment with newer, more current equipment.
SG&A
expenses amounted to $13.1 million in the first quarter of 2008, a 13.9%
increase from $11.5 million in the first quarter of 2007. The increase was
primarily due to increased bad debt expense, higher marketing and promotional
expense and higher legal expense related to the Kerzner lawsuit (see “LEGAL
PROCEEDINGS” discussion below). As a percentage of net revenue,
SG&A expenses increased to 38.2% in the first quarter of 2008 from 30.5% in
the same period in 2007.
Net
interest income increased to $247,000 for the first quarter of 2008 from
$195,000 for the first quarter of 2007. This increase was driven by a
decrease in interest income which was more than offset by a decrease in interest
expense. The decrease in interest income was the result of a lower
average balance of interest bearing cash and cash equivalents during the first
quarter of 2008 as compared to the same quarter in 2007. The decrease
in interest expense was the result of a charge for deferred loan costs in the
first quarter of 2007 that did not recur in 2008.
LIQUIDITY AND CAPITAL
RESOURCES
For the
three months ended March 31, 2008, net cash provided by operating activities
totaled $5.9 million, a decrease of 35.2% compared to the same period last year.
Net cash used in investing activities totaled $17.1 million and $2.2 million in
the three months ended March 31, 2008 and 2007, respectively. During
the first three months of 2008, net cash used in investing activities consisted
primarily of construction costs associated with the current expansion phase of
the Atlantis that commenced in June 2007, and the acquisition of property and
equipment. During the first three months of 2007, 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 $11.9 million for the first three months of 2008 compared to
net cash provided by financing activities of $318,180 for the same period in
2007. Net cash used in financing activities for the first three months of 2008
was due to our purchase of Monarch common stock pursuant to the Repurchase Plan
(see “COMMITMENTS AND CONTINGENCIES” below). During the first three months of
2007, we received approximately $318,180 in cash form the proceeds of stock
option exercises and the related tax benefits. At March 31, 2008, we had a cash
and cash equivalents balance of $15.7 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 (see Commitments and Contingencies section below) should
we decide to do so, and 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 March 31, 2008, we had no balance outstanding on the Credit
Facility and had $50 million available to be drawn under the Credit
Facility.
OFF BALANCE SHEET
ARRANGEMENTS
A
driveway was completed and opened on September 30, 2004, that is being shared
between the Atlantis and a shopping center (the “Shopping Center”) directly
adjacent to the Atlantis. The Shopping 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 months based on the Consumer Price Index. We also use part of
the common area of the Shopping Center and pay our proportional share of the
common area expense of the Shopping Center. We have the option to renew the
lease for 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 $75,000 in lease payments
for the leased driveway space at the Shopping Center during the three months
ended March 31, 2008.
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, 2007
(“2007 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 2007 Form 10-K filed on March 17,
2008.
OTHER FACTORS AFFECTING
CURRENT AND FUTURE RESULTS
The
economy in Reno and our feeder markets, like many other areas around the
country, are experiencing the effects of several negative macroeconomic trends,
including higher fuel prices, home mortgage defaults, higher mortgage interest
rates and declining residential real estate values. These negative
trends could adversely impact discretionary incomes of our target customers,
which, in turn could adversely impact our business. Management
continues to monitor these trends and intends, as appropriate, to adopt
operating strategies to attempt to mitigate the effects of such adverse
conditions. We can make no assurances that such strategies will be
effective.
As
discussed below in “COMMITMENTS AND CONTINGENCIES” we commenced construction on
an expansion project to the Atlantis in the second quarter of 2007. The expected
construction period of twelve months will continue into the second quarter of
2008 with the exception of the spa facilities, which we expect to open in the
third quarter of 2008. 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 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. 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.
We also
believe 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 our
business.
In June
2004, five California Indian tribes signed compacts with the state that allow
the tribes to increase the number of slot machines beyond the previous
2,000-per-tribe limit in exchange for higher fees from each of the five
tribes. 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.
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 2007 Form 10-K.
