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 March 31, 2006
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______.
Commission File No. 0-22088
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer ___ Accelerated Filer _X_ Non-Accelerated Filer ___
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the 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 May 8, 2006, there
were 18,911,308 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 ended March 31, 2006 and 2005 (unaudited).......... 3
Condensed Consolidated Balance Sheets at
March 31, 2006 (unaudited) and December 31, 2005................ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2006 and 2005 (unaudited).......... 6
Notes to Condensed Consolidated Financial Statements (unaudited). 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 23
Item 4. Controls and Procedures.......................................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 24
Item 1A. Risk Factors.................................................... 25
Item 6. Exhibits......................................................... 25
Signatures....................................................... 26
Exhibit Index.................................................... 27
Exhibit 31.1 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 ...................................... 28
Exhibit 31.2 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 ...................................... 29
Exhibit 32.1 Certification of John Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.................... 30
Exhibit 32.2 Certification of Ben Farahi pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.................... 31
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2006 2005
------------ ------------
(Unaudited) (Unaudited)
Revenues
Casino...................................... $ 24,124,047 $ 20,901,908
Food and beverage........................... 9,744,817 9,026,336
Hotel....................................... 6,033,935 5,588,152
Other....................................... 1,090,576 1,048,337
------------ ------------
Gross revenues........................... 40,993,375 36,564,733
Less promotional allowances................. (5,387,714) (5,002,031)
------------ ------------
Net revenues............................. 35,605,661 31,562,702
------------ ------------
Operating expenses
Casino...................................... 8,012,162 7,534,847
Food and beverage........................... 4,790,771 4,437,365
Hotel....................................... 2,103,723 2,027,873
Other....................................... 314,454 321,646
Selling, general, and administrative........ 10,841,486 8,809,293
Gaming development expense.................. 43,765 204,398
Depreciation and amortization............... 2,146,758 2,038,200
------------ ------------
Total operating expenses................. 28,253,119 25,373,622
------------ ------------
Income from operations................... 7,352,542 6,189,080
Other expense
Interest expense............................ (59,444) (305,374)
------------ ------------
Income before income taxes............... 7,293,098 5,883,706
Provision for income taxes.................... 2,525,000 2,030,000
------------ ------------
Net income............................... $ 4,768,098 $ 3,853,706
============ ============
Earnings per share of common stock
Net income
Basic..................................... $ 0.25 $ 0.20
Diluted................................... $ 0.25 $ 0.20
Weighted average number of common
shares and potential common
shares outstanding
Basic................................... 18,885,595 18,816,819
Diluted................................. 19,252,277 19,043,546
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
March 31, December 31,
2006 2005
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash............................................ $ 12,010,163 $ 12,886,494
Receivables, net................................ 3,091,337 3,559,602
Federal income tax refund receivable............ - 286,760
Inventories..................................... 1,458,070 1,456,453
Prepaid expenses................................ 2,537,300 2,401,619
Deferred income taxes........................... 1,518,152 1,326,224
------------- -------------
Total current assets......................... 20,615,022 21,917,152
------------- -------------
Property and equipment
Land............................................ 10,339,530 10,339,530
Land improvements............................... 3,166,107 3,166,107
Buildings....................................... 78,955,538 78,955,538
Building improvements........................... 10,398,814 10,398,814
Furniture and equipment......................... 68,826,326 67,393,755
Leasehold improvement........................... 1,346,965 1,346,965
------------- -------------
173,033,280 171,600,709
Less accumulated depreciation and amortization.. (78,138,462) (76,117,346)
------------- -------------
Net property and equipment................... 94,894,818 95,483,363
------------- -------------
Other assets, net................................. 269,524 269,524
------------- -------------
Total assets................................. $ 115,779,364 $ 117,670,039
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-4-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................ $ 6,761,798 $ 7,335,630
Accrued expenses................................ 7,590,609 8,722,221
Federal income taxes payable.................... 2,548,782 -
------------- -------------
Total current liabilities.................... 16,901,189 16,057,851
Long-term debt, less current maturities........... - 8,100,000
Deferred income taxes............................. 5,747,192 5,953,193
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; 19,072,550 shares issued;
18,894,576 outstanding at 03/31/2006,
18,879,310 outstanding at 12/31/2005........... 190,726 190,726
Additional paid-in capital...................... 18,630,715 17,882,827
Treasury stock,
177,974 shares at 03/31/2006, 193,240 shares
at 12/31/2005, at cost......................... (652,875) (708,877)
Retained earnings............................... 74,962,417 70,194,319
------------- -------------
Total stockholders' equity................... 93,130,983 87,558,995
------------- -------------
Total liabilities and stockholders' equity... $ 115,779,364 $ 117,670,039
============= =============
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of these statements.
