United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended June 30, 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 Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
3800
S. Virginia St.
Reno,
Nevada
|
89502
|
(Address
of Principal Executive Offices)
|
(ZIP
Code)
|
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
(775) 335-4600
Registrant'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 x 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”, “non-accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer
¨
|
Accelerated
Filer x
|
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 x
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
|
|
16,122,048
shares
|
Class
|
|
Outstanding
at July 22, 2008
|
|
|
|
Page Number
|
|
|
|
|
PART I - FINANCIAL
INFORMATION
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
4
|
|
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|
|
|
|
|
5
|
|
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|
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|
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6
|
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7
|
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Item
2.
|
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15
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Item
3.
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24
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Item
4.
|
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24
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PART II - OTHER
INFORMATION
|
|
|
|
|
|
Item
1.
|
|
|
25
|
|
|
|
|
Item
1A.
|
|
|
25
|
|
|
|
|
Item
4.
|
|
|
26
|
|
|
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|
Item
6.
|
|
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26
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|
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|
|
Signatures
|
27
|
|
|
|
|
|
|
Exhibit
31.1 Certification of John Farahi pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
28
|
|
|
|
|
|
|
Exhibit
31.2 Certification of Ronald Rowan 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 Ronald Rowan pursuant to SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
|
31
|
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
Condensed
Consolidated Statements of Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$ |
25,672,907 |
|
|
$ |
29,277,718 |
|
|
$ |
49,428,857 |
|
|
$ |
54,575,990 |
|
Food
and beverage
|
|
|
9,547,395 |
|
|
|
10,568,173 |
|
|
|
19,308,615 |
|
|
|
21,072,388 |
|
Hotel
|
|
|
5,545,006 |
|
|
|
7,027,156 |
|
|
|
11,375,701 |
|
|
|
13,855,123 |
|
Other
|
|
|
1,185,503 |
|
|
|
1,285,828 |
|
|
|
2,417,572 |
|
|
|
2,474,451 |
|
Gross
revenues
|
|
|
41,950,811 |
|
|
|
48,158,875 |
|
|
|
82,530,745 |
|
|
|
91,977,952 |
|
Less
promotional allowances
|
|
|
(6,607,046 |
) |
|
|
(6,597,555 |
) |
|
|
(12,913,587 |
) |
|
|
(12,635,041 |
) |
Net
revenues
|
|
|
35,343,765 |
|
|
|
41,561,320 |
|
|
|
69,617,158 |
|
|
|
79,342,911 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
9,266,916 |
|
|
|
9,268,084 |
|
|
|
18,013,416 |
|
|
|
17,737,421 |
|
Food
and beverage
|
|
|
4,606,282 |
|
|
|
4,866,969 |
|
|
|
9,295,647 |
|
|
|
9,835,686 |
|
Hotel
|
|
|
1,967,720 |
|
|
|
2,111,765 |
|
|
|
4,073,093 |
|
|
|
4,255,105 |
|
Other
|
|
|
312,997 |
|
|
|
377,437 |
|
|
|
659,651 |
|
|
|
741,057 |
|
Selling,
general and administrative
|
|
|
12,877,513 |
|
|
|
12,792,008 |
|
|
|
25,981,613 |
|
|
|
24,322,811 |
|
Depreciation
and amortization
|
|
|
1,893,237 |
|
|
|
2,064,970 |
|
|
|
3,899,794 |
|
|
|
4,140,416 |
|
Total
operating expenses
|
|
|
30,924,665 |
|
|
|
31,481,233 |
|
|
|
61,923,214 |
|
|
|
61,032,496 |
|
Income
from operations
|
|
|
4,419,100 |
|
|
|
10,080,087 |
|
|
|
7,693,944 |
|
|
|
18,310,415 |
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
46,238 |
|
|
|
473,537 |
|
|
|
297,582 |
|
|
|
817,421 |
|
Interest
expense
|
|
|
(131,335 |
) |
|
|
(3,174 |
) |
|
|
(135,492 |
) |
|
|
(152,274 |
) |
Total
other (expense) income
|
|
|
(85,097 |
) |
|
|
470,363 |
|
|
|
162,090 |
|
|
|
665,147 |
|
Income
before income taxes
|
|
|
4,334,003 |
|
|
|
10,550,450 |
|
|
|
7,856,034 |
|
|
|
18,975,562 |
|
Provision
for income taxes
|
|
|
(1,531,100 |
) |
|
|
(3,650,000 |
) |
|
|
(2,751,100 |
) |
|
|
(6,580,000 |
) |
Net
income
|
|
$ |
2,802,903 |
|
|
$ |
6,900,450 |
|
|
$ |
5,104,934 |
|
|
$ |
12,395,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.16 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
|
$ |
0.65 |
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.36 |
|
|
$ |