COMMITMENTS AND
CONTINGENCIES
Our
contractual cash obligations as of March 31, 2008 and the next five years and
thereafter are as follow:
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less
Than
|
|
|
1
to 3
|
|
|
4
to 5
|
|
|
More
Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Operating
leases (1)
|
|
$ |
4,680,000 |
|
|
$ |
613,000 |
|
|
$ |
922,000 |
|
|
$ |
740,000 |
|
|
$ |
2,405,000 |
|
Purchase
obligations (2)
|
|
|
39,072,000 |
|
|
|
39,072,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
contractual cash obligations
|
|
$ |
43,752,000 |
|
|
$ |
39,685,000 |
|
|
$ |
922,000 |
|
|
$ |
740,000 |
|
|
$ |
2,405,000 |
|
(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
in lease payments to Triple J (see Note 5. Related Party Transactions, in the
Notes to the Condensed Consolidated Financial Statements in this Form
10-Q).
(2) Our
open purchase order and construction commitments total approximately $39.1
million. Of the total purchase order and construction commitments,
approximately $2.1 million are cancelable by us upon providing a 30-day
notice.
On
September 28, 2006, our Board of Directors (our “Board”) authorized 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 stock in the open market or in privately negotiated transactions from
time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act
of 1934, subject to market conditions, applicable legal requirements and other
factors. The Repurchase Plan does not obligate us to acquire any
particular amount of common stock and the plan may be suspended at any time at
our discretion.
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 quarter of 2008, we purchased 695,396
shares of the Company’s common stock pursuant to the Repurchase Plan at a
weighted average purchase price of $17.12 per share, which increased the total
number of shares purchased pursuant to the Repurchase Plan to 1,250,904 at a
weighted average purchase price of $20.61. As of March 31, 2008,
1,749,096 shares remain 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”). New space to be added to the first floor
casino level, the second and third floors and the basement level will total
approximately 116,000 square feet. Once complete, the existing casino floor will
be expanded by over 10,000 square feet, or approximately
20%. The first floor plans include a redesigned, updated and
expanded race and sports book of approximately 4,000 square feet and an enlarged
poker room. The plans also include a Manhattan deli
restaurant. The second floor expansion will create additional
ballroom and convention space of approximately 27,000 square feet, doubling our
existing facilities. The spa and fitness center will be remodeled and
expanded to create an ultra-modern spa and fitness center
facility. We expect to open the Expansion late in the second quarter
of 2008 with the exception of the spa facilities which we expect to open in the
third quarter of 2008. We have also begun construction of a
pedestrian skywalk over Peckham Lane that will connect the Reno-Sparks
Convention Center directly to the Atlantis. Construction of the
skywalk 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. Through March 31, 2008, the Company has
paid approximately $32.0 million of the estimated Expansion and skybridge
cost.
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
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 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. The Nevada Supreme Court has yet to rule on that
motion. In the event that the Nevada Supreme Court does not reverse its original
decision, we believe that we would be entitled to a refund on previously paid
use tax on complimentary employee and patron meals, as would other gaming
companies with Nevada casinos. No assurances can be provided as to
the outcome of the litigation. 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 March 31,
2008.
THE CREDIT
FACILITY
On
February 20, 2004, a previous credit facility was refinanced (the "Credit
Facility") for $50 million. At our option, borrowings under the Credit Facility
would 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 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 percent 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. At March 31, 2008,
we had no borrowings under the Credit Facility; however, our leverage ratio was
such that the pricing for borrowings would have been the Base Rate plus 0.00
percent or LIBOR plus 1.00 percent. 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.
The
Credit Facility is secured by liens on substantially all of the real and
personal property of the Atlantis, and is guaranteed by Monarch.
The
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 Credit Facility also contains
covenants requiring us to maintain certain financial ratios and contains
provisions that restrict cash transfers between Monarch and its affiliates. The
Credit Facility also contains provisions requiring the achievement of certain
financial ratios before we can repurchase our common stock. We do not consider
the covenants to restrict our operations.
Beginning
June 30, 2004, the maximum principal available under the Credit Facility was to
be reduced over five years by an aggregate of $30.875 million in equal
increments of $1.625 million per quarter with the remaining balance due at the
maturity date. We may prepay borrowings under the 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. 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 reduce the available borrowings to $5
million. We may reduce the maximum principal available under the
Credit Facility at any time so long as the amount of such reduction is at least
$500,000 and a multiple of $50,000.