-5-
MONARCH CASINO & RESORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
----------------------------
2006 2005
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income.................................. $ 4,768,098 $ 3,853,706
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 2,146,758 2,038,200
Amortization of deferred loan costs....... - 22,875
Share-based compensation.................. 548,366 -
Provision for bad debt.................... 279,849 89,913
Loss (gain) on disposal of assets......... 54,685 (6,500)
Deferred income taxes..................... (397,928) (174,000)
Changes in assets and liabilities
Receivables, net.......................... 475,176 949,446
Inventories............................... (1,616) 199,919
Prepaid expenses.......................... (135,681) (188,819)
Accounts payable.......................... (573,832) 932,233
Accrued expenses and federal income
taxes payable........................... 1,417,170 (86,285)
------------ ------------
Net cash provided by
operating activities.................... 8,581,045 7,630,688
------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets................ 2,916 6,500
Acquisition of property and equipment....... (1,615,815) (861,631)
------------ ------------
Net cash used in investing activities.... (1,612,899) (855,131)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options..... 168,138 18,337
Tax benefit of stock option exercise........ 87,385 -
Principal payments on long-term debt........ (8,100,000) (9,300,000)
------------ ------------
Net cash used in
financing activities.................... (7,844,477) (9,281,663)
------------ ------------
Net decrease in cash..................... (876,331) (2,506,106)
Cash at beginning of period................... 12,886,494 11,814,778
------------ ------------
Cash at end of period......................... $ 12,010,163 $ 9,308,672
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest...................... $ 66,659 $ 381,164
Cash paid for income taxes.................. $ - $ -
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-month periods ended March 31, 2006 and 2005 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, 2005. The
results for the three-month period ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2006, 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.
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.
-7-
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.
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,
-8-
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
On January 1, 2006, we adopted the provisions of SFAS 123R and SAB 107
requiring the measurement and recognition of all share-based compensation
under the fair value method. We implemented SFAS 123R using the modified
prospective transition method.
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
-9-
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
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. STOCK-BASED COMPENSATION
Our stock-based compensation arrangements are designed to attract and
retain employees and outside independent members of our Board of Directors.
The amount, frequency, and terms of share-based awards may vary based on
competitive practices, company operating results, and government regulations.
New shares are issued out of our treasury stock upon option exercise. We may
repurchase some of our common stock from time to time in order to have
adequate amounts of stock in treasury to cover option exercises.
The Company maintains three stock option plans, consisting of the
Directors' Stock Option Plan, the Executive Long-term Incentive Plan, and the
Employee Stock Option Plan (the "Plans"), which collectively provide for the
granting of options to purchase up to 2,250,000 common shares. The exercise
price of stock options granted under the Plans is established by the
respective plan committees, but the exercise price may not be less than the
market price of the Company's common stock on the date the option is granted.
Our 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.
