Monarch Casino & Resort (MCRI)

 

        Recently, the residential real estate market in Reno and the U.S. has experienced a significant downturn due to declining real estate values, substantially reducing mortgage loan originations and securitizations, and precipitating more generalized credit market dislocations and a significant contraction in available liquidity globally. These factors, combined with rising oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and fears of a possible recession. Individual consumers are experiencing higher delinquency rates on various consumer loans and defaults on indebtedness of all kinds have increased. Further declines in real estate values in Reno and the U.S. or elsewhere and continuing credit and liquidity concerns could have an adverse affect on our results of operations.

 

CONSTRUCTION RELATED DISRUPTIONS TO OUR BUSINESS COULD IMPACT OUR BUSINESS OPERATIONS

As discussed above in “Item 1. Business - The Atlantis Casino Resort Spa” we commenced construction on an expansion project to the Atlantis in the second quarter of 2007. The expected construction period of twelve months will continue into the second quarter of 2008.  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 GAMING INDUSTRY IS HIGHLY COMPETITIVE AND INCREASED COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE OPERATIONS

The gaming industry is highly competitive.  As competitive pressures from California Native American casinos increase, other Reno area casinos may intensify their targeting of the Reno area resident market, which is one of our key markets.  Increased competitive pressures in the local market could adversely impact our ability to continue to attract local residents to the Atlantis or require us to use more expensive and therefore less profitable promotions to compete more efficiently.

Several Native American casinos have opened in Northern California since passage of the 2000 constitutional amendment. Certain experienced Nevada gaming operators manage Indian casino facilities near Sacramento, one of Reno's key feeder markets.  One major facility near Sacramento has been operating since June 2003 and has been very successful, adversely impacting many hotel casinos in Reno. Central and Northern California gaming facilities could provide an alternative to Reno area casinos, especially during certain winter periods when auto travel through the Sierra Nevada mountain passes is hampered. This loss of California drive-in guests could adversely affect our operations.

We also believe that the legalization of 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 impact on our business.

In June 2004, five California Indian tribes signed compacts with the state that allow the tribes to increase the number of slot machines beyond the previous 2,000-per-tribe limit in exchange for higher fees from each of the five tribes.  In February 2008, the voters of the State of California approved compacts with four tribes located in Southern California that increase the limit of Native American operated slot machines in the State of California.

Other states are also considering legislation that would enable the development and operation of casinos or casino-like operations.

In addition, Native American gaming facilities in California and other jurisdictions in some instances operate under regulatory requirements less stringent than those imposed on Nevada licensed casinos, which could provide them a competitive advantage in our markets.  Moreover, increases in the popularity of, and competition from, Internet and other account wagering gaming services, which allow their guests to wager on a wide variety of sporting events and play Las Vegas-style casino games from home, could have a material adverse effect on our business, financial condition, operating results and prospects.

OUR BUSINESS MAY BE ADVERSELY IMPACTED BY THE ENTRY OF STATION CASINOS IN THE RENO MARKET

Station Casinos, Inc., a casino operator operating primarily in the Las Vegas market and catering mainly to Las Vegas area residents, has acquired several parcels in the Reno area and has announced plans to build two casinos, one of which will be located within one mile of our Atlantis Casino Resort Spa. Station Casinos is the dominant casino operator catering to local residents in the Las Vegas market. Should Station Casinos proceed with its plans, it will create additional competition for us in the Reno area resident, conventioneer and tour and travel markets and could have a material adverse impact on our business.

COST OVERRUNS AND DELAYS ON EXPANSION PROJECTS COULD ADVERSELY AFFECT OUR BUSINESS

We began construction in the second quarter of 2007 on the next expansion phase of the Atlantis. A variety of factors outside our control, such as weather and difficulties in obtaining permits or other regulatory approvals, as well as the performance by third party contractors, may result in increased costs or delays in construction. Cost overruns or delays in completing a project could have an adverse effect on our results of operations and cash flows.

OUR BUSINESS MAY BE ADVERSELY IMPACTED IF THE RENO ECONOMY DECLINES

We market to and rely upon business from Reno area residents.  In recent years, Reno has enjoyed robust business growth and has attracted a number of technology, product distribution and marketing companies.  These businesses have created jobs and helped fuel residential development, including the southwest Reno metropolitan area near the Atlantis.  Should there be adverse changes in the business and employment conditions in Reno, our business could be adversely impacted.

OUR BUSINESS MAY BE ADVERSELY IMPACTED BY EXPANDED NATIVE AMERICAN GAMING OPERATIONS IN CALIFORNIA AND THE PACIFIC NORTHWEST

A large source of leisure traveler guests is California and the Pacific Northwest, including a large number who drive to Reno from the San Francisco and Sacramento metropolitan areas.  Several large-scale Native American-owned casino facilities have commenced operations in that state, some of which are located close to our key markets. The increased competition from these facilities could have a material adverse impact on our business.

OUR BUSINESS MAY BE ADVERSELY IMPACTED IF WE ARE UNABLE TO ADEQUATELY STAFF OUR OPERATIONS

The robust business growth Reno has enjoyed in recent years has increased the competition for employees.  The new and growing businesses in the area have created job opportunities that at times have exceeded the area’s supply of qualified employees.  The unemployment rate in the Reno area has been significantly lower than the national average over the last several years.  If we are unable to attract and retain qualified employees, or if competition for employees results in materially increased wages, our ability to maintain and grow our business could be adversely impacted.

OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WEAKENED ECONOMIC CONDITIONS IN CALIFORNIA AND THE PACIFIC NORTHWEST

Because California and the Pacific Northwest are significant markets for our leisure traveler and conventioneer guests, our business may be adversely impacted in the event of weakened economic conditions in those geographical markets.

OUR BUSINESS MAY BE ADVERSELY IMPACTED BY DOMESTIC AND INTERNATIONAL EVENTS

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 conflict 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.

AN OUTBREAK OF HIGHLY INFECTIOUS DISEASE COULD ADVERSELY AFFECT THE NUMBER OF VISITORS TO OUR FACILITIES AND DISRUPT OUR OPERATIONS, RESULTING IN A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS

There have been recent fears concerning the spread of an “avian flu” and cruise ships have reported other highly infectious virus outbreaks. Potential future outbreaks of highly infectious diseases may adversely affect the number of visitors to our property and our business and prospects. Furthermore, an outbreak might disrupt our ability to adequately staff our business and could generally disrupt our operations. If any of our guests or employees is suspected of having contracted certain highly contagious diseases, we may be required to quarantine these customrs or employees or the affected areas of our facilities and temporarily suspend part or all of our operations at affected facilities. Any new outbreak of such a highly infectious disease could have a material adverse effect on our financial condition, results of operations and cash flows.

FAILURE OF THE RENO-SPARKS CONVENTION CENTER TO BOOK AND ATTRACT CONVENTION BUSINESS COULD ADVERSELY IMPACT OUR BUSINESS

The Atlantis is the closest hotel-casino to the Reno-Sparks Convention Center. If the Reno-Sparks Convention Center does not succeed in booking the anticipated level of conventions, our future results of operations could be adversely impacted.

BECAUSE WE ARE CURRENTLY DEPENDENT UPON A SINGLE PROPERTY IN A SINGLE MARKET FOR ALL OF OUR CASH FLOW, WE ARE SUBJECT TO GREATER RISKS THAN A GAMING COMPANY WITH MORE OPERATING PROPERTIES OR THAT OPERATES IN MORE MARKETS

We currently do not have material assets or operations other than the Atlantis. As a result, we are entirely dependent upon the Atlantis property for all of our cash flow until we develop other properties.

OUR ABILITY TO INCREASE REVENUES IS LIMITED UNTIL MATERIAL EXPANSION OF OUR OPERATIONS OCCURS

We are solely dependent on our single operation, the Atlantis.  Our ability to materially increase revenues and other operating results is limited by capacity constraints at the Atlantis.  While an expansion is currently underway, our ability to produce material increases in revenues is relatively limited, unless we complete a material expansion of the Atlantis, open or acquire another hotel-casino, or acquire or combine with another hotel-casino company.