0.29 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares and potential common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,189,200 |
|
|
|
19,091,756 |
|
|
|
17,802,518 |
|
|
|
19,081,173 |
|
Diluted
|
|
|
17,253,109 |
|
|
|
19,366,442 |
|
|
|
17,899,384 |
|
|
|
19,345,213 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
Condensed
Consolidated Balance Sheets
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
11,672,748 |
|
|
$ |
38,835,820 |
|
Receivables,
net
|
|
|
3,679,824 |
|
|
|
4,134,099 |
|
Federal
income tax refund receivable
|
|
|
- |
|
|
|
998,123 |
|
Inventories
|
|
|
1,471,347 |
|
|
|
1,496,046 |
|
Prepaid
expenses
|
|
|
3,040,123 |
|
|
|
3,144,374 |
|
Deferred
income taxes
|
|
|
582,407 |
|
|
|
1,084,284 |
|
Total
current assets
|
|
|
20,446,449 |
|
|
|
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
|
|
|
73,328,364 |
|
|
|
72,511,165 |
|
Leasehold
improvements
|
|
|
1,346,965 |
|
|
|
1,346,965 |
|
|
|
|
181,439,935 |
|
|
|
176,754,367 |
|
Less
accumulated depreciation and amortization
|
|
|
(96,011,025 |
) |
|
|
(92,215,149 |
) |
|
|
|
85,428,910 |
|
|
|
84,539,218 |
|
Construction
in progress
|
|
|
53,494,393 |
|
|
|
17,236,062 |
|
Net
property and equipment
|
|
|
138,923,303 |
|
|
|
101,775,280 |
|
Other
assets, net
|
|
|
2,817,842 |
|
|
|
2,817,842 |
|
Total
assets
|
|
$ |
162,187,594 |
|
|
$ |
154,285,868 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Borrowings
under credit facility
|
|
$ |
34,000,000 |
|
|
$ |
- |
|
Accounts
payable
|
|
|
12,788,488 |
|
|
|
10,840,318 |
|
Construction
payable
|
|
|
3,330,226 |
|
|
|
1,971,022 |
|
Accrued
expenses
|
|
|
9,193,030 |
|
|
|
9,230,157 |
|
Federal
income taxes payable
|
|
|
51,100 |
|
|
|
- |
|
Total
current liabilities
|
|
|
59,362,844 |
|
|
|
22,041,497 |
|
Deferred
income taxes
|
|
|
2,825,433 |
|
|
|
2,825,433 |
|
Total
Liabilities
|
|
|
62,188,277 |
|
|
|
24,866,930 |
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 10,000,000 shares authorized; none
issued
|
|
|
- |
|
|
|
- |
|
Common
stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares
issued; 16,122,048 outstanding at 6/30/08 18,566,540 outstanding at
12/31/07
|
|
|
190,963 |
|
|
|
190,963 |
|
Additional
paid-in capital
|
|
|
26,891,871 |
|
|
|
25,741,972 |
|
Treasury
stock, 2,974,252 shares at 6/30/08 529,760 shares at 12/31/07, at
cost
|
|
|
(48,943,359 |
) |
|
|
(13,268,905 |
) |
Retained
earnings
|
|
|
121,859,842 |
|
|
|
116,754,908 |
|
Total
stockholders' equity
|
|
|
99,999,317 |
|
|
|
129,418,938 |
|
Total
liabilities and stockholder's equity
|
|
$ |
162,187,594 |
|
|
$ |
154,285,868 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,104,934 |
|
|
$ |
12,395,562 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,899,794 |
|
|
|
4,140,416 |
|
Amortization
of deferred loan costs
|
|
|
- |
|
|
|
148,838 |
|
Share
based compensation
|
|
|
1,149,899 |
|
|
|
1,072,018 |
|
Provision
for bad debts
|
|
|
607,721 |
|
|
|
22,786 |
|
Gain
on disposal of assets
|
|
|
(10,200 |
) |
|
|
(5,770 |
) |
Deferred
income taxes
|
|
|
501,877 |
|
|
|
(740,206 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
844,677 |
|
|
|
(379,484 |
) |
Inventories
|
|
|
24,700 |
|
|
|
(23,254 |
) |
Prepaid
expenses
|
|
|
104,251 |
|
|
|
(174,778 |
) |
Other
assets
|
|
|
- |
|
|
|
(4,826 |
) |
Accounts
payable
|
|
|
1,948,170 |
|
|
|
1,794,905 |
|
Accrued
expenses
|
|
|
(37,127 |
) |
|
|
59,915 |
|
Federal
income taxes payable, net
|
|
|
51,100 |
|
|
|
930,599 |
|
Net
cash provided by operating activities
|
|
|
14,189,796 |
|
|
|
19,236,721 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of assets
|
|
|
10,200 |
|
|
|
5,770 |
|
Acquisition
of property and equipment
|
|
|
(41,047,818 |
) |
|
|
(5,263,977 |
) |
Changes
in construction payable
|
|
|
1,359,204 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(39,678,414 |
) |
|
|
(5,258,207 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
311,353 |
|
Tax
benefit of stock option exercise
|
|
|
- |
|
|
|
141,684 |
|
Borrowings
under credit facility
|
|
|
34,000,000 |
|
|
|
- |
|
Purchase
of treasury stock
|
|
|
(35,674,454 |
) |
|
|
- |
|
Net
cash (used in) provided by financing activities
|
|
|
(1,674,454 |
) |
|
|
453,037 |
|
Net
(decrease) increase in cash
|
|
|
(27,163,072 |
) |
|
|
14,431,551 |
|
Cash
and cash equivalents at beginning of period
|
|
|
38,835,820 |
|
|
|
36,985,187 |
|
Cash
and cash equivalents at end of period
|
|
$ |
11,672,748 |
|
|
$ |
51,416,738 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest.
|
|
$ |
50,158 |
|
|
$ |
3,437 |
|
Cash
paid for income taxes
|
|
$ |
1,200,000 |
|
|
$ |
6,247,923 |
|
The Notes
to the Condensed Consolidated Financial Statements are an integral part of these
statements.