-10-
Current year stock option activity as of and for the quarter ended March
31, 2006:
Weighted Average
-----------------------
Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
----------------------------------- --------- --------- ----------- -----------
Outstanding at beginning of period 1,117,558 $13.25 - -
Granted 15,000 25.93 - -
Exercised (15,266) 11.01 - -
Forfeited (110,000) 12.44 - -
Expired - - - -
--------- --------- ----------- -----------
Outstanding at end of period 1,007,292 $13.56 8.8 yrs. $14,936,555
========= ========= =========== ===========
Exercisable at end of period 228,286 $12.02 8.5 yrs. $ 3,736,703
--------- --------- ----------- -----------
Expense Measurement and Recognition
On January 1, 2006, we adopted the provisions of SFAS 123R and SAB 107
requiring the measurement and recognition of all share-based compensation
under the fair value method. We implemented SFAS 123R using the modified
prospective transition method.
Accordingly, for the quarter ended March 31, 2006, we 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, we 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 our plans, which resulted in pro-
forma compensation expense only for stock option awards. Prior period
financial statements have not been adjusted to reflect fair value share-based
compensation expense under SFAS 123R.
With the adoption of SFAS 123R, we changed our method of expense
attribution for fair value share-based compensation from the straight-line
approach to the accelerated approach for all awards granted. We anticipate the
accelerated method will provide a more meaningful measure of costs incurred
and be most representative of the economic reality associated with our
unvested stock options outstanding. Unrecognized costs related to all share-
based awards outstanding at March 31, 2006 totaled approximately $3.8 million
and is expected to be recognized over a weighted average period of 1.83 years.
We use historical data and projections to estimate expected employee,
executive and director behaviors related to option exercises and forfeitures.
We estimate 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.
-11-
Three Months Ended
March 31,
------------------
2006 2005
-------- --------
Option Valuation Assumptions:
Expected volatility 44.5% 45.8%
Expected dividends 0.0% 0.0%
Expected life (in years)
Directors? Plan 2.5 4.7
Executive Plan 9.0 9.0
Employee Plan 4.1 5.0
Weighted average risk free rate 4.3% 4.1%
The risk-free interest rate is based on the U.S. treasury security rate
in effect as of the date of grant. The expected lives of options are based on
historical data of the Company. In 2006, the Company determined that an
implied volatility is more reflective of market conditions and a better
indicator of expected volatility.
Weighted average grant date fair value per share
of options granted: $10.52 $ 7.42
Total intrinsic value of options exercised: $249,640 $ 80,916
Cash received for all stock option exercises: $168,138 $ 18,337
Tax benefit realized for tax return deductions: $ 87,385 $ 28,320
Reported stock based compensation was classified as follows:
Three Months Ended
March 31,
------------------
2006 2005
-------- --------
Casino $ 21,561 -
Food and beverage 20,167 -
Hotel 17,230 -
Selling, general & administrative 489,408 -
-------- --------
Total stock-based compensation $548,366 $385,048
Tax benefit (191,928) (132,844)
-------- --------
Total stock-based compensation, net of tax $356,438 $252,204
======== ========
-12-
The following table illustrates the effect on net income and net income
per common share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to all outstanding stock option awards for periods
presented prior to the Company?s adoption of SFAS No. 123R:
Three Months Ended
March 31,
----------
2005
----------
Net income, as reported $3,853,706
Proforma share-based compensation, net of tax (252,204)
----------
Comparative net income $3,601,502
==========
Basic earnings per share,
As reported: $ 0.20
Pro forma: $ 0.19
Diluted earnings per share
As reported: $ 0.20
Pro forma: $ 0.19
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. 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 March 31,
-----------------------------------
2006 2005
---------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
------ --------- ------ ---------
Basic..................... 18,886 $ 0.25 18,817 $ 0.20
Effect of dilutive
stock options............ 366 - 227 -
------ ------- ------ -------
Diluted................... 19,252 $ 0.25 19,044 $ 0.20
====== ======= ====== =======
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.
-13-
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
None.