OUR BUSINESS IS SUBJECT TO RESTRICTIONS AND LIMITATIONS IMPOSED BY GAMING REGULATORY AUTHORITIES THAT COULD ADVERSELY AFFECT US

The ownership and operation of casino gaming facilities are subject to extensive state and local regulation.  The State of Nevada and the applicable local authorities require various licenses, registrations, permits and approvals to be held by us and our subsidiary.  The Nevada Gaming Commission may, among other things, limit, condition, suspend, revoke or decline to renew a license or approval to own the stock of our Nevada subsidiary for any cause deemed reasonable by such licensing authority.  If we violate gaming laws or regulations, substantial fines could be levied against us, our subsidiary and the persons involved, and we could be forced to forfeit a portion of our assets.  The suspension, revocation or non-renewal of any of our licenses or the levy on us of substantial fines or forfeiture of assets would have a material adverse effect on our business, financial condition and results of operations.

To date, we have obtained all governmental licenses, findings of suitability, registrations, permits and approvals necessary for the operation of our current gaming activities.  However, gaming licenses and related approvals are deemed to be privileges under Nevada law.  We cannot assure you that our existing licenses, permits and approvals will be maintained or extended.

OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COVER ALL POSSIBLE LOSSES THAT OUR PROPERTY COULD SUFFER.  IN ADDITION, OUR INSURANCE COSTS MAY INCREASE AND WE MAY NOT BE ABLE TO OBTAIN THE SAME INSURANCE COVERAGE IN THE FUTURE

Although we have general property insurance covering damage caused by a casualty loss (such as fire and natural disasters), each such policy has certain exclusions. In addition, our property insurance is in an amount that may be less than the expected replacement cost of rebuilding the complex if there was a total loss. Our level of insurance coverage may not be adequate to cover all losses in the event of a major casualty. In addition, certain casualty events, such as labor strikes, nuclear events, acts of war, loss of income due to cancellation of room reservations or conventions due to fear of terrorism, deterioration or corrosion, insect or animal damage and pollution, might not be covered at all under our policies. Therefore, certain acts could expose us to heavy, uninsured losses.

In addition, although we currently have insurance coverage for occurrences of terrorist acts and for certain losses that could result from these acts, our terrorism coverage is subject to the same risks and deficiencies as those described above for our general property coverage. The lack of sufficient insurance for these types of acts could expose us to heavy losses in the event that any damages occur, directly or indirectly, as a result of terrorist attacks or otherwise, which could have a significant negative impact on our operations.

In addition to the damage caused to our property by a casualty loss (such as fire, natural disasters, acts of war or terrorism), we may suffer business disruption as a result of these events or be subject to claims by third parties injured or harmed. While we carry business interruption insurance and general liability insurance, this insurance may not be adequate to cover all losses in such event.

We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to reduce our policy limits or agree to certain exclusions from our coverage. Among other factors, it is possible that the situation in Iraq, homeland security concerns, other catastrophic events or any change in government legislation governing insurance coverage for acts of terrorism could materially adversely affect available insurance coverage and result in increased premiums on available coverage (which may cause us to elect to reduce our policy limits) and additional exclusions from coverage. Among other potential future adverse changes, in the future we may elect not to, or may not be able to, obtain any coverage for losses due to acts of terrorism.

Our debt instruments and other material agreements require us to maintain a certain minimum level of insurance. Failure to satisfy these requirements could result in an event of default under these debt instruments or material agreements, which would have a material adverse effect on our financial condition, results of operations or cash flows.

IF THE STATE OF NEVADA OR THE CITY OF RENO INCREASES GAMING TAXES AND FEES, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED

State and local authorities raise a significant amount of revenue through taxes and fees on gaming activities. From time to time, legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, worsening economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes.  If the State of Nevada or the City of Reno were to increase gaming taxes and fees, our results of operations could be adversely affected.  There are several gaming tax increase proposals currently circulating in Nevada.  These proposals would take the form of voter referendum.  If successfully implemented, such an increase would have a material adverse effect on our financial condition, results of operations or cash flows.

IF WE LOSE OUR KEY PERSONNEL, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED

We depend on the continued performances of John Farahi and Bob Farahi, our Chief Executive Officer and our President, respectively, and their management team.  If we lose the services of the Farahi brothers, or other senior Atlantis management personnel, and cannot replace such persons in a timely manner, our business could be materially adversely affected.

ADVERSE WINTER WEATHER CONDITIONS IN THE SIERRA NEVADA MOUNTAINS AND RENO-LAKE TAHOE AREA COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Adverse winter weather conditions, particularly snowfall, can prevent customers from traveling or make it difficult for them to drive to the Atlantis.  Adverse winter weather would most significantly affect our drive-in customers from northern California and the Pacific Northwest.  If the Reno area itself were to experience prolonged adverse winter weather conditions, our results of operations and financial condition could also be materially adversely affected.

CLAIMS HAVE BEEN BROUGHT AGAINST US AND OUR SUBSIDIARY IN VARIOUS LEGAL PROCEEDINGS, AND ADDITIONAL LEGAL AND TAX CLAIMS ARISE FROM TIME TO TIME

It is possible that our cash flows and results of operations could be affected by the resolution of legal and other claims. We believe that the ultimate disposition of current matters will not have a material impact on our financial condition or results of operations. Please see the further discussion under “Legal Proceedings” in Item 3 of this Form 10-K.

ENERGY PRICE INCREASES MAY ADVERSELY AFFECT OUR COST OF OPERATIONS AND OUR REVENUES

Our facility uses significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy or fuel have been experienced to date, substantial increases in energy and fuel prices in the United States have negatively affected and may continue to negatively affect, our operating results. The extent of the impact is subject to the magnitude and duration of the energy and fuel price increases, but this impact could be material. In addition, energy and gasoline price increases in cities that constitute a significant source of customers for our properties could result in a decline in disposable income of potential customers and a corresponding decrease in visitation and spending at our properties, which would negatively impact revenues.

CHANGES IN REGULATIONS ON LAND USE REQUIREMENTS COULD ADVERSELY IMPACT OUR BUSINESS

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.  A relaxation in such regulations could make it easier for competitors to enter our immediate market.  A tightening of such regulations could adversely impact our future expansion opportunities.

OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY HIGH-END PLAYERS' WINNINGS

Although not the major focus of our marketing efforts, we have selectively targeted high-end players since opening our newest tower in 1999. Should one or more of these high-end players win large sums in our casino, or should a material amount of credit extended to such players not be repaid, our results of operations could be adversely impacted.

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.

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 1B. UNRESOLVED STAFF COMMENTS

There were no unresolved comments from the SEC staff at the time of filing this Form 10-K.

ITEM 2. PROPERTIES

Our properties consist of:

(a)  An approximate 13-acre site in Reno, Nevada on which the Atlantis is situated, including the hotel towers, casino, restaurant facilities and surrounding parking.

(b)  An approximately 16-acre site, adjacent to the Atlantis and connected to the Atlantis by the Sky Terrace, which includes approximately 11 acres of paved parking used for customer, employee and valet parking.  The remainder of the site is undeveloped.  This site is compliant with all casino zoning requirements and is suitable and available for future expansion of the Atlantis facilities, parking, or complementary resort casino and/or entertainment amenities.  We have not determined the ultimate use of this site.

(c)  An approximate 2.6-acre site across Virginia Street from the Atlantis which is expected to be utilized as administrative offices (“the Administrative Site”) for Atlantis staff.

(d)  Leased land consisting of 37,368 square-feet next door to the Atlantis serving as a driveway entrance to the Atlantis.

(e) Leased land consisting of approximately 2.3 acres adjacent to the Administrative Site utilized for storage and administrative offices.

Our credit facility is secured by liens on all of our real property.

ITEM 3. LEGAL PROCEEDINGS>

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fourth quarter of 2007.

