**United States**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-K**

 

**(MARKONE)**

** **
| **x** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

** **

**FOR THE FISCAL YEAR ENDEDDECEMBER 31, 2009**

** **

**OR**

** **
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**FOR THE TRANSITION PERIOD FROM             TO            **

 

**Commission File No. 0-22088**

 

 

**MONARCH CASINO & RESORT,INC.**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                               | ** **   | **88-0300760**      |
|------------------------------------------|--------------|---------------------|
| (State or Other Jurisdiction of          |         | (I.R.S. Employer    |
| Incorporation or Organization)           |         | Identification No.) |
|                                     |         |                |
| **3800 S. Virginia Street**              | *** *** | *** ***        |
| **Reno, Nevada**                         | ** **   | **89502**           |
| (Address of Principal Executive Offices) |         | (ZIP Code)          |

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed SinceLast Report)

 

Registrant’s telephone number, including area code:**(775)335-4600**

 

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SECURITIES REGISTERED PURSUANT TOSECTION 12(b) OF THE ACT:

 

|   | ** **              | ** ** | **Name of each exchange** |   |
|--------|-------------------------|------------|---------------------------|--------|
|   | **Title of each class** | ** ** | **on which registered**   |   |
|   | None                    |       | None                      |   |

 

SECURITIES REGISTERED PURSUANT TOSECTION 12(g) OF THE ACT:

 

**COMMON STOCK, $0.01 PAR VALUE**

(Title of Class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. YES o   NO  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. YES o   NO x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x   NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o   NO o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “accelerated filer”, “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large accelerated filer o |   | Accelerated Filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated Filer o   |   | Smaller reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). YES o   NO  x

 

Theaggregate market value of voting and non-voting common equity held bynonaffiliates as of June 30, 2009, based on the closing price as reportedon The Nasdaq Stock Market (SM) of $7.30 per share, was approximately $117.7million.

 

As ofMarch 4, 2010, Registrant had 16,125,388 shares of Common Stockoutstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portionsof the Proxy Statement for Registrant’s 2010 Annual Meeting of Stockholders,which Proxy Statement shall be filed with the Commission not later than 120days after the end of the fiscal year covered by this report, are incorporatedby reference into Part III.

 

STATEMENTSIN THIS ANNUAL REPORT ON FORM 10-K WHICH EXPRESS THE “BELIEF”,“ANTICIPATION”, “INTENTION”, “EXPECTATION”, OR “SCHEDULED” AS WELL ASOTHER  STATEMENTS WHICH ARE NOTHISTORICAL FACT, AND STATEMENTS AS TO BUSINESS OPPORTUNITIES, MARKETCONDITIONS, COST ESTIMATIONS AND OPERATING PERFORMANCE INSOFAR AS THEYMAY APPLY PROSPECTIVELY, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGOF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THESECURITIES EXCHANGE ACT OF 1934 AND INVOLVE RISKS AND UNCERTAINTIES THAT COULDCAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.

 

 

 

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**PART I**

 

**ITEM 1.BUSINESS**

 

Monarch Casino &Resort, Inc. (the “Company” or “we”), through its wholly-owned subsidiary,Golden Road Motor Inn, Inc. (“Golden Road”), owns and operates theAtlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the “Atlantis”).  Monarch’s other wholly owned subsidiaries,High Desert Sunshine, Inc. (“High Desert”) and Golden North, Inc. (“GoldenNorth”), each own separate parcels of land located adjacent to the Atlantis.Unless otherwise indicated, “Monarch” or the “Company” refers to Monarch Casino &Resort, Inc. and its subsidiaries. Monarch was incorporated in 1993 underNevada law for the purpose of acquiring all of the stock of Golden Road. Theprincipal asset of Monarch is the stock of Golden Road, which holds all of theassets of the Atlantis.  Our principalexecutive offices are located at 3800 S. Virginia Street; Reno, Nevada 89502;telephone (775)335-4600.

 

**AVAILABLE INFORMATION**

 

Our website address iswww.monarchcasino.com.  We make availablefree of charge on or through our internet website our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the Securities and Exchange Commission.

 

**THE ATLANTIS CASINO RESORT SPA**

 

ThroughGolden Road, we own and operate the Atlantis Casino Resort Spa, which islocated approximately three miles south of downtown in the generally moreaffluent area of Reno, Nevada.  TheAtlantis features approximately 61,000 square feet of casino space; a hotel anda motor lodge with a combined 973 guest rooms; ten food outlets; an enclosedyear-round pool with waterfall; an outdoor pool; a health spa; two retailoutlets offering clothing and resort gift shop merchandise; a full servicesalon for men and women; an 8,000 square-foot family entertainment center; andapproximately 52,000 square feet of banquet, convention and meeting room space.