NOTE 5. RELATED PARTY TRANSACTIONS
Four affiliated principal stockholders potentially control the Company
through their 44.8% beneficial ownership of the Company?s outstanding common
shares as of March 31, 2006.
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 does not have any ownership, options to purchase (except with
respect to the driveway discussed below) or first rights of refusal over or
control of the Shopping Center. The Company does not have any management
control over or respect to the Shopping Center. The Shopping Center is owned
by Biggest Little Investments, LP (?BLI?), a separate publicly held limited
partnership. As of March 27, 2006, based on disclosures in BLI?s Form 10-KSB,
there were approximately 1,534 holders of BLI units owning an aggregate of
180,937 units (including units held by affiliates of BLI?s general
partner). Three of the Company's principal stockholders have ownership
interests in the general partner of BLI, Maxum LLC, and beneficially own
limited partnership interests in BLI. Maxum LLC is a separate, private limited
liability company whose sole manager is one of the Company's principal
stockholders, Ben Farahi. As the sole manager of Maxum LLC, Ben Farahi
controls BLI, the Shopping Center?s owner.
The Company currently rents various spaces totaling approximately 12,000
square feet in the Shopping Center which it uses as office space, and paid
rent of approximately $23,600 plus common area expenses for the three months
ended March 31, 2006, and approximately $14,800 for the three months ended
March 31, 2005.
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 three five-year terms, and
at the end of the extension periods, the Company has the option to purchase
the leased section of the Shopping Center at a price to be determined based on
an MAI Appraisal. The leased space is being used by the Company for pedestrian
and vehicle access to the Atlantis, and the Company may use a portion of the
parking spaces at the Shopping Center. The total cost of the project was $2.0
million; the Company was responsible for two thirds of the total cost, or
$1.35 million. The cost of the new driveway is being depreciated over the
initial 15-year lease term; some components of the new driveway are being
depreciated over a shorter period of time. The Company paid approximately
$75,000 plus common area maintenance charges for its leased driveway space at
the Shopping Center during each of the three months ended March 31, 2006 and
2005.
The Company is currently leasing sign space from the Shopping Center. The
lease took effect in March 2005 for a monthly cost of $1. The lease was
renewed for another year for a monthly lease of $1,000 effective January 1,
2006. The Company paid $3,000 for the leased sign at the Shopping Center for
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the three months ended March 31, 2006 and did not make any payments for the
three months ended March 31, 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 2005 a charge of approximately $289,000 in gaming
development costs related to the potential new hotel casino. The option
agreement was set to expire on September 15, 2005, and the Company?s Board of
Directors voted to let the agreement expire on such date without exercising
the Company?s option to purchase.
The Company is currently leasing billboard advertising space from
affiliates of its controlling stockholders for a total cost of $17,500 for the
three months ended March 31, 2006, and $7,000 for the three months ended March
31, 2005.
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 March 31,
2006 and 2005.
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 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.
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OPERATING RESULTS SUMMARY
During the first quarter of 2006, we exceeded all previously reported
Company first quarter casino revenues, hotel revenues, net revenues, net
income and earnings per share.
Three Months Percentage
ended March 31, Increase / (Decrease)
------------------- -------------------------
2006 2005 First Quarter ?06 vs ?05
-------- -------- -------------------------
(In millions, except earnings per share
and percentages)
Casino revenues......................... $ 24.1 $ 20.9 15.4%
Food and beverage revenues.............. 9.7 9.0 8.0%
Hotel revenues.......................... 6.0 5.6 8.0%
Other revenues.......................... 1.1 1.0 4.0%
Net revenues............................ 35.6 31.6 12.8%
Income from operations.................. 7.4 6.2 18.8%
Net income.............................. 4.8 3.9 23.7%
Earnings per share - diluted............ 0.25 0.20 25.0%
Operating margin........................ 20.6% 19.6% 1.0 pt.