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 (“U.S.
GAAP”) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management of the Company,
all adjustments considered necessary for a fair presentation are
included. Operating results for the three months and six months ended
June 30, 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. GAAP 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. GAAP , 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.
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 northern Nevada residents. A major casino-hotel operator
that successfully focuses on local resident business in Las Vegas announced
plans to develop hotel-casino properties in Reno. The competition for this
market segment is likely to increase and could impact the Company’s
business.
NOTE 2.
STOCK-BASED COMPENSATION
The
Company’s three stock option plans, consisting of the Directors' Stock Option
Plan, the Executive Long-term Incentive Plan, and the Employee Stock Option Plan
(the "Plans"), collectively provide for the granting of options to purchase up
to 3,250,000 common shares. The exercise price of stock options granted under
the Plans is established by the respective plan committees, but the exercise
price may not be less than the market price of the Company's common stock on the
date the option is granted. The Company’s stock options typically vest on a
graded schedule, typically in equal, one-third increments, although the
respective stock option committees have the discretion to impose different
vesting periods or modify existing vesting periods. Options expire ten years
from the grant date. By their amended terms, the Plans will expire in June 2013
after which no options may be granted.
A summary
of the current year stock option activity as of and for the six months ended
June 30, 2008 is presented below:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Options
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at beginning of period
|
|
|
1,295,426 |
|
|
$ |
19.04 |
|
|
|
- |
|
|
|
- |
|
Granted
|
|
|
74,957 |
|
|
|
17.15 |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(20,000 |
) |
|
|
24.04 |
|
|
|
- |
|
|
|
- |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at end of period
|
|
|
1,350,383 |
|
|
$ |
18.86 |
|
|
7.5
yrs.
|
|
|
$ |
(9,512,414 |
) |
Exercisable
at end of period
|
|
|
542,750 |
|
|
$ |
10.20 |
|
|
7.0
yrs.
|
|
|
$ |
(782,787 |
) |
A summary
of the status of the Company’s nonvested shares as of June 30, 2008, and for the
six months ended June 30, 2008, is presented below:
Nonvested
Shares
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair
Value
|
|
Nonvested
at January 1, 2008
|
|
|
782,676 |
|
|
$ |
10.43 |
|
Granted
|
|
|
74,957 |
|
|
|
6.49 |
|
Vested
|
|
|
(30,000 |
) |
|
|
6.54 |
|
Forfeited
|
|
|
(20,000 |
) |
|
|
24.04 |
|
Nonvested
at June 30, 2008
|
|
|
807,633 |
|
|
$ |
10.20 |
|
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 six months ended June 30,
2008 and 2007, the Company recognized share-based compensation for all current
award grants and for the unvested portion of previous award grants based on
grant date fair values. Prior to fiscal 2006, the Company accounted for
share-based awards under the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, but applied APB No. 25 and related interpretations in
accounting for the Plans, which resulted in pro-forma compensation expense only
for stock option awards. Prior period financial statements have not been
adjusted to reflect fair value share-based compensation expense under SFAS
123R. With the adoption of SFAS 123R, the Company changed its method
of expense attribution for fair value share-based compensation from the
straight-line approach to the accelerated approach for all awards granted. The
Company anticipates the accelerated method will provide a more meaningful
measure of costs incurred and be most representative of the economic reality
associated with unvested stock options outstanding. Unrecognized costs related
to all share-based awards outstanding at June 30, 2008 is approximately $3.9
million and is expected to be recognized over a weighted average period of 1.18
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 each quarter were as follows:
|
|
Three
Months
Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Expected
volatility
|
|
|
55.1 |
% |
|
|
37.8 |
% |
Expected
dividends
|
|
|
- |
|
|
|
- |
|
Expected
life (in years)
|
|
|
|
|
|
|
|
|
Directors’
Plan
|
|
|
2.5 |
|
|
|
2.5 |
|
Executive
Plan
|
|
|
4.5 |
|
|
|
8.3 |
|
Employee
Plan
|
|
|
3.1 |
|
|
|
3.1 |
|
Weighted
average risk free rate
|
|
|
1.9 |
% |
|
|
4.5 |
% |
Weighted
average grant date fair value per share of options granted
|
|
$ |
4.77 |
|
|
$ |
7.66 |
|
Total
intrinsic value of options exercised
|
|
|
- |
|
|
$ |
465,471 |
|
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
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Casino
|
|
$ |
20,490 |
|
|
$ |
21,285 |
|
|
$ |
40,970 |
|
|
$ |
35,974 |
|
Food
and beverage
|
|
|
18,816 |
|
|
|
11,972 |
|
|
|
35,583 |
|
|
|
23,591 |
|
Hotel
|
|
|
9,520 |
|
|
|
9,152 |
|
|
|
20,117 |
|
|
|
18,058 |
|
Selling,
general and administrative
|
|
|
536,002 |
|
|
|
529,725 |
|
|
|
1,053,229 |
|
|
|
994,395 |
|
Total
stock-based compensation, before taxes
|
|
|
584,828 |
|
|
|
572,134 |
|
|
|
1,149,899 |
|
|
|
1,072,018 |
|
Tax
benefit
|
|
|
(204,689 |
) |
|
|
(200,247 |
) |
|
|
(402,464 |
) |
|
|
(375,206 |
) |
Total
stock-based compensation, net of tax
|
|
$ |
380,139 |
|
|
$ |
371,887 |
|
|
$ |
747,435 |
|
|
$ |
696,812 |
|
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 June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
Basic
|
|
|
17,189 |
|
|
$ |
0.16 |
|
|
|
19,092 |
|
|
$ |
0.36 |
|
Effect
of dilutive stock options
|
|
|
64 |
|
|
|
- |
|
|
|
274 |
|
|
|
- |
|
Diluted
|
|
|
17,253 |
|
|
$ |
0.16 |
|
|
|
19,366 |
|
|
$ |
0.36 |
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
|
Shares
|
|
|
Per
Share Amount
|
|
Basic
|
|
|
17,803 |
|
|
$ |
0.29 |
|
|
|
19,081 |
|
|
$ |
0.65 |
|
Effect
of dilutive stock options
|
|
|
96 |
|
|
|
- |
|
|
|
264 |
|
|
|
(0.01 |
) |
Diluted
|
|
|
17,899 |
|
|
$ |
0.29 |
|
|
|
19,345 |
|
|
$ |
0.64 |
|
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 U.S. GAAP 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 FAS 157-2, which defers the effective date of SFAS 157 for
non-financial 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 after November 15, 2008, and interim periods within those fiscal
years. We are evaluating SFAS 157 as it relates to non-financial 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. The adoption of
SFAS No. 141 (revised) is prospective and early adoption is not
permitted.