On April
14, 2008, we entered into an agreement to amend the Credit
Facility. 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 March 31, 2008, we had no
balance outstanding on the Credit Facility and had $50 million available to be
drawn under the Credit Facility.
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 March 31, 2008, that
are subject to market risks.
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.
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Litigation
was filed against Monarch on January 27, 2006, by Kerzner International Limited
(“Kerzner ") owner of the Atlantis, Paradise Island, Bahamas in the United
States District Court, District of Nevada. The case number assigned
to the matter is 3:06-cv-00232-ECR (RAM). The complaint seeks
declaratory judgment prohibiting Monarch from using the name "Atlantis" in
connection with offering casino services other than at Monarch's Atlantis Casino
Resort Spa located in Reno, Nevada, and particularly prohibiting Monarch from
using the "Atlantis" name in connection with offering casino services in Las
Vegas, Nevada; injunctive relief enforcing the same; unspecified compensatory
and punitive damages; and other relief. Monarch believes Kerzner's claims to be
entirely without merit and is defending vigorously against the suit. Further,
Monarch has filed a counterclaim against Kerzner seeking to enforce the license
agreement granting Monarch the exclusive right to use the Atlantis name in
association with lodging throughout the state of Nevada; to cancel Kerzner's
registration of the Atlantis mark for casino services on the basis that the mark
was fraudulently obtained by Kerzner; and to obtain declaratory relief on these
issues. Litigation is in the discovery phase.
We are
party to other claims that arise in the normal course of
business. Management believes that the outcomes of such claims will
not have a material adverse impact on our financial condition, cash flows or
results of operations.
A
description of our risk factors can be found in Item 1A of our Annual Report on
Form 10-K, as amended, for the year ended December 31, 2007. There
were no material changes to those risk factors during the three months ended
March 31, 2008.
ITEM 2.
UNREGISTERED SALE OF EQUITY SECURITIES AND
USE OF PROCEEDS
(c) As
discussed above in “COMMITMENTS AND CONTINGENCIES”, our Board authorized the
Repurchase Plan under which we may repurchase up to three million shares of our
common stock. As of March 31, 2008, 1,749,096 shares remain under the
three million share Repurchase Plan authorization.
The
following table summarizes the repurchases made during the three month period
ended March 31, 2008. All repurchases were made in the open
market.
Period
|
|
(a)
Total
number of shares purchased
(1)
|
|
|
(b)
Average
price paid per share
|
|
|
(c)
Total
number of shares purchased as part of publicly announced plans
|
|
|
(d)
Maximum
number of shares that may yet be purchased under the plans
|
|
January
1, 2008 through January 31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
February
1, 2008 through February 29, 2008
|
|
|
112,388 |
|
|
$ |
16.95 |
|
|
|
112,388 |
|
|
|
332,104 |
|
March
1, 2008 through March 31, 2008
|
|
|
583,008 |
|
|
$ |
17.16 |
|
|
|
583,008 |
|
|
|
749,096 |
|
(1) All
shares were purchased pursuant to the Repurchase Plan discussed
above.
(a)
Exhibits
10.1
|
Second
Amendment to Credit Agreement and Amendment to Revolving Credit Note,
dated as of April 14, 2008, entered into by and among Golden road Motor
Inn, Inc., Monarch Casino & Resort, Inc. and Wells Fargo Bank,
National Association is incorporated herein by reference to the Company’s
Form 8-K filed April 18, 2008, Exhibit
10.1.
|
|
Letter
of Understanding Regarding Terms of Employment between the Company and
Ronald Rowan dated May 22,
2006.
|
|
Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
Certification
of John Farahi, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
Certification
of Ronald Rowan, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
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: May
12, 2008
|
By:
/s/ RONALD ROWAN
|
|
Ronald Rowan,
Chief Financial Officer
|
|
and
Treasurer (Principal Financial
|
|
Officer
and Duly Authorized Officer)
|