Some significant items that affected our first quarter results in 2006
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 15.4% in our casino,
8.0% in our food and beverage, 8.0% in our hotel and 4.0% in our other
revenue centers, led to an increase of 12.1% in our gross revenues.
This increase, combined with a slight improvement in promotional
allowances as a percentage of gross revenues, led to a 12.8% increase
in our net revenues.
- Our departmental expenses increased at a lesser rate than our revenues,
leading to unchanged or improved margins across all revenue centers.
- Our selling, general and administrative (?SG&A?) expenses increased
23.1%, primarily due to increased marketing and promotional
expenditures, increased payroll and benefit costs, increased energy
costs, and expenses related to stock options awarded under the
provisions of SFAS 123R. Our depreciation expense increased 5.3%.
- The improved margins, partially offset by the increases in SG&A and
depreciation, led to an 18.8% increase in operating income and a one
percentage point increase in our operating margin as a percentage of
net revenues.
- We incurred approximately $548,000, or approximately $0.03 per diluted
share, in equity compensation expense as a result of the adoption of
the provisions of SFAS 123R.
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CAPITAL SPENDING AND DEVELOPMENT
Capital expenditures at the Atlantis totaled approximately $1.6 million
and $862,000 during the first three months of 2006 and 2005, respectively.
During the three months ended March 31, 2006, our capital expenditures
consisted primarily of acquisitions of gaming and computer equipment, the
installation of a casino High Definition video display system, and ongoing
property public area renovations and upgrades. During last year's first three
months, capital expenditures consisted primarily of acquisitions of gaming and
computer systems equipment.
Future cash needed to finance ongoing maintenance capital spending is
expected to be made available from operating cash flow, the New Credit
Facility (see "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.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month
Periods Ended March 31, 2006 and 2005
For the three-month period ended March 31, 2006, the Company?s net income
was $4.8 million, or $0.25 per diluted share, on net revenues of $35.6
million, an increase from net income of $3.9 million, or $0.20 per diluted
share, on net revenues of $31.6 million for the three months ended March 31,
2005. Income from operations for the three months ended March 31, 2006 totaled
$7.4 million, an 18.8% increase when compared to $6.2 million for the same
period in 2005. Both net revenues and net income for the first quarter of 2006
represent new first quarter records for the Company. Net revenues increased
12.8%, and net income increased 23.7% when compared to last year's first
quarter.
Casino revenues totaled $24.1 million in the first quarter of 2006, a
15.4% increase from $20.9 million in the first quarter of 2005, which was
primarily due to increases in slot, table games, poker and Keno revenues.
Casino operating expenses amounted to 33.2% of casino revenues in the first
quarter of 2006, compared to 36.0% in the first quarter of 2005, with the
-17-
difference due primarily to reduced payroll and benefit expenses, reduced
direct operating costs, and reduced complimentaries as a percentage of casino
revenues.
Food and beverage revenues totaled $9.7 million in the first quarter of
2006, an 8.0% increase from $9.0 million in the first quarter of 2005, due
primarily to a 10.3% increase in the average revenue per food cover partially
offset by an approximate 2.4% decrease in the number of food covers served
during the quarter. Food and beverage operating expenses amounted to 49.2% of
food and beverage revenues during the first quarter of 2006, unchanged
relative to the first quarter of 2005.
Hotel revenues were $6.0 million for the first quarter of 2006, an
increase of 8.0% from the $5.6 million reported in the 2005 first quarter.
This increase was the result of increases in both the average daily room rate
(?ADR?) and hotel occupancy. Both first quarters' 2006 and 2005 revenues also
included a $3 per occupied room energy surcharge. During the first quarter of
2006, the Atlantis experienced a 91.9% occupancy rate, as compared to 91.4%
during the same period in 2005. The Atlantis' ADR was $64.68 in the first
quarter of 2006 compared to $60.25 in the first quarter of 2005. Hotel
operating expenses as a percent of hotel revenues decreased to 34.9% in the
2006 first quarter, compared to 36.3% in the 2005 first quarter. The improved
margin is primarily due to the increased ADR and more efficient operations
resulting in reduced payroll and benefit expenses and reduced direct operating
costs as a percentage of hotel revenues.