                                        

 

 

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)  Our common stock trades on The NASDAQ Stock Market under the symbol MCRI. The following table sets forth the high and low bid prices of our common stock, as reported by The NASDAQ Stock Market, during the periods indicated.

		2007								2006
		High				Low				High				Low
First quarter		$	27.32			$	23.18			$	29.85			$	22.44
Second quarter		$	28.93			$	24.59			$	32.97			$	25.14
Third quarter		$	31.20			$	22.00			$	28.50			$	17.50
Fourth quarter		$	31.39			$	23.50			$	25.74			$	19.45

As of March 5, 2008, there were approximately 87 holders of record of our common stock, and approximately 2,819 beneficial stockholders.

We have never paid dividends. We presently intend to retain earnings and use free cash flow to finance our operating activities, for maintenance and for expansion capital expenditures. We do not anticipate declaring cash dividends in the foreseeable future. Our bank loan agreement also contains provisions that require the achievement of certain financial ratios before we can pay or declare dividends to our stockholders. See Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5."

Securities Authorized for Issuance Under Equity Compensation Plans.  See Part III, Item 12 - Security Ownership of Certain Beneficial Owners and Management.

STOCK PERFORMANCE GRAPH

The following chart reflects the cumulative total return (change in stock price plus reinvested dividends) of a $100 investment in the Company’s Common Stock from the five-year period from January 1, 2002 through December 31, 2007, in comparison to the Standard & Poor’s 500 Composite Stock Index and an industry peer group index. The comparisons are not intended to forecast or be indicative of possible future performance of the Company’s Common Stock.

 

[Missing Graphic Reference]

Peer Group Companies: The companies included in the peer group are as follows: Ameristar Casinos, Inc; Boyd Gaming Corp.; Harrahs Entertainment, Inc.; Isle of Capri Casinos, Inc.; Las Vegas Sands Corp.; MGM Mirage; Nevada Gold & Casinos, Inc.; Penn National Gaming, Inc.; Pinnacle Entertainment, Inc.; Riviera Holdings Corp.; Station Casinos, Inc. and Wynn Resorts, Ltd.

(b)  Not applicable.

(c)  On September 28, 2006, the Company’s Board of Directors authorized a stock repurchase plan that superseded an older plan adopted in 2003 (the “Repurchase Plan”).  Under the Repurchase Plan, the Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company’s common stock in the open market or in privately negotiated transactions from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors.  The Repurchase Plan does not obligate the Company to acquire any particular amount of common stock and the plan may be suspended at any time at the Company’s discretion.

 

The following table summarizes the repurchases made during the three month period ended December 31, 2007.  All repurchases were made in the open market.

 

										(c)				(d)
										Total number of				Maximum number of
		(a)				(b)				shares purchased as				shares that may yet
		Total number of				Average price				part of publicly				be purchased under
Period		shares purchased				paid per share				announced plans				the plans
October 1, 2007 through October 31, 2007			-				-				-				-
November 1, 2007 through November 30, 2007			-				-				-				-
December 3, 2007 through December 31, 2007			523,396	(1)		$	25.03				523,396				444,492

(1) All shares were purchased pursuant to the Repurchase Plan discussed above.

      ITEM 6. SELECTED FINANCIAL DATA

Years ended December 31,

Amounts in thousands, except per share amounts

	2007				2006		2005		2004		2003
OPERATING RESULTS
Casino revenues	$ 110,259				$ 103,333		$  94,501		$  84,132		$   74,956
Other revenues	75,117				72,329		67,165		65,545		59,741
Gross revenues	185,376				175,662		161,666		149,677		134,697
Promotional allowances	(25,519)				(23,693)		(21,881)		(20,220)		(18,746)
Net revenues	159,856				151,969		139,785		129,457		115,951
Income from operations	35,688		(F1)		33,492	(F2)	33,069	(F3)	26,274	(F4)	17,209	(F5)
Income before income tax	37,464				33,860		32,056		24,689		14,572
Net income	$  24,480				$  22,080		$  21,035		$  16,526		$     9,606
INCOME PER SHARE OF COMMON STOCK (F6)
Net income per share
Basic		$     1.28			$     1.16		$      1.12		$      0.88		$       0.51
Diluted		$     1.27			$     1.15		$      1.10		$      0.88		$       0.51
Weighted average number of common shares and potential common shares outstanding
Basic		19,058		18,990			18,849		18,756		18,759
Diluted		19,329		19,275			19,094		18,815		18,825
OTHER DATA
Depreciation and amortization		$   8,138		$   8,559			$    8,379		$    9,628		$   10,797
Other income (expense)		$   1,776		$      368			$ (1,013)		$ (1,584)		$  (2,638)
Capital expenditures (F7)		$ 17,287		$ 5,795			$    6,113		$    9,710		$     8,406
BALANCE SHEET DATA
Total assets		$154,286		$138,381			$117,670		$118,339		$115,877
Current maturities of long-term debt		$            -		$            -			$            -		$            -		$    6,060
Long-term debt, less current maturities		$            -		$            -			$    8,100		$  32,400		$  41,125
Stockholders' equity (F8)		$129,419		$115,646			$  87,559		$  65,763		$  48,723

   Footnotes to Selected Financial Data:

   (F1) 2007 includes a $7 thousand gain on disposal of fixed assets

   (F2) 2006 includes a $55 thousand loss on disposal of fixed assets

   (F3) 2005 includes a $42 thousand gain on disposal of fixed assets.

   (F4) 2004 includes a $173 thousand loss on disposal of fixed assets.

   (F5) 2003 includes a $133 thousand gain on disposal of fixed assets.

   (F6) Per share data and shares outstanding prior to 2005 are adjusted to reflect a 2-for-1 stock split

       effective March 31, 2005.

   (F7) Includes amounts financed with debt or capitalized lease obligations.

   (F8) We paid no dividends during the five year period ended December 31, 2007.

                                        

 

 

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ITEM 7. 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 Spa, 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 capitalize on the Atlantis' location for tour and travel visitors, conventioneers and Locals by offering exceptional service, value and an appealing theme to our guests.  Our hands-on management style focuses on customer service and cost efficiencies.

Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch Casino & Resort, Inc. and its Golden Road subsidiary.

OPERATING RESULTS SUMMARY

During 2007, we exceeded all previously reported Company annual casino revenues, food and beverage revenues, hotel revenues, net revenues, net income and earnings per share.

Amounts in millions, except per share amounts							Percentage
							Increase / (Decrease)
		2007		2006		2005	07 vs 06	06 vs 05
Casino revenues	$110.3			$103.3		$ 94.5	6.8%	9.3%
Food and beverage revenues	42.4			41.0		38.6	3.4%	6.2%
Hotel revenues	27.9			26.4		23.9	5.7%	10.5%
Other revenues	4.9			4.9		4.7	-	4.3%
Net revenues	159.9			152.0		139.8	5.2%	8.7%
Sales, general and admin exp	50.0			46.3		38.1	8.0%	21.5%
Income from operations	35.7			33.5		33.1	6.6%	1.2%
Net income	24.5			22.1		21.0	10.9%	5.2%
Earnings per share - diluted	1.27			1.15		1.10	10.4%	4.5%
Operating margin	22.3%			22.0%		23.7%	0.3 pts	(1.7) pts

We attribute our improved results to our experienced management team, the superb location of the Atlantis in the more affluent and growing south part of Reno, the quality of our product that drives repeat business, and our ability to attract leisure travelers.

In 2007, our income from operations increased 6.6% over 2006, while our net income and earnings per diluted share increased 10.9% and 10.4%, respectively.  Significant factors that affected our 2007 results 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.

·	Net revenues in 2007 increased 5.2% over 2006 due to increases in our casino, food and beverage and hotel revenue segments, which increased 6.8%, 3.4% and 5.7%, respectively, over 2006.