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.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”, which identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles. SFAS 162 will become effective
sixty days following the Securities and Exchange Commission’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of the provisions of SFAS 162 is not
anticipated to materially impact 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 the
Company’s 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 and storage space and paid rent of approximately $67,900 and $168,600
plus common area expenses for the three and six months ended June 30, 2008,
respectively, and approximately $31,700 and $61,400 plus common area expenses
for the three and six months ended June 30, 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 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 June 30, 2008 and 2007.
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, and subsequently
renewed on June 15, 2007 for a monthly lease of $1,060. The Company paid $3,200
and $6,400 for the leased sign at the Shopping Center for the three and six
months ended June 30, 2008, respectively, and paid $3,060 and $6,060 for the
three and six months ended June 30, 2007, respectively.
The
Company is currently leasing billboard advertising space from affiliates of its
controlling stockholders and paid $21,000 for each of the three and six months
ended June 30, 2008, and paid $21,000 for the three and six months ended June
30, 2007, respectively.
On
December 24, 2007, the Company entered into a lease with Triple “J” Plus, LLC
(“Triple J”) for the use of a facility on 2.3 acres of land (jointly the
“Property”) across Virginia Street from the Atlantis that the Company currently
utilizes for storage. The managing partner of Triple J is a
first-cousin of John and Bob Farahi, the Company’s Chief Executive Officer and
President, respectively. The term of the lease is two years requiring
monthly rental payments of $20,256. 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 U.S. GAAP , 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 June 30, 2008, the Company had no assets that are
required to be measured at fair value on a recurring basis.
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, tourists and conventioneers, emphasizing
slot machine play in our casino. We capitalize on the Atlantis' location for
locals, tour and travel visitors and conventioneers by offering exceptional
service, value and an appealing theme to our guests. Our hands-on management
style focuses on customer service and cost efficiencies.
Unless
otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch
Casino & Resort, Inc. and its Golden Road subsidiary.
OPERATING RESULTS
SUMMARY
Below is
a summary of our second quarter results for 2008 and 2007:
Amounts in millions,
except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
|
|
|
Ended
June 30,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)/Increase
|
|
Casino
revenues
|
|
$ |
25.7 |
|
|
$ |
29.3 |
|
|
|
(12.3 |
) |
Food
and beverage revenues
|
|
|
9.6 |
|
|
|
10.6 |
|
|
|
(9.4 |
) |
Hotel
revenues
|
|
|
5.6 |
|
|
|
7.0 |
|
|
|
(20.0 |
) |
Other
revenues
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
(7.7 |
) |
Net
revenues
|
|
|
35.3 |
|
|
|
41.6 |
|
|
|
(15.1 |
) |
Sales,
general and admin expense
|
|
|
12.9 |
|
|
|
12.8 |
|
|
|
0.8 |
|
Income
from operations
|
|
|
4.4 |
|
|
|
10.1 |
|
|
|
(56.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
2.8 |
|
|
|
6.9 |
|
|
|
(59.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted
|
|
|
0.16 |
|
|
|
0.36 |
|
|
|
(55.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
12.5 |
% |
|
|
24.3 |
% |
|
(11.8
|
)
pts. |
|
|
Six
Months
|
|
|
|
|
|
|
Ended
June 30,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)/Increase
|
|
Casino
revenues
|
|
$ |
49.4 |
|
|
$ |
54.6 |
|
|
|
(9.5 |
) |
Food
and beverage revenues
|
|
|
19.3 |
|
|
|
21.1 |
|
|
|
(8.5 |
) |
Hotel
revenues
|
|
|
11.4 |
|
|
|
13.9 |
|
|
|
(18.0 |
) |
Other
revenues
|
|
|
2.4 |
|
|
|
2.5 |
|
|
|
(4.0 |
) |
Net
revenues
|
|
|
69.6 |
|
|
|
79.3 |
|
|
|
(12.2 |
) |
Sales,
general and admin expense
|
|
|
26.0 |
|
|
|
24.3 |
|
|
|
7.0 |
|
Income
from operations
|
|
|
7.7 |
|
|
|
18.3 |
|
|
|
(57.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
5.1 |
|
|
|
12.4 |
|
|
|
(58.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted
|
|
|
0.29 |
|
|
|
0.64 |
|
|
|
(54.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
11.1 |
% |
|
|
23.1 |
% |
|
(12.0
|
)
pts. |
Our
results for the three months ended June 30, 2008 reflect the effects of the
challenging operating environment that we also experienced in the three month
periods ended December 31, 2007 and March 31, 2008. As in many other areas
around the country, the economic slowdown in northern Nevada in the fourth
quarter of 2007 accelerated in the first and second quarters of 2008. Other
factors causing negative financial impact that continued from the fourth quarter
of 2007 were disruption from construction related to our $50 million expansion
project (see “COMMITMENTS AND CONTINGENCIES” below) and aggressive marketing
programs by our competitors. Consistent with the fourth quarter of 2007 and the
first quarter of 2008, we increased marketing and promotional expenditures to
attract and retain guests in response to these challenges. 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 12.3%, 9.4% and 20.0% in our casino, food and beverage and hotel
revenues, respectively, resulting in a net revenue decrease of
15.1%.