Promotional allowances increased to $5.4 million in the first quarter of
2006 compared to $5.0 million in the first quarter of 2005. The dollar
increase is attributable to continued promotional efforts to generate
additional revenues. Promotional allowances as a percentage of gross revenues
decreased to 13.1% during the first quarter of 2006, from 13.7% in the first
quarter of 2005.
Other revenues increased 4.0% to $1.1 million in the 2006 first quarter
compared to $1.0 million in the same period last year. The increase reflects
an approximate 8.7% increase in gift and sundries retail shops revenues and an
approximate 5.4% increase in the entertainment fun center revenues. Other
revenues include a loss of approximately $55,000 on disposal of assets in the
quarter ended March 31, 2006, while a $6,500 gain was recorded in the quarter
ended March 31, 2005. Other expenses in the 2006 first quarter decreased to
28.8% of other revenues, from 30.7% of the revenues in the 2005 first quarter,
which is the result of more efficient operations.
Depreciation and amortization expense was $2.1 million in the first
quarter of 2006, an increase of 5.3% when compared to $2.0 million in the same
period last year. The increase in depreciation expense was mainly due to
acquisitions of property and equipment. 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.
SG&A expenses amounted to $10.8 million in the first quarter of 2006, a
23.1% increase from $8.8 million in the first quarter of 2005. The increase
was primarily a result of increased marketing and promotional expenditures,
increased payroll and benefit costs, increased energy costs, and expenses
related to stock options awarded under the provisions of SFAS 123R. As a
percentage of net revenues, SG&A expenses increased to 30.4% in the first
quarter of 2006 from 27.9% the first quarter of 2005.
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Interest expense for the 2006 first quarter totaled $59,000, a decrease
of 80.5%, from $305,000 in the 2005 first quarter. The decrease reflects the
Company's reduction in debt outstanding; during the first quarter of 2006, the
Company paid off the entire balance on its revolving credit facility (see "THE
CREDIT FACILITY" below).
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our daily hotel and casino activities with
net cash provided by operating activities.
For the three months ended March 31, 2006, net cash provided by operating
activities totaled $8.6 million, an increase of 12.5% compared to the same
period last year. Net cash used in investing activities totaled $1.6 million
and $855,000 in the three months ended March 31, 2006 and 2005, respectively.
During the first three months of 2006 and 2005, 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 $7.8 million for the first three months of 2006 compared to
$9.3 million for the same period last year. Net cash used in financing
activities was primarily for debt reduction in both periods. During the first
three months of 2006, the Company paid off its $8.1 million December 31, 2005
bank debt balance. As a result, at March 31, 2006, the Company had a cash
balance of $12.0 million compared to $9.3 million at March 31, 2005, and $12.9
million at December 31, 2005. As a result of paying off our debt, as of April
28, 2006, we have begun investing our surplus cash in stable, short-term
investments, such as certificates of deposit. These investments may be subject
to market risk.
The Company has a reducing revolving credit facility with a group of
banks (see "THE CREDIT FACILITY" below). At March 31, 2006, the Company had no
balance outstanding on the New Credit Facility (as defined below). At March
31, 2006, we had $24 million available to be drawn down under the New Credit
Facility should we require such funds.
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 three five-year terms, and at
the end of the extension periods, the Company has the option to purchase the
leased section of the Shopping Center at a price to be determined based on an
MAI Appraisal. The leased space is being used by the Company for pedestrian
and vehicle access to the Atlantis, and the Company may use a portion of the
parking spaces at the Shopping Center. The total cost of the project was $2.0
million; 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
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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
March 31, 2006.