·	Sales, general and administrative expenses increased 8.0% over 2006 primarily driven by:

o	higher legal expense principally related to the ongoing Kerzner litigation (see ITEM 3. LEGAL PROCEEDINGS above)

o

higher marketing and promotional expense primarily related to our efforts to mitigate the negative effects of disruption our guests experienced related to construction of our expansion project (see additional discussion below under Capital Spending and Development), aggressive marketing programs by our nearest competitor to promote the grand opening of its major expansion project and negative macroeconomic trends experienced in the Reno, our feeder markets and the nation as a whole

o	higher payroll and benefits expense primarily related to increased headcount related to our expansion project (see additional discussion below under Capital Spending and Development), higher health care benefits expense and an increase in the minimum wage

o	all partially offset by the impact of a $1.2 million non-cash charge in the second quarter of 2006, which did not recur in 2007, related to early vesting of stock options for the Company’s former Co-Chairman and Chief Financial Officer who resigned in 2006.

·

Departmental expenses related to casino, food and beverage and other revenue segments increased in 2007 over 2006 by 5.3%, 3.8% and 2.4%, respectively, primarily driven by an overall increase in commodity and supply costs combined with an increase in the minimum wage.  Expenses for the hotel segment remained flat in 2007 as compared to 2006.  Margins for the casino and hotel segments improved, while margins for food and beverage and other decreased in 2007 as compared to 2006.

CAPITAL SPENDING AND DEVELOPMENT

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

Capital expenditures at the Atlantis (including non-cash capital expenditures) totaled approximately $17.3 million, $5.8 million and $6.1 million in 2007, 2006 and 2005, respectively. During 2007 capital expenditures at the Atlantis consisted 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. During 2006, capital expenditures primarily consisted of acquisition of gaming and computer equipment, the installation of a casino high-definition video display system, renovation of our Java Coast Gourmet Coffee and pastry bar, initial design and planning expenditures associated with our Atlantis expansion and ongoing property public area renovations and upgrades.  During 2005, capital expenditures consisted primarily of the replacement of and upgrade to our ventilation and cooling system, acquisition of gaming and computer systems equipment, and continued renovations to the facility.

Future cash needed to finance ongoing capital expenditures is expected to be available from cash on-hand and operating cash flow, the Credit Facility (see Item 8, "FINANCIAL STATEMENTS, Notes to Consolidated Financial Statements, Note 5.") and, if necessary, additional borrowings.

In June 2007, we announced the groundbreaking on an expansion project with completion expected in the second quarter of 2008.  New space will be added to the first floor casino level, the second and third floors and the basement level totaling approximately 116,000 square feet.  The existing casino floor will be expanded by over 10,000 square feet, or approximately 20%.   The first floor casino plans include a redesigned, updated and expanded race and sports book of approximately 4,000 square feet and an enlarged poker room.   The expansion will also include a New York-style deli restaurant.  The second floor expansion will create additional ballroom and convention space of approximately 27,000 square feet, doubling the existing facilities.  The spa and fitness center will be remodeled and expanded to create an ultra-modern spa and fitness center facility.  We also plan to add 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 December 31, 2007, the Company has paid approximately $17.2 million of the estimated expansion and skybridge cost.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with principles generally accepted in the United States.  Certain of our policies, including the estimated lives assigned to our assets, the determination of bad debt reserves, self insurance reserves, concentration of credit risk, and the calculation of income tax liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  Our judgments are based on historical experience, terms of existing contracts, observations of trends in the industry, information provided by customers and information available from other outside sources, as appropriate.  There can be no assurance that actual results will not differ from our estimates.  To provide an understanding of the methodologies applied, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.

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

Self-insurance Reserves

The Company reviews self-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reports prepared by the third party plan administrator for any significant unpaid claims.  The reserve is an amount estimated to pay both reported and unreported claims as of the balance sheet date, which management believes are adequate.

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 retail value of hotel, food and beverage services provided to customers without charge is included in gross revenue and deducted as promotional allowances.

Income Taxes

Income taxes are recorded in accordance with the liability method specified by Statement of Financial Accounting Standards ("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 Financial Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which prescribes minimum recognition thresholds a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Implementation has resulted in no material impact on the Company’s financial position or results of operations.

RESULTS OF OPERATIONS

2007 Compared with 2006

For the year ended December 31, 2007, we earned net income of $24.5 million, or $1.27 per diluted share, on net revenues of $159.9 million, compared to net income of $22.1 million, or $1.15 per diluted share, on net revenues of $152.0 million for the year ended December 31, 2006.  Net revenue for 2007 is the highest in Company history.  Income from operations totaled $35.7 million for 2007, a 6.6% increase when compared to $33.5 million for 2006. Net income for the year 2007 represents a record high for our Company. We believe that for much of 2007, the Atlantis continued to benefit from the increasing popularity of the Atlantis with visitors to the Reno area, from our commitment to ongoing property upgrades and renovations and from the rapid growth occurring in the residential and commercial areas south of the Atlantis in Reno.

Casino revenues totaled $110.3 million in 2007, up 6.8% from $103.3 million in 2006, driven by increases in slot, table games, poker and Keno win.  Revenue from slot and video poker machines ("slot machines") increased approximately 7.3% in 2007 compared to 2006. We believe that increased slot machine play was due to continued effective marketing and continuous upgrade of facilities and equipment. Table game win increased approximately 2.4% in 2007 compared to 2006. Keno and poker room revenues combined increased approximately 11.0% in 2007 over 2006 due to continued effective marketing and the quality of the product and service offering at the Atlantis. Casino operating expenses were 32.6% of casino revenues in 2007, a slight improvement from 33.0% in 2006.

Food and beverage revenues increased 3.4% to $42.4 million in 2007 from $41.0 million in 2006, primarily due to a 3.5% increase in average revenue per cover. Food and beverage operating expenses as a percentage of food and beverage revenue increased slightly to 47.9% in 2007 from to 47.6% in 2006.

Hotel revenues totaled $27.9 million in 2007, an increase of 5.7% from $26.4 million in 2006. The increase reflects an increase in both the average daily room rate (“ADR”) and occupancy rate during the twelve month period of 2007 compared to the same period in 2006.  The Atlantis' ADR was $74.04 in 2007, compared to $69.87 in 2006.  The average occupancy rate at the Atlantis was 93.8% in 2007 compared to 93.3% in 2006.  Hotel operating expenses decreased slightly to 30.0% of hotel revenues in 2007, compared to 31.7% in 2006.  This decrease in operating expenses as a percentage of hotel revenues resulted primarily from the revenue impact of the increased ADR partially offset by increased direct hotel operating expenses.

Promotional allowances increased to $25.5 million in 2007 compared to $23.7 million in 2006.  As a percentage of gross revenue, the amount in 2007 increased slightly to 13.8% as compared to 13.5% for 2006.  The dollar increase is attributable to continued efforts to generate additional revenues and reflects efforts to ensure that promotional costs are directed toward gaming guests.

Other revenues in 2007 remained flat at $4.9 million when compared to 2006.  Other operating expenses were 30.5% of other revenues in 2007, an increase from 29.7% in 2006.

Selling, general and administrative ("SG&A") expenses totaled $50.0 million, or 31.3% of net revenues, in 2007 compared to $46.3 million, or 30.5% of net revenues, in 2006 for a year over year increase of $3.7 million or 8.0%.  The primary drivers of this increase are: i) higher legal expense related to the ongoing Kerzner litigation (see ITEM 3. LEGAL PROCEEDINGS above); ii) higher marketing and promotional expense primarily related to our efforts to mitigate the negative effects of disruption our guests experienced related to construction of our expansion project (see additional discussion below under Capital Spending and Development), aggressive marketing programs by our nearest competitor to promote the grand opening of its major expansion project and negative macroeconomic trends experienced in the Reno, our feeder markets and the nation as a whole and iii) higher payroll and benefits expense primarily related to increased headcount related to our expansion project (see additional discussion below under Capital Spending and Development), higher health care benefits expense and an increase in the minimum wage all partially offset by the impact of a $1.2 million non-cash charge in the second quarter of 2006, which did not recur in 2007, related to early vesting of stock options for the Company’s former Co-Chairman and Chief Financial Officer who resigned in 2006.