|
|
·
|
A
decrease in our second quarter 2008 operating margin by 11.8 points or
48.6%.
|
CAPITAL SPENDING AND
DEVELOPMENT
Capital
expenditures at the Atlantis totaled approximately $41.1 and $5.3 million
during the first six months of 2008 and 2007, respectively. During
the six months ended June 30, 2008, our capital expenditures consisted primarily
of construction costs associated with our $50 million expansion project and the
Atlantis Convention Center Skybridge project (see additional discussion of these
projects under “COMMITMENTS AND CONTINGENCIES” below). Additional
capital expenditures during the six months ended June 30, 2008 were for
acquisition of land to be used for administrative offices, acquisition of gaming
equipment to upgrade and replace existing equipment and continued renovation and
upgrades to the Atlantis facility. During the six months ended June
30, 2007, our capital expenditures consisted primarily of construction costs
associated with the current expansion phase of the Atlantis that commenced in
June 2007 and the acquisition of gaming equipment to upgrade and replace
existing gaming equipment
Future
cash needed to finance ongoing maintenance capital spending is expected to be
made available from operating cash flow and 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 national, regional and local economic
conditions, 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, the 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 June 30, 2008 and
2007
For the
three-month period ended June 30, 2008, our net income was $2.8 million, or
$0.16 per diluted share, on net revenues of $35.3 million, a decrease from net
income of $6.9 million, or $0.36 per diluted share, on net revenues of $41.6
million for the three months ended June 30, 2007. Income from operations for the
three months ended June 30, 2008 totaled $4.4 million, a 56.4% decrease when
compared to $10.1 million for the same period in 2007. Net revenues
decreased 15.1%, and net income decreased 59.4%, when compared to last year's
second quarter.
Casino
revenues totaled $25.7 million in the second quarter of 2008, a 12.3% decrease
from $29.3 million in the second quarter of 2007, which was primarily due to
decreases in slot, table games, poker and keno revenues. Casino
operating expenses amounted to 36.1% of casino revenues in the second quarter of
2008, compared to 31.7% in the second quarter of 2007; the increase was due
primarily due to the decreased casino revenue.
Food and
beverage revenues totaled $9.6 million in the second quarter of 2008, a 9.4%
decrease from $10.6 million in the second quarter of 2007, due primarily to a
15.4% decrease in covers served partially offset by a 6.5% increase in the
average revenue per cover. Food and beverage operating expenses
amounted to 48.3% of food and beverage revenues during the second quarter of
2008 as compared to 46.1% for the second quarter of 2007. This
increase was primarily the result of the lower revenue combined with increased
food commodity and labor costs.
Hotel
revenues were $5.6 million for the second quarter of 2008, a decrease of 20.0%
from the $7.0 million reported in the 2007 second quarter. This
decrease was the result of decreases in both the average daily room rate (“ADR”)
and hotel occupancy. Both second quarters' 2008 and 2007 revenues
also included a $3 per occupied room energy surcharge. During the second quarter
of 2008, the Atlantis experienced an 86.5% occupancy rate, as compared to 97.0%
during the same period in 2007. The Atlantis' ADR was $64.08 in the second
quarter of 2008 compared to $72.47 in the second quarter of
2007. Hotel operating expenses as a percent of hotel revenues
increased to 35.5% in the 2008 second quarter, compared to 30.1% in the 2007
second quarter. The lower margin is primarily due to the decreases in occupancy
and ADR combined with higher payroll and benefit expenses and higher direct
operating costs.
Promotional
allowances were $6.6 million in both the second quarter of 2008 and the second
quarter of 2007. Promotional allowances as a percentage of gross
revenues increased to 15.7% during the second quarter of 2008 from 13.7% in the
second quarter of 2007. This increase was primarily the result of
increased promotional and discount programs in response to the challenging
economic environment and ongoing competitor promotional and discount
programs.
Depreciation
and amortization expense was $1.9 million in the second quarter of 2008 as
compared to $2.1 million for the second quarter of 2007. This
decrease is primarily attributable to assets that became fully depreciated
during the period.