On September 23, 2003, the Company entered into an option agreement with
an affiliate of its controlling stockholders to purchase property in South
Reno for development of a new hotel casino. The Company, through the current
property owner, filed an application with the City of Reno for both master
plan and zoning changes for 13 acres of the property. On January 20, 2005, the
City of Reno Planning Commission approved the application for zoning change on
the property; the Reno City Council would next have to approve the
application. On April 13, 2005, the Reno City Council rejected the application
for master plan and zoning change. As a result of the City Council?s decision,
the Company expensed during 2005, a charge of approximately $289,000 in gaming
development costs related to the potential new hotel casino. The option
agreement was set to expire on September 15, 2005, and the Company?s Board of
Directors voted to let the agreement expire on such date without exercising
the Company?s option to purchase.
Critical Accounting 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,
2005 (?2005 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 2005 Form 10-K filed on March
16, 2006.
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.
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 the 2005 Form 10-K.
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COMMITMENTS AND CONTINGENCIES
Contractual cash obligations for the Company as of March 31, 2006 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 $ - $ - $ - $ - $ -
Operating Leases (1) 4,995,000 370,000 740,000 740,000 3,145,000
Purchase Obligations (2) 1,471,000 1,471,000 - - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash
Obligations $ 6,466,000 $ 1,841,000 $ 740,000 $ 740,000 $ 3,145,000
(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?).
(2) Our open purchase order commitments total approximately $1.5 million. Of
the total purchase order commitments, approximately $1.1 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. We did not make this
request, and, therefore, the $30 million increase is currently not available
to us. 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
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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 March
31, 2006, the Company had had no Base Rate loans outstanding and had no LIBOR
loans outstanding. At March 31, 2006, we had $24 million available to be drawn
down under the New Credit Facility should we require such funds.
We may utilize proceeds from the New Credit Facility for working capital
needs and general corporate purposes relating to the Atlantis and for ongoing
capital expenditure requirements at the Atlantis.
The New Credit Facility is secured by liens on substantially all of the
real and personal property of the Atlantis, and is guaranteed by Monarch. The
Original Credit Facility was guaranteed individually by certain controlling
stockholders of the Company. These individuals were not required to provide
any personal guarantees for the New Credit Facility and, therefore, going
forward, we will no longer incur guarantee fee expenses.
The New Credit Facility contains covenants customary and typical for a
facility of this nature, including, but not limited to, covenants requiring
the preservation and maintenance of our assets and covenants restricting our
ability to merge, transfer ownership of Monarch, incur additional
indebtedness, encumber assets, and make certain investments. The New Credit
Facility also contains covenants requiring us to maintain certain financial
ratios and 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 March 31, 2006, 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.
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SHORT-TERM DEBT.
At March 31, 2006, we had no short-term debt outstanding.
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,
2006, that are subject to market risks. As of April 28, 2006, we began
investing excess cash in stable, short-term investments, such as certificates
of deposit, which may be subject to market risk.
A one-point increase in interest rates would have resulted in an increase
in interest expense of approximately $9,000 in the first quarter of 2006 and
$69,000 in the first quarter of 2005.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-
Q, (the "Evaluation Date"), an evaluation was carried out by our management,
with the participation of our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined by Rule 13a-15(e) under the Securities Exchange Act of 1934). Based
upon the evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
Management?s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can
provide only reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal controls may vary over time.
Management assessed the effectiveness of our internal control over
financial reporting as of March 31, 2006. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (?COSO?) in Internal Control-Integrated Framework. Based
on our assessment we believe that, as of March 31, 2006, the Company?s
internal control over financial reporting is effective based on those
criteria. No changes were made to our internal control over financial
reporting (as defined by Rule 13a-15(e) under the Securities Exchange Act of
1934) during the last fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
-23-
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. Most recently the parties have reached a global
settlement agreement which will dispose of all litigation and place final
closure on this lawsuit. Documentation of the settlement is in the process of
being formalized. The anticipated settlement will not generate any material
financial impact on Monarch.