Depreciation and amortization expense was $8.1 million in 2007, a decrease of 5.8% compared to $8.6 million in 2006.

Interest expense, reflecting amortization of various one-time fees and other loan costs required to open our credit facility (see THE CREDIT FACILITY below), totaled $152,000 in 2007 as compared to $98,000 in 2006.  Interest income derived from investment of surplus cash in short-term, interest bearing instruments was $1.9 million in 2007 compared to $466,000 in 2006.  This increase was driven primarily by higher average surplus cash invested in 2007 as compared to 2006.

2006 Compared with 2005

For the year ended December 31, 2006, we earned net income of $22.1 million, or $1.15 per diluted share, on net revenues of $152.0 million, compared to net income of $21.0 million, or $1.10 per diluted share, on net revenues of $139.8 million for the year ended December 31, 2005.  Net revenue for 2006 represented the highest in Company history before being topped by 2007 results.  Income from operations totaled $33.5 million for 2006, a 1.2% increase when compared to $33.1 million for 2005. Net income for the year 2006 also represented a record high for our Company before reporting the 2007 results. We believe the Atlantis continued to benefit in 2006 from increasing popularity of the Atlantis with visitors to the Reno area, from our commitment to ongoing property upgrades and renovations and from the rapid growth occurring in the residential and commercial areas south of the Atlantis in Reno.

Casino revenues totaled $103.3 million in 2006, up 9.3% from $94.5 million in 2005, driven by increases in slot, table games, poker and Keno win.  Revenue from slot and video poker machines ("slot machines") increased approximately 9.6% in 2006 compared to 2005. We believe that increased slot machine play was due to continued effective marketing and continuous upgrade of facilities and equipment. Table game win increased approximately 6.2% in 2006 compared to 2005 due to a higher win percentage partially offset by a decrease in drop. Keno and poker room revenues combined increased approximately 21.7% in 2006 over 2005. Keno write increased approximately 15.1% in 2006 compared to 2005 while poker revenue increased approximately 32.6% compared to 2005 due to continued effective marketing. Casino operating expenses were 33.0% of casino revenues in 2006, a slight improvement from 33.9% in 2005.

Food and beverage revenues increased 6.2% to $41.0 million in 2006 from $38.6 million in 2005, primarily due to a 5.6% increase in average revenue per cover. Food and beverage operating expenses decreased to 47.6% of food and beverage revenues in 2006 compared to 48.7% in 2005, due to increased revenue per cover partially offset by a slight increase in cost of sales per cover and higher operating expenses.

Hotel revenues totaled $26.4 million in 2006, an increase of 10.5% from $23.9 million in 2005. The increase reflects an increase in both the average daily room rate (“ADR”) and occupancy rate during the twelve month period of 2006 compared to the same period in 2005.  The Atlantis' ADR was $69.87 in 2006, compared to $63.24 in 2005.  The average occupancy rate at the Atlantis was 93.3% in 2006 compared to 93.0% in 2005.  Hotel operating expenses decreased slightly to 31.7% of hotel revenues in 2006, compared to 32.2% in 2005.  This decrease in operating expenses as a percentage of hotel revenues resulted primarily from the revenue impact of the increased ADR partially offset by increased direct hotel operating expenses.

Promotional allowances increased to $23.7 million in 2006 compared to $21.9 million in 2005.  As a percentage of gross revenue, both 2006 and 2005 represent 13.5%. The dollar increase is attributable to continued efforts to generate additional revenues and reflects efforts to ensure that promotional costs are directed toward gaming guests.

Other revenues increased 4.3% in 2006 to $4.9 million from $4.7 million in 2005. The overall increase was primarily driven by a 10.5% increase in gift and sundries retail shops revenue.  Other operating expenses were 29.7% of other revenues in 2006, an increase from 28.6% in 2005.

Selling, general and administrative ("SG&A") expenses totaled $46.3 million, or 30.5% of net revenues, in 2006 compared to $38.1 million, or 27.2% of net revenues, in 2005 for a year over year increase of $8.2 million or 21.5%.   Effective January 1, 2006, we began recognizing expense related to the issuance of stock options in accordance with SFAS 123R.  For the year, we recorded $3.3 million of stock option expense (pre-tax), $3.1 million of which was reported as SG&A expense with the balance reported as operating expense in the appropriate revenue center expense line consistent with the assignment of the respective employee receiving the stock options benefit.  No similar expense is reflected in the financial statements for periods prior to 2006.  Of the $3.3 million of stock option expense recorded in 2006, $1.2 million related to a one-time, non-cash charge related to early vesting of stock options for the Company’s former Co-Chairman and Chief Financial Officer who resigned in the second quarter of 2006.  In addition to stock option expense, significant drivers of this increase in SG&A were increased marketing and promotional expense, higher energy and utilities expense, higher professional fees and higher bad debt expense.

Depreciation and amortization expense was $8.6 million in 2006, an increase of 2.4% compared to $8.4 million in 2005.

Interest expense for 2006 totaled $98,000 compared to $1,013,000 in 2005, a decrease of $915,000, as a result of the repayment of all of our bank related debt in the first quarter of 2006.  In that same quarter, we began investing surplus cash in short-term, interest bearing instruments which drove an increase in interest income in 2006 compared to 2005 of $466,000.

 

 

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded our daily hotel and casino activities with net cash provided by operating activities.  For the years 2007, 2006 and 2005, net cash provided by operating activities totaled $30.1 million, $35.2 million and $31.0 million, respectively.  During each of the three years, net cash provided by operating activities was sufficient to fund our day-to-day operating expenses.

Net cash used in investing activities, which consisted of acquisitions of property and equipment, totaled $15.3 million, $5.8 million and $6.1 million in 2007, 2006 and 2005, respectively.  Total capital expenditures, including amounts financed, were $17.3 million, $5.8 million and $6.1 million in 2007, 2006 and 2005, respectively.

Net cash used in financing activities totaled $13.0 million in 2007, $5.4 million in 2006 and $23.9 million in 2005. Cash used in financing activities was principally related to our treasury stock purchases in 2007, and to the paydown of our outstanding debt in 2006 and 2005.

COMMITMENTS AND CONTINGENCIES

Our contractual cash obligations as of December 31, 2007 and the next five years and thereafter are as follows:

Contractual Cash		Payments Due by Period
Obligations						less than				1 to 3				4 to 5				more than
		Total				1 year				years				years				5 years
Operating Leases(1)		$	4,834,000			$	613,000			$	983,000			$	740,000			$	2,498,000
Purchase Obligations(2)			35,645,000				35,645,000				-				-				-
Total Contractual Cash Obligations		$	40,479,000			$	36,258,000			$	983,000			$	740,000			$	2,498,000

 (1) Operating leases include $370,000 per year in lease and common expense payments to the shopping center adjacent to the Atlantis (see Capital Spending and Development) and $243,000 per year in lease payments to Triple J (see Note 10 to the Consolidated Financial Statements).

(2) Our open purchase order commitments total approximately $35.6 million.  Of the total purchase order commitments, approximately $2.1 million are cancelable by the Company upon providing a 30-day notice.

On September 28, 2006, the Board of Directors authorized a stock repurchase plan that superseded an older plan adopted in 2003 (the “Repurchase Plan”).  Under the Repurchase Plan, the Board of Directors authorized a program to repurchase up to 1,000,000 shares of the company’s common stock in the open market or in privately negotiated transactions from time to time, in compliance with Rule 10b-18 of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors.  The Repurchase Plan does not obligate us to acquire any particular amount of common stock and the plan may be suspended at any time at our discretion.  On March 11, 2008, the Board of Directors authorized a new repurchase plan 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 Company had purchased the full 1,000,000 shares under the Repurchase Plan.