 

In June 2007, webroke ground on an expansion project, several phases of which we completed andopened in the second half of 2008.  Newspace was added to the first floor casino level, the second and third floorsand the basement level totaling approximately 116,000 square feet.  The existing casino floor was expanded byover 10,000 square feet, or approximately 20%. The first floor casino expansion includes a redesigned, updated andexpanded race and sports book of approximately 4,000 square feet and anenlarged poker room.   The expansion alsoincluded the new “Manhattan deli”, a New York deli-style restaurant.  The second floor expansion created additionalballroom and convention space of approximately 27,000 square feet, doubling theexisting facilities.  We constructed andopened a pedestrian skywalk over Peckham Lane that connects the Reno-SparksConvention Center directly to the Atlantis. In January 2009, we opened the final phase of the expansionproject, the new Spa Atlantis featuring an atmosphere, amenities and treatmentsthat are unique from any other offering in our market.  Additionally, many of the pre-expansion areasof the Atlantis were redesigned to be consistent with the upgraded look andfeel of the new facilities.  Through December 31,2009, the Company had incurred approximately $80 million related to thesecapital projects.

 

Withthe opening of the new skywalk the Atlantis became the only hotel-casino to bephysically connected to the Reno-Sparks Convention Center.  The Reno-Sparks Convention Center offersapproximately 500,000 square feet of leasable exhibition, meeting room,ballroom and lobby space.

 

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**ATLANTIS CASINO**

** **

TheAtlantis Casino offers approximately 1,500 slot and video poker machines;approximately 38 table games, including blackjack, craps, roulette and others;a sports book; Keno and a poker room.

 

TheAtlantis offers what we believe are higher than average payout rates on slotmachines relative to other northern Nevada casinos.  We seek to attract high-end players throughhigh quality amenities and services and by extension of gaming credit after acareful credit history evaluation.

 

**HOTEL ANDMOTOR LODGE**

** **

TheAtlantis includes three contiguous high-rise hotel towers with a total of 824rooms and suites, and a low-rise motor lodge with an additional 149 rooms, fora total of 973 guest rooms. The first of the three hotel towers contains 160rooms and suites in 13 stories. The 19-story second hotel tower contains 278rooms and suites. The third tower contains 386 rooms and suites in 28 stories.The rooms on the top seven floors in the third tower are nearly 20% larger thanthe standard guest rooms and offer key card elevator access, upscaleaccommodations and a private concierge service.

 

TheAtlantis hotel rooms feature design and furnishings consistent with the highestquality in the Northern Nevada market as well as nine-foot ceilings (moststandard hotel rooms have eight-foot ceilings), which create an open andspacious feel. The third hotel tower features a four-story waterfall with anadjacent year-round swimming pool in a climate controlled, five-story glassenclosure, which shares an outdoor third floor pool deck with a seasonaloutdoor swimming pool and year round whirlpool. A full service salon (the “Salonat Atlantis”) overlooks the third floor sundeck and outdoor seasonal swimmingpool and offers salon-grade products and treatments for hair, nails, skincareand body services for both men and women. A health spa is located adjacent tothe swimming areas which offers treatments and amenities unique to ourmarket.  The hotel rooms on the spa floorare designated as “spa rooms” and feature décor that is themed consistent withthe spa.  Certain spa treatments are alsoavailable in spa floor hotel rooms.  Thehotel also features glass elevators rising the full 19 and 28 stories,respectively, of the two taller hotel towers, providing panoramic views of theReno area and the Sierra Nevada mountain range.

 

The149-room motor lodge is a two-story structure located adjacent to the hotel.The motor lodge rooms, are smaller than the tower hotel rooms and have standardeight-foot ceilings. We believe the motor lodge rooms appeal to value conscioustravelers who want to enjoy the experience and amenities of a first-classhotel-casino resort.

 

Theaverage occupancy rate and average daily room rate at the Atlantis for thefollowing periods were:

 
| ** **              | ** ** | **Years ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Occupancy rate          |       | 80.6                              | %          | 84.9 | % | 93.8 | % |
| Average daily room rate |       | $                                 | 64.91      |   | $ | 65.52 |   | $ | 74.04 |   |
|                         |            |                                   |            |  |  |  |  |  |  |  |

 

We continually monitor and adjust hotel room rates based upon demandand other competitive factors. Our average daily room rate was adverselyimpacted in 2008 and 2009 by the declining market demand and by rooms sold atdiscounted rates to select wholesale operators for tour and travel packages.