SG&A
expense totaled $12.9 million in the second quarter of 2008, a .8% increase from
$12.8 million in the second quarter of 2007. The slight increase was primarily
due to increased rental expense partially offset by decreased payroll and
benefits expense. SG&A expense as a percentage of net revenues
increased to 36.4% for the second quarter of 2008 as compared to 30.8% in the
second quarter of 2007. This increase is the result of the decrease
in net revenue.
Through
June 30, 2008, we drew $34 million from our $50 million credit facility to pay
for share repurchases and to fund ongoing capital projects. As a
result of this borrowing activity, we incurred interest expense of $131 thousand
during the quarter, an increase of $128 thousand when compared to the same
quarter of the prior year. We used our invested cash reserves during
the quarter to fund the $50 million expansion project and share repurchases
resulting in a decrease in interest income from the $474 thousand reported in
the second quarter of 2007 to $46 thousand in the current
quarter.
Comparison of Operating
Results for the Six-Month Periods Ended June 30, 2008 and 2007.
For the
six months ended June 30, 2008, our net income was $5.1 million, or $0.29 per
diluted share, on net revenues of $69.6 million, a decrease from net income of
$12.4 million, or $0.64 per diluted share, on net revenues of $79.3 million
during the six months ended June 30, 2007. Income from operations for the 2008
six-month period totaled $7.7 million, compared to $18.3 million for the same
period in 2007. Net revenues decreased 12.2%, and net income decreased 58.9%
when compared to the six-month period ended June 30, 2007.
Casino
revenues for the first six months of 2008 totaled $49.4 million, a 9.5% decrease
from $54.6 million for the first six months of 2007. Casino operating
expenses amounted to 36.4% of casino revenues for the six months ended June 30,
2008, compared to 32.5% for the same period in 2007, the increase was primarily
due to the decreased casino revenue combined with decreased payroll and
benefit expenses offset by increased direct departmental expenses.
Food and
beverage revenues totaled $19.3 million for the six months ended June 30, 2008,
a decrease of 8.5% from the $21.1 million for the six months ended June 30,
2007, due to an approximate 13.5% decrease in the number of covers served
partially offset by a 6.2% increase in the average revenue per
cover. Food and beverage operating expenses amounted to 48.1% of food
and beverage revenues during the 2008 six-month period, an increase when
compared to 46.7% for the same period in 2007. This increase was
primarily the result of the lower revenue combined with increased food commodity
and labor costs.
Hotel
revenues for the first six months of 2008 decreased 18.0% to $11.4 million
from $13.9 million for the first six months of 2007, primarily due to decreases
in the occupancy and ADR at the Atlantis. Hotel revenues for the
entire first six months of 2008 and 2007 also include a $3 per occupied room
energy surcharge. The Atlantis experienced a decrease in the ADR during the 2008
six-month period to $66.29, compared to $72.23 for the same period in
2007. The occupancy rate decreased to 86.1% for the six-month period
in 2008, from 96.3% for the same period in 2007. Hotel operating
expenses in the first six months of 2008 were 35.8% of hotel revenues, an
increase compared to 30.7% for the same period in 2007. The increase was
primarily due to the decreased revenues.
Promotional
allowances increased to $12.9 million in the first six months of 2008 compared
to $12.6 million in the same period of 2007. Promotional allowances
as a percentage of gross revenues increased to 15.6% for the first six months of
2008 compared to 13.7% for the same period in 2007. This increase was
primarily the result of increased promotional and discount programs in response
to the challenging economic environment and ongoing competitor promotional and
discount programs.
Depreciation
and amortization expense was $3.9 million in the first six months of 2008, a
decrease of 4.9% compared to $4.1 million in the same period last year. This
decrease is primarily attributable to assets that became fully depreciated
during the period.
SG&A
expenses increase 7.0% to $26.0 million in the first six months of 2008,
compared to $24.3 million in the first six months of 2007, primarily as a result
of increased payroll and benefit costs, increased rental expense and increased
bad debt expense. As a percentage of net revenue, SG&A expenses
increased to 37.3% in the 2008 six-month period from 30.7% in the same period in
2007.
Net
interest income for the first six months of 2008 totaled $162,000, compared to
$665,000 for the same period of the prior year. The difference reflects our
reduction in interest bearing cash and cash equivalents, combined with increased
debt outstanding (see "THE CREDIT FACILITY" below), during the first six months
of 2008 as compared to same period in 2007.
LIQUIDITY AND CAPITAL
RESOURCES
For the
six months ended June 30, 2008, net cash provided by operating activities
totaled $14.2 million, a decrease of 26.2% compared to the same period last
year. Net cash used in investing activities totaled $39.7 million and $5.3
million in the six months ended June 30, 2008 and 2007,
respectively. During the first six 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 six months of 2007, net
cash used in investing activities consisted primarily of construction costs
associated with the current expansion of the Atlantis and the acquisition of
gaming equipment to upgrade and replace existing gaming equipment. Net cash used
in financing activities totaled $1.7 million for the first six months of 2008
compared to net cash provided by financing activities of $453,037 for the same
period in 2007. Net cash used in financing activities for the first six months
of 2008 was due to our $35.7 million purchase of Monarch common stock pursuant
to the Repurchase Plan offset by $34.0 million in credit line draws under the
Credit Facility (see “COMMITMENTS AND CONTINGENCIES” below). Net cash
provided by financing activities for the first six months of 2007 was due to
proceeds from the exercise of stock options and the tax benefits associated with
such stock option exercises. At June 30, 2008, we had a cash and cash
equivalents balance of $11.7 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) 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 June 30, 2008, we had $34
million outstanding on the Credit Facility and had $16 million available to be
drawn under the Credit Facility. We plan to amend the Credit Facility
to extend its maturity beyond April 18, 2009. Such an amendment will
likely result in the amendment of other material provisions of the Credit
Facility, such as the interest rate charged and other material
covenants. In the event that we are not able to come to mutually
acceptable terms with the Credit Facility lender, we believe that the strength
of our balance sheet, combined with our operating cash flow, will provide the
basis for a successful refinancing of the Credit Facility with an alternative
lender. However, there is no assurance that we will be able to reach
acceptable terms for a Credit Facility amendment or refinancing.