 

In June 2007, we announced the groundbreaking on an expansion project with completion expected in the second quarter of 2008.  New space will be added to the first floor casino level, the second and third floors and the basement level totaling approximately 116,000 square feet.  The existing casino floor will be expanded by over 10,000 square feet, or approximately 20%.   The first floor casino plans include a redesigned, updated and expanded race and sports book of approximately 4,000 square feet and an enlarged poker room.   The expansion will also include a New York-style deli restaurant.  The second floor expansion will create additional ballroom and convention space of approximately 27,000 square feet, doubling the existing facilities.  The spa and fitness center will be remodeled and expanded to create an ultra-modern spa and fitness center facility.  We also plan to add 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 December 31, 2007, the Company has paid approximately $17.2 million of the estimated expansion and skybridge cost.

 

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

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, (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.  At December 31, 2007 and 2006, we had no borrowings under the New Credit Facility; however, our leverage ratio was such that the pricing for borrowings would have been the Base Rate plus 0.00 percent or LIBOR plus 1.00 percent.

Effective February 2007, in consideration of our cash balance, cash expected to be generated from operations and to avoid agency and commitment fees, we elected to permanently reduce the available borrowings to $5 million.  We may 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.  In the future we may utilize borrowings from the New Credit Facility for working capital needs, general corporate purposes and for ongoing capital expenditure requirements.

Borrowings under the New Credit Facility would be secured by liens on substantially all of the real and personal property of the Atlantis and is guaranteed by Monarch.

The New Credit Facility contains covenants customary and typical for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of 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 that we maintain certain financial ratios and contains provisions that restrict cash transfers between Monarch and our affiliates.  The New 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 operations.

The maturity date of any borrowings under the New Credit Facility is February 23, 2009.  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 reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

We paid various one-time fees and other loan costs upon the closing of the refinancing of the New Credit Facility that will be amortized over the term of the New Credit Facility using the straight-line method.

SHORT-TERM DEBT

At December 31, 2007, we had no slot purchase contracts or other short-term debt outstanding.

STATEMENT ON FORWARD LOOKING INFORMATION

Certain information included herein contains statements that may be considered forward-looking, such as statements relating to projections of future results of operations or financial condition, expectations for our casino, and expectations of the continued availability of capital resources. Any forward-looking statement made by us necessarily is based upon a number of estimates and assumptions that, while considered reasonable by us, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and are subject to change.  Actual results of our operations may vary materially from any forward-looking statement made by us or on our behalf.  Forward-looking statements should not be regarded as representation by us or any other person that the forward-looking statements will be achieved.  Undue reliance should not be placed on any forward-looking statements.  Some of the contingencies and uncertainties to which any forward-looking statement contained herein are subject to include, but are not limited to, those set forth above in the heading “ITEM 1A. Risk Factors.”

RECENTLY ISSUED ACCOUNTING STANDARDS

      In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold 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.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 as of January 1, 2007, as required.  FIN 48 requires that the cumulative effect of adoption be recorded in retained earnings.  Implementation resulted in no cumulative effect for the Company nor any material impact on the Company’s financial position or results of operations.

 

   In September 2006, the FASB issued SFAS 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the provisions of SFAS 157 to determine its impact, if any, on the Company’s financial position and results of operations.

 

                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 Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated financial statements.

                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. The adoption of SFAS No. 141 (revised) is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

                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.

ITEM 7A. 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 December 31, 2007 that are subject to market risk.  As of December 31, 2007 and 2006, we had no outstanding debt subject to market risk.

                                        

 

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Monarch Casino & Resort, Inc.:

We have audited the accompanying consolidated balance sheets of Monarch Casino & Resort, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statements schedule listed in the index at Item 15(a). These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Monarch Casino & Resort, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2008 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Las Vegas, Nevada

March 12, 2008

                                        

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders’ of Monarch Casino and Resort, Inc.:

We have audited Monarch Casino and Resort, Inc. and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 of Monarch Casino and Resort, Inc. and Subsidiaries and our report dated March 12, 2008 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Las Vegas, Nevada

March 12, 2008

                                        

 

 

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MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		Years ended December 31,
		2007				2006				2005
Revenues
Casino		$	110,259,104			$	103,332,559			$	94,501,028
Food and beverage			42,364,225				41,037,321				38,564,365
Hotel			27,885,858				26,412,755				23,909,915
Other			4,866,536				4,878,840				4,690,105
Gross revenues			185,375,723				175,661,475				161,665,413
Less promotional allowances			(25,519,352	)			(23,692,521	)			(21,880,793	)
Net revenues			159,856,371				151,968,954				139,784,620
Operating expenses
Casino			35,927,672				34,134,518				31,990,758
Food and beverage			20,283,267				19,533,532				18,795,268
Hotel			8,357,541				8,383,382				7,696,576
Other			1,485,550				1,450,100				1,340,556
Selling, general and administrative			49,966,276				46,309,938				38,073,313
Gaming development costs			10,477				106,477				439,984
Depreciation and amortization			8,137,886				8,559,374				8,379,033
Total operating expenses			124,168,669				118,477,321				106,715,488
Income from operations			35,687,702				33,491,633				33,069,132
Other income (expense)
Interest income			1,928,450				466,050				257
Interest expense			(152,274	)			(97,722	)			(1,013,377	)
Total other income (expense)			1,776,176				368,328				(1,013,120	)
Income before income taxes			37,463,878				33,859,961				32,056,012
Provision for income taxes			12,983,660				11,779,590				11,020,552
Net income		$	24,480,218			$	22,080,371			$	21,035,460
Earnings per share of common stock
Net income
Basic		$	1.28			$	1.16			$	1.12
Diluted		$	1.27			$	1.15			$	1.10
Weighted average number of
common shares and potential
common shares outstanding:
Basic			19,057,583				18,990,331				18,848,532
Diluted			19,329,131				19,274,847				19,093,777

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

                                        

 

 

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MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2007				2006
ASSETS
Current assets
Cash		$	38,835,820			$	36,985,187
Receivables, net			4,134,099				3,268,970
Federal income tax refund receivable			998,123				-
Inventories			1,496,046				1,471,667
Prepaid expenses			3,144,374				2,833,126
Deferred income taxes			1,084,284				965,025
Total current assets			49,692,746				45,523,975
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			10,435,062				10,435,062
Furniture and equipment			72,511,165				72,708,061
Leasehold improvements			1,346,965				1,346,965
			176,754,367				176,951,263
Less accumulated depreciation and amortization			(92,215,149	)			(84,325,578	)
			84,539,218				92,625,685
Construction in progress			17,236,062				-
Net property and equipment			101,775,280				92,625,685
Other assets, net			2,817,842				231,247
Total assets		$	154,285,868			$	138,380,907

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

                                        

 

 

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MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY		December 31,
Current liabilities		2007				2006
Accounts payable			10,840,318				8,590,669
Construction accounts payable			1,971,022				-
Accrued expenses			9,230,157				9,878,851
Federal income taxes payable			-				16,457
Total current liabilities			22,041,497				18,485,977
Deferred income taxes			2,825,433				4,248,614
Total liabilities			24,866,930				22,734,591
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;
18,566,540 outstanding at 12/31/07 and
19,065,968 outstanding at 12/31/06			190,963				190,726
Additional paid-in capital			25,741,972				23,205,045
Treasury stock, 529,760 shares at 12/31/07 and
6,582 shares at 12/31/06, at cost			(13,268,905	)			(24,145	)
Retained earnings			116,754,908				92,274,690
Total stockholders' equity			129,418,938				115,646,316
Total liabilities and stockholder's equity		$	154,285,868			$	138,380,907