Additionally, Monarch previously has disclosed litigation filed against
it on January 27, 2006, by Kerzner International Limited (?Kerzner?) owner of
the Atlantis, Paradise Island, Bahamas in the United States District Court,
District of Nevada, Case No. 2:06-cv-00102, seeking declaratory judgment
prohibiting Monarch from using the name ?Atlantis? in connection with offering
casino services other than at Monarch?s Atlantis Casino Resort 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 declaratory relief on these issues. On
April 17, 2006 the court issued an order granting Monarch?s motion to transfer
venue of the lawsuit to the unofficial Northern District of Nevada. The new
case number assigned to the matter is 3:06-cv-00232-ECR(RAM). Litigation
currently is in the discovery phase.
We are party to other claims that arise in the normal course of business.
Management believes that the outcomes of such claims will not have a material
adverse impact on our financial condition, cash flows or results of
operations.
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ITEM 1A. RISK FACTORS
Our business prospects are subject to various risks and uncertainties
that impact our business. You should carefully consider the following
discussion of risks, and the other information provided in this quarterly
report on Form 10-Q. The risks described below are not the only ones facing
us. Other risk factors are disclosed in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005. Furthermore, additional risks that are
presently unknown to us or that we currently deem immaterial may also impact
our business.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO
DILUTION OF OUR ISSUED AND OUTSTANDING COMMON STOCK.
The issuance of additional equity securities or securities convertible
into equity securities would result in dilution of our existing stockholders?
equity interests in us. Our Board of Directors has the authority to issue,
without vote or action of stockholders, preferred stock in one or more series,
and has the ability to fix the rights, preferences, privileges and
restrictions of any such series. Any such series of preferred stock could
contain dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences or other rights
superior to the rights of holders of our common stock. If we issue convertible
preferred stock, a subsequent conversion may dilute the current common
stockholders? interest. In addition, as of March 31, 2006, we were authorized
to issue, without stockholder approval, up to 10,927,450 shares of common
stock. Of that amount, 228,286 shares of our common stock were issuable upon
the exercise of vested options.
WE DO NOT INTEND TO PAY CASH DIVIDENDS. AS A RESULT, STOCKHOLDERS WILL BENEFIT
FROM AN INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE.
We have never paid a cash dividend on our common stock, and we do not
plan to pay any cash dividends on our common stock in the foreseeable future.
We currently intend to retain any future earnings to finance our operations
and further expansion and growth of our business, including acquisitions. As a
result, the success of an investment in our common stock will depend upon any
future appreciation in its value. We cannot guarantee that our common stock
will appreciate in value or even maintain the price at which stockholders have
purchased their shares.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. 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
-25-
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: May 10, 2006 By: /s/ BEN FARAHI
------------------------------------
Ben Farahi, Co-Chairman of the Board,
Secretary, Treasurer, and Chief
Financial Officer(Principal Financial
Officer and Duly Authorized Officer)
-26-
EXHIBIT INDEX
Exhibit Page
Number Description Number
--------- ---------------------------------------------------------- ------
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 28
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 29
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 30
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31
-27-
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
first 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: May 10, 2006
By: /s/ John Farahi
---------------
John Farahi
Chief Executive Officer
-28-
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
first 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: May 10, 2006
By: /s/ Ben Farahi
---------------
Ben Farahi
Chief Financial Officer, Secretary and Treasurer
-29-
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 March 31, 2006, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John Farahi, Chief Executive Officer of the Company certify,
pursuant to 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: May 10, 2006
By: /s/ JOHN FARAHI
---------------
John Farahi
Chief Executive Officer
-30-
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 March 31, 2006, 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: May 10, 2006
By: /s/ BEN FARAHI
---------------
Ben Farahi
Chief Financial Officer
-31-