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 $150,000 in lease payments
for the leased driveway space at the Shopping Center during the six months ended
June 30, 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 northern Nevada and our feeder markets, like many other areas around
the country, are experiencing the effects of several negative macroeconomic
trends, including a possible broad economic recession, higher fuel prices, home
mortgage defaults, higher mortgage interest rates and declining residential real
estate values. These negative trends could adversely impact
discretionary incomes of our target customers, which, in turn could adversely
impact our business. We believe that as recessionary pressures
increase or continue for an extended period of time, target customers may
further curtail discretionary spending for leisure activities and businesses may
reduce spending for conventions and meetings, both of which would adversely
impact our business. Management continues to monitor these trends and
intends, as appropriate, to adopt operating strategies to attempt to mitigate
the effects of such adverse conditions. We can make no assurances
that such strategies will be effective.
As
discussed below in “COMMITMENTS AND CONTINGENCIES” we commenced construction on
an expansion project to the Atlantis, and skybridge to the Reno-Sparks
Convention Center, in the second quarter of 2007. While most of the
expansion was completed in July 2008, construction of the spa facilities is
expected to continue through the third quarter of 2008, construction of the
skybridge is expected to continue through the fourth quarter of 2008 and various
remodeling of the pre-expansion facilities are expected to continue into the
first half of 2009. During the construction period, there could be
disruption to our operations from various construction activities. In
addition, the construction activity may make it inconvenient for our patrons to
access certain locations and amenities at the Atlantis which may in turn cause
certain patrons to patronize other Reno area casinos rather than deal with
construction-related inconveniences. As a result, our business and
our results of operations may be adversely impacted so long as we are
experiencing construction related operational disruption.
The
constitutional amendment approved by California voters in 1999 allowing the
expansion of 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
norther Nevada residents as well.
Higher
fuel costs may deter California and other drive-in customers from coming to the
Atlantis
We also
believe that unlimited land-based casino gaming in or near any major
metropolitan area in the Atlantis' key feeder market areas, such as San
Francisco or Sacramento, could have a material adverse effect on our
business.
Other
factors that may impact current and future results are set forth in detail in
Part II - Item 1A “Risk Factors” of this Form 10-Q and in Item 1A “Risk Factors”
of our 2007 Form 10-K.
COMMITMENTS AND
CONTINGENCIES
Our
contractual cash obligations as of June 30, 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)
|
|
$ |
4,527,000 |
|
|
$ |
613,000 |
|
|
$ |
862,000 |
|
|
$ |
740,000 |
|
|
$ |
2,312,000 |
|
Current
maturities of borrowings under credit facility (2)
|
|
|
34,000,000 |
|
|
|
34,000,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchase
obligations (3)
|
|
|
27,003,000 |
|
|
|
27,003,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
contractual cash obligations
|
|
$ |
65,530,000 |
|
|
$ |
61,616,000 |
|
|
$ |
862,000 |
|
|
$ |
740,000 |
|
|
$ |
2,312,000 |
|
(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) The
amount represents outstanding draws against the Credit Facility as of June 30,
2008.
(3) Our
open purchase order and construction commitments total approximately $27.0
million. Of the total purchase order and construction commitments,
approximately $2.0 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 did not obligate us to acquire any
particular amount of common stock.
On March
11, 2008, our Board increased its initial authorization by 1 million shares and
on April 22, 2008, the Board increased its authorization a third time by 1
million shares which increased the shares authorized to be repurchased to a
total of three million shares. During the second quarter of
2008, we purchased 1,749,096 shares of the Company’s common stock pursuant to
the Repurchase Plan at a weighted average purchase price of $13.59 per share,
which increased the total number of shares purchased pursuant to the Repurchase
Plan to 3,000,000 at a weighted average purchase price of $16.52 per
share. As of June 30, 2008, the Company had purchased all shares
under the three million share Repurchase Plan authorization.
We began
construction in the second quarter of 2007 on the next expansion phase of the
Atlantis (the “Expansion”). The Expansion impacts the first floor
casino level, the second and third floors and the basement level by adding
approximately 116,000 square feet. The project adds over 10,000 square feet to
the existing casino, or approximately 20%. The Expansion
includes a redesigned, updated and expanded race and sports book of
approximately 4,000 square feet, an enlarged poker room and a Manhattan deli
restaurant. The second floor expansion creates additional ballroom
and convention space of approximately 27,000 square feet. The spa and
fitness center will be remodeled and expanded to create an ultra-modern spa and
fitness center facility. We opened the Expansion in July 2008 with
the exception of the spa facilities which we expect to open in the fourth
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 June 30, 2008, the Company paid approximately $53.5
million of the estimated Expansion and skybridge cost.