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

MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

		Common Stock								Additional
		Shares								Paid-in				Retained				Treasury
		Outstanding				Amount				Capital				Earnings				Stock				Total
Balance, January 1, 2005			18,812,448			$	190,726			$	17,367,909			$	49,158,859			$	(954,152	)		$	65,763,342
Exercise of stock options, including			66,862				-				514,918				-				245,275				760,193
related tax benefit
Net income			-				-				-				21,035,460				-				21,035,460
Balance, December 31, 2005			18,879,310				190,726				17,882,827				70,194,319				(708,877	)			87,558,995
Exercise of stock options, including			186,658				-				1,528,757				-				684,732				2,213,489
related tax benefit
Share based compensation expense			-				-				3,793,461				-				-				3,793,461
Net income			-				-				-				22,080,371				-				22,080,371
Balance, December 31, 2006			19,065,968				190,726				23,205,045				92,274,690				(24,145	)			115,646,316
Exercise of stock options, including
related tax benefit			56,080				237				(26,887	)			-				629,286				602,636
Purchase of treasury stock			(555,508	)			-				-				-				(13,874,046	)			(13,874,046	)
Share based compensation expense			-				-				2,563,814				-				-				2,563,814
Net income			-				-				-				24,480,218				-				24,480,218
Balance, December 31, 2007			18,566,540			$	190,963			$	25,741,972			$	116,754,908			$	(13,268,905	)		$	129,418,938

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

                MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES>

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

							Years ended December 31,
							2007		2006		2005
Cash flows from operating activities:
	Net income						$ 24,480,218		$ 22,080,371		$ 21,035,460
	Adjustments to reconcile net income to net
	cash provided by operating activities:
				Depreciation and amortization			8,137,886		8,559,374		8,379,033
				Amortization of deferred loan costs			148,838		38,277		137,096
				Share based compensation			2,271,057		3,273,708		-
				Provision for bad debts			554,891		903,426		550,512
				(Gain) loss on disposal of assets			(6,969)		55,115		(41,636)
				Deferred income taxes			(1,542,439)		(1,343,380)		(766,817)
	Changes in operating assets and liabilities
			Receivables, net				(2,418,143)		(326,034)		(943,183)
			Inventories				(24,379)		(15,214)		(3,756)
			Prepaid expenses				(311,248)		(431,507)		(55,377)
			Other assets				(2,735,433)		-		-
			Accounts payable				2,249,649		1,255,038		1,587,855
			Accrued expenses				(648,694)		1,156,630		1,134,254
			Federal income taxes payable				(16,457)		16,457		-
					Net cash provided by operating activities		30,138,777		35,222,261		31,013,441
Cash flows from investing activities:
		Proceeds from sale of assets					6,969		38,280		41,636
		Change in construction payable					1,971,022		-		-
		Acquisition of property and equipment					(17,287,483)		(5,795,089)		(6,113,220)
						Net cash used in investing activities	(15,309,492)		(5,756,809)		(6,071,584)
Cash flows from financing activities:
		Proceeds from exercise of stock options					602,636		2,213,489		429,859
		Deferred tax asset write-off					-		(203,067)		-
		Tax benefit of stock option exercise					292,757		722,819		-
		Proceeds from long-term borrowings					-		-		3,000,000
		Principal payments on long-term debt					-		(8,100,000)		(27,300,000)
		Purchase of treasury stock					(13,874,045)		-		-
						Net cash used in financing activities	(12,978,652)		(5,366,759)		(23,870,141)
						Net increase in cash	1,850,633		24,098,693		1,071,716
Cash and cash equivalents at beginning of year							36,985,187		12,886,494		11,814,778
Cash and cash equivalents at end of year							$ 38,835,820		$ 36,985,187		$ 12,886,494
Supplemental disclosure of cash flow information:
		Cash paid for interest					$          3,437		$        66,659		$      973,314
		Cash paid for income taxes					$ 15,247,923		$ 12,300,000		$ 11,250,000

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

                                        

 

 

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MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES NOTES TO 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 Spa (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.

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 year.  Actual results could differ from those estimates.

Self-insurance Reserves

The Company reviews self-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reports prepared by the third party plan administrator 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 date, which management believes are adequate.

Capitalized Interest

The Company capitalizes interest costs associated with debt incurred in connection with major construction projects.  When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company's average cost of borrowed money.  Interest capitalization is ceased when the project is substantially complete.  The Company did not record capitalized interest during the years ended December 31, 2007, 2006 and 2005.

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, as well as investments purchased with an original maturity of 90 days or less.

 

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.  Property and equipment is 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 points which may be redeemed for a variety of goods and services at our Atlantis Casino Resort Spa. Points 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. Points earned may also be applied toward off-property events such as concerts, shows and sporting events. Points 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 estimated departmental costs of providing such promotional allowances are included in casino costs and expenses as follows:

		Years ended December 31,
		2007				2006				2005
Food and beverage		$	12,735,942			$	11,706,382			$	11,363,365
Hotel			2,143,988				2,004,909				1,820,435
Other			460,099				504,945				436,430
		$	15,340,029			$	14,216,236			$	13,620,230

 

Advertising Costs

All advertising costs are expensed as incurred.  Advertising expense, which is included in selling, general and administrative expense, was $3,657,712, $3,533,057 and $3,321,653 for 2007, 2006 and 2005, respectively.

Income Taxes

Income taxes are recorded in accordance with the liability method specified by SFAS No. 109, "Accounting for Income Taxes."  Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements: (a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.

The Company also applies the requirements of FIN 48 which prescribes minimum recognition thresholds a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Implementation has resulted in no material impact on the Company’s financial position or results of operations.

Allowance for Doubtful Accounts

The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and due on demand. In addition, the Company also has receivables due from hotel guests which are primarily secured with a credit card at the time a customer checks in. An allowance for doubtful accounts is set up for all Company receivables based upon the Company’s historical collection and write-off experience, unless situations warrant a specific identification of a necessary reserve related to certain receivables.  The Company charges off its uncollectible receivables once all efforts have been made to collect such receivables. The book value of receivables approximates fair value due to the short-term nature of the receivables.

Stock Based Compensation

The Company maintains three stock option plans, which are described more fully in Note 8.  Prior to January 1, 2006, the Company accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations in accounting for its plans.  For the year ended December 31, 2005, no stock-based compensation costs are reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement 123(R), Share-Based Payment, using the modified prospective transition method. Under that transition method, compensation cost recognized in the years ended December 31, 2007 and 2006 include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Statement 123(R), and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Statement 123(R).  Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes for the years ended December 31, 2007 and 2006 is $2.3 million and $3.3 million lower, and net income for the years ended December 31, 2007 and 2006 is $1.5 million and $2.2 million lower, respectively, than if it had continued to account for share based compensation under APB 25.  Basic and diluted earnings per share would have been $1.36 and $1.34, respectively, for the year ended December 31, 2007 and would have been $1.28 and $1.26, respectively for the year ended December 31, 2006, respectively, if the Company had not adopted Statement 123(R).

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows.  Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.  The $292,757 and $722,819 excess tax benefits for the years ended December 31, 2007 and 2006 classified as financing cash inflows would have been classified as operating cash inflows if the Company had not adopted Statement 123(R).

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement 123 to options granted under the Company’s stock option plans in all periods presented.  If the Company had elected to recognize compensation cost on the fair market value at the grant dates for awards under the stock option plans, consistent with the method prescribed by Statement 123, net income and income per share for the year ended December 31, 2005 would have been changed to the pro forma amounts indicated below:

		December 31, 2005
Net income, as reported		$	21,035,460
Stock based employee  compensation expensed determined under the fair value based method for all awards, net of related tax effects			(1,113,398	)
Pro forma net income		$	19,922,062
Basic earnings per share
As reported		$	1.12
Pro forma		$	1.06
Diluted earnings per share
As reported		$	1.10
Pro forma		$	1.04

 

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):

		Years ended December 31,
		2007								2006								2005
		Shares				Per Share Amount				Shares				Per Share Amount				Shares				Per Share Amount
Net income
Basic			19,058			$	1.28				18,990			$	1.16				18,849			$	1.12
Effect of dilutive      stock options			271				(0.01	)			285				(0.01	)			245				(0.02	)
Diluted			19,329			$	1.27				19,275			$	1.15				19,094			$	1.10

The following options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and their inclusion would be antidilutive:

		Years ended December 31,
		2007				2006				2005
Options to purchase shares of        common stock (in thousands)			232				122				35
Exercise prices			$27.39-$30.07				$25.89-$28.25				$19.98-$21.46
Expiration dates (mo./yr.)		5/16-10/17				5/16-6/16				4/15-11/15

Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107 "Disclosures About Fair Value of Financial Instruments."  The estimated fair value of the Company's financial instruments has been determined by the Company, using available market information and valuation methodologies.  However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of bank deposits, short term investments of surplus cash and trade receivables.  The Company maintains its surplus cash in bank accounts and money market mutual funds 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.

Impact of Recently Issued Accounting Standards

 

   In September 2006, the FASB issued SFAS 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the provisions of SFAS 157 to determine its impact, if any, on the Company’s financial position and results of operations.

 

                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 Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated financial statements.

                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. The adoption of SFAS No. 141 (revised) is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

                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.

 

NOTE 2.  ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

		December 31,
		2007				2006
Casino		$	4,135,884			$	3,338,227
Hotel			665,079				1,019,019
Other			751,255				165,021
			5,552,218				4,522,267
Less  allowance for doubtful accounts			(1,418,119	)			(1,253,297	)
		$	4,134,099			$	3,268,970

The Company recorded bad debt expense of $554,891, $903,426 and $550,512 in 2007, 2006 and 2005, respectively.

NOTE 3.  ACCRUED EXPENSES

Accrued expenses consist of the following:

		December 31,
		2007				2006
Accrued salaries, wages
and related benefits		$	4,022,526			$	4,714,956
Progressive slot machine
and other gaming accruals			2,785,054				2,539,657
Accrued gaming taxes			374,754				660,478
Accrued interest			25,534				25,534
Other accrued liabilities			2,022,289				1,938,226
		$	9,230,157			$	9,878,851

NOTE 4.  LEASE COMMITMENTS

In 2004, a driveway was constructed that is being shared between the Atlantis and the adjacent Sierra Marketplace Shopping Center that is owned and controlled by affiliates of the Company's principal stockholders (the "Shopping Center"). A traffic signal was erected at mid-block on South Virginia Street, serving the driveway.  As part of this project, the Company is leasing 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 is also using part of the common area of the Shopping Center and pays its proportional share of the common area expense of the Shopping Center. The Company has the option to renew the lease for 3 five-year terms, and at the end of the extension periods, the Company has the option to purchase the leased section of the Shopping Center at a price to be determined based on an MAI appraisal. The Company uses the leased driveway space for pedestrian and vehicle access to the Atlantis, and the Company has use of 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 project was completed, the driveway was put into use and the Company began paying rent on September 30, 2004. The cost of the driveway is being depreciated over the initial 15-year lease term; some components of the driveway are being depreciated over a shorter period of time.

On December 24, 2007, the Company entered into a lease with Triple “J” Plus, LLC (Triple J) for the use of a facility on 2.3 acres of land (jointly “the Property”) across Virginia Street from the Atlantis that the Company plans to utilize for administrative office and storage space for Atlantis staff . 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.  At December 31, 2007, the fair value of the loan approximated book value.

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.

Following is a summary of future minimum payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2007:

		Operating Leases
Year ending December 31,
2008		$	613,000
2009			613,000
2010			370,000
2011			370,000
2012			370,000
Thereafter			2,498,000
Total minimum lease payments		$	4,834,000

Rental expense for operating leases amounted to $0, $9,085 and $79,383 in 2007, 2006 and 2005, respectively, as reported in selling, general and administrative expenses in the statements of income.

NOTE 5.  LONG-TERM DEBT

THE CREDIT FACILITY

Until February 20, 2004, the Company had a reducing revolving term loan credit facility with a consortium of banks that was to expire on June 30, 2004, (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.  At December 31, 2007 and 2006, the Company had no borrowings under the New Credit Facility; however, its leverage ratio was such that the pricing for borrowings would have been the Base Rate plus 0.00 percent or LIBOR plus 1.00 percent.

Effective February 2007, in consideration of the Company’s cash balance, cash expected to be generated from operations and to avoid agency and commitment fees, the Company elected to permanently reduce the available borrowings to $5 million.  The Company may 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.  The Company in the future may utilize borrowings from the New Credit Facility for working capital needs, general corporate purposes and for ongoing capital expenditure requirements.

Borrowings under the New Credit Facility would be secured by liens on substantially all of the real and personal property of the Atlantis and is guaranteed by Monarch.

The New Credit Facility contains covenants customary and typical for a facility of this nature, including, but not limited to, covenants requiring the preservation and maintenance of Company assets and covenants restricting the Company’s ability to merge, transfer ownership of Monarch, incur additional indebtedness, encumber assets and make certain investments.  The New Credit Facility also contains covenants requiring the Company to maintain certain financial ratios and contains provisions that restrict cash transfers between Monarch and its affiliates.  The New Credit Facility also contains provisions requiring the achievement of certain financial ratios before the Company can repurchase its common stock. Management does not consider the covenants to restrict operations.

The maturity date of any borrowings under the New Credit Facility is February 23, 2009.  The Company 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 reborrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

The Company 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.

NOTE 6.  INCOME TAXES

Income tax provision (benefit) from continuing operations consists of the following:

		Years ended December 31,
		2007				2006				2005
Current provision		$	14,494,634			$	13,157,285			$	11,834,750
Deferred provision (benefit)			(1,510,974	)			(1,377,695	)			(814,198	)
		$	12,983,660			$	11,779,590			$	11,020,552

Income tax benefits were recognized through stockholders’ equity of $292,757, $519,751 and $330,333 during the years of 2007, 2006 and 2005, respectively, as compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.

The difference between the Company's provision for federal income taxes as presented in the accompanying Consolidated Statements of Income, and the provision for income taxes computed at the statutory rate is comprised of the items shown in the following table as a percentage of pre-tax earnings.

		Years ended December 31,
		2007				2006				2005
Income tax at the statutory rate			35.00	%			35.00	%			35.00	%
Non-deductible expenses and other			-				-				-
Tax credits			-0.30	%			-0.20	%			-0.60	%
			34.70	%			34.80	%			34.40	%

The components of the deferred income tax assets and liabilities at December 31, 2007 and 2006, as presented in the Consolidated Balance Sheets, are as follows:

		2007				2006
DEFERRED TAX ASSETS
Share based compensation		$	1,375,644			$	659,231
Compensation and benefits			337,275				393,087
Bad debt reserves			496,342				438,654
Accrued gaming liabilities			489,910				353,360
Accrued interest			8,937				8,937
Accrued other			216,455				199,499
Deferred income tax asset		$	2,924,563			$	2,052,768
DEFERRED TAX LIABILITIES
Impairment of assets		$	(72,260	)		$	(72,260	)
Depreciation			(4,059,567	)			(4,749,378	)
Land basis			(285,706	)			(285,706	)
Real estate taxes			(248,179	)			(229,013	)
Deferred income tax liability		$	(4,665,712	)		$	(5,336,357	)
NET DEFERRED INCOME TAX LIABILITY		$	(1,741,149	)		$	(3,283,589	)

The January 1, 2007 adoption of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, did not affect the Company’s financial position.  The Company is required to file a federal tax return only.  As of December 31, 2007, tax years 2004 through 2007 were subject to examination by the Internal Revenue Service.  The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes.  The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease through the twelve month period ending December 31, 2008.

NOTE 7.  BENEFIT PLANS

Savings Plan - Effective November 1, 1995, the Company adopted a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code.  Under the plan, participating employees may defer up to 15% of their pre-tax compensation, but not more than statutory limits.  For years earlier than 2007, the Company contributed twenty five cents for each dollar contributed by a participant, with a maximum contribution of 4% of a participant's compensation.  Effective January 1, 2007, the Company increased its contribution to fifty cents for each dollar contributed by a participant.  The Company's matching contributions were approximately $238,510, $59,774 and $46,504 in 2007, 2006 and 2005, respectively.

 

NOTE 8. SHARE-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"), which 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 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 twelve months ended December 31, 2007 is presented below:

						Weighted Average
Options		Shares				Exercise Price				Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at beginning of period			1,121,199			$	16.49				-				-
Granted			260,307		</