We
believe that our 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 (the “Court”) ruled that
complimentary meals provided to employees and patrons are not subject to Nevada
use tax. On April 15, 2008, the Department of Taxation filed a motion for
rehearing of the Supreme Court’s decision. On July 17, 2008, the
Court denied the petition of the Department of Taxation. The
Governor’s office of the State of Nevada has indicated that it intends to work
with the Nevada legislature to change the law to require that such meals are
subject to Nevada use tax and to prevent the refund of any use tax paid on
complimentary meals prior to the effective date of this new law. The
Company is evaluating the Court’s ruling and pending action by the Governor’s
office. Accordingly, we have not recorded a receivable for a refund
for previously paid use tax on complimentary employee and patron meals in the
accompanying consolidated balance sheet at June 30,
2008.
THE CREDIT
FACILITY
On
February 20, 2004, our 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. Our leverage ratio
during the three months ended June 30, 2008 was such that the pricing for
borrowings was the Base Rate plus 0.00 percent or LIBOR plus 1.00
percent. We selected the LIBOR plus 1.00 option for all of the
borrowings during the three months ended June 30, 2008. We paid
various one-time fees and other loan costs upon the closing of the refinancing
of the Credit Facility that will be amortized over the term of the Credit
Facility using the straight-line method.
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.
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. 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 to increase
the available borrowings from $5 million to $50 million and to extend the
maturity date from February 23, 2009 to April 18, 2009. At June 30,
2008, $34 million was outstanding on the Credit Facility, and $16 million was
available to be drawn under the Credit Facility. We intend to
renegotiate or refinance the Credit Facility to extend its maturity behond April
18, 2009, which will likely result in the amendment of other material provisions
of the Credit Facility, such as the interest rate charged and other material
covenants. There is no assurance that we will be able to reach
acceptable terms for a Credit Facility amendment or refinancing.
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 June 30, 2008, that
are subject to market risks.
The
interest rate on borrowings under our Credit Facility at June 30, 2008 is LIBOR
plus 1%. A one-point increase in interest rates would have had
increased interest expense in the second quarter of 2008 by
$32,000.
Disclosure Controls and
Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, (the
"Evaluation Date"), an evaluation was carried out by our management, with the
participation of our Chief Executive Officer and our Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined by Rule
13a-15(e) under the Securities Exchange Act of 1934). Based upon the evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Changes in Internal Control
over Financial Reporting
No
changes were made to our internal control over financial reporting (as defined
by Rule 13a-15(e) under the Securities Exchange Act of 1934) during the last
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II – OTHER
INFORMATION
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 for the year ended December 31, 2007. The following
information represents material changes to those risk factors during the six
months ended June 30, 2008.
LIMITATIONS
OR RESTRICTIONS ON THE CREDIT FACILITY COULD HAVE A MATERIAL ADVERSE AFFECT ON
OUR LIQUIDITY
We intend
to renegotiate or refinance the Credit Facility to extend its maturity beyond
April 18, 2009. Any such renegotiation or refinancing will likely
result in the amendment of other material provisions of the Credit Agreement,
such as the interest rate charged an other material covenants. The
Credit Facility is an important component of our liquidity. Any
material restriction on our ability to use the Credit Facility, or the failure
to obtain a new credit facility upon the maturity of the existing Credit
Facility could adversely impact our operations and future growth
options.
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 repurchased three million shares of our common
stock. As of June 30, 2008, no shares remain under the three million
share Repurchase Plan authorization.
The
following table summarizes the repurchases made during the three month period
ended June 30, 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
|
|
April
1, 2008 through April 30, 2008
|
|
|
60,769 |
|
|
$ |
13.06 |
|
|
|
60,769 |
|
|
|
1,688,327 |
|
May
1, 2008 through May 31, 2008
|
|
|
951,417 |
|
|
$ |
13.92 |
|
|
|
951,417 |
|
|
|
736,910 |
|
June
1, 2008 through June 30, 2008
|
|
|
736,910 |
|
|
$ |
13.20 |
|
|
|
736,910 |
|
|
|
- |
|
(1) All
shares were purchased pursuant to the Repurchase Plan discussed
above.
On June
18, 2008, our Annual Meeting of Stockholders was held. The following directors
were re-elected to two-year terms and the votes received were as
follows:
Director
|
|
Votes
Received
|
|
|
Votes
Withheld
|
|
John
Farahi
|
|
|
13,024,965 |
|
|
|
3,993,925 |
|
Charles
W. Scharer
|
|
|
14,407,843 |
|
|
|
2,611,047 |
|
Craig
F. Sullivan
|
|
|
14,407,841 |
|
|
|
2,611,049 |
|
Abstentions
are effectively treated as votes withheld. The following directors were not up
for election, but their terms continue until the 2009 Annual Meeting of
Stockholders: Bob Farahi and Ronald R. Zideck.
Exhibit
No
|
|
Description
|
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.
|
|
|
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
|
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: August
7, 2008
|
By:
/s/ RONALD ROWAN
|
|
Ronald Rowan,
Chief Financial Officer
|
|
and
Treasurer (Principal Financial
|
|
Officer
and Duly Authorized Officer)
|