 

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**RESTAURANTSAND DINING**

** **

The Atlantis has eight restaurants, two gourmet coffee bars and onesnack bar as described below.

 

·                  The 600-seat Toucan Charlie’sBuffet & Grill, which offers a wide variety of standard hot foodselections, salads and seafood, specialty substations featuring made-to-orderitems such as Mongolian barbecue, fresh Southwest and Asian specialties, meatsroasted in wood-fired rotisserie ovens, two salad stations, and a wide varietyof freshly made desserts.

·                  The 160-seat, AtlantisSteakhouse gourmet restaurant.

·                  The 200-seat, upscale BistroNapa featuring a centrally located wine cellar.

·                  The Oyster Bar restaurant inthe Sky Terrace offering fresh seafood, soups and bisques made to order.

·                  The Sushi Bar, also in theSky Terrace, offering a variety of fresh raw and cooked sushi specialties,including all-you-can-eat lunch and dinner selections. Combined, the Oyster Barand Sushi Bar can accommodate up to 139 guests.

·                  The 178-seat 24-hour PurpleParrot coffee shop.

·                  The 122-seat  Café Alfresco restaurant serving a full menu, pizzas prepared in a wood-fired, brickoven and a variety of gelato deserts.

·                  The 170-seat Manhattan delirestaurant specializing in piled-high sandwiches, soups, salads and desserts

·                  Two gourmet coffee bars,offering specialty coffee drinks, pastries and desserts made fresh daily in theAtlantis bakery.

·                  A snack bar and sodafountain serving ice cream and arcade-style refreshments.

 

**THE SKYTERRACE**

** **

TheSky Terrace is a unique structure with a diamond-shaped, blue glass bodysuspended approximately 55 feet, and spanning 160 feet across, South VirginiaStreet.  The Sky Terrace connects theAtlantis with additional parking on our 16-acre site across South VirginiaStreet. The structure rests at each end on two 100-foot tall Grecian columnswith no intermediate support pillars. The tropically-themed interior of the SkyTerrace contains the Oyster Bar, the Sushi Bar, a video poker bar, banks ofslot machines and a lounge area with oversized leather sofas and chairs.

 

Operations at theAtlantis are conducted 24 hours a day, every day of the year. The Atlantis’business is seasonal in nature, with higher revenues during the summer monthsand lower revenues during the winter months.

 

**ATLANTIS IMPROVEMENTS**

 

Wehave continuously invested in upgrading the Atlantis and providing for futureexpansion opportunities.  Our capitalexpenditures at the Atlantis were $15.8 million in 2009; $67.9 million in 2008and $17.3 million in 2007.

 

During2009, 2008 and 2007 capital expenditures primarily consisted of construction costsassociated with the expansion, skybridge and redesign capital projects thatcommenced in June 2007.****During2009 we spent approximately $5.2 million to acquire two additional land parcelswith buildings within close proximity to the Atlantis (see additionaldiscussion of these parcels below under “Properties” in ITEM 2.).

 

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**ADDITIONALEXPANSION POTENTIAL**

** **

Expansionpotential at our current site is twofold. First, we could further expand our existing hotel and casino, therebygiving us more hotel rooms, amenities and additional casino space.  Second, we could develop the 16-acre parcelwe own across the street from the Atlantis. This site is connected to theAtlantis by the Sky Terrace and is currently used for parking and specialevents related to the Atlantis.  Our16-acre parcel meets all current Reno zoning requirements in the event wedecide to build another resort casino or entertainment facility.  We have also recently acquired additionalland adjacent to our two large sites that would facilitate expansionopportunities by allowing us to relocate certain of our administrative andother non-operational personnel and offices.

 

**MARKETINGSTRATEGY**

** **

TheReno/Sparks region is a major gaming and leisure destination with aggregategaming revenues of approximately $715 million (as reported by the Nevada StateGaming Control Board).

 

Ourrevenues and operating income are principally dependent on the level of gamingactivity at the Atlantis casino.  Ourpredominant marketing goal is to utilize all of the Atlantis facilities togenerate additional casino play.  Oursecondary goal is to maximize revenues from our hotel, food and beverage, spacocktail lounges, convention and meeting rooms, retail and other amenities.

 

Ourmarketing efforts are directed toward three broad consumer groups:  leisure travelers, conventioneers andnorthern Nevada residents.   We believethe Atlantis’ location south of downtown Reno, near the airport, near majorfreeway arteries and across the street from the Reno-Sparks Convention Centermakes the facility appealing to all three groups.

 

LEISURETRAVELERS:  The Reno/Tahoe region is apopular gaming and vacation destination that enjoys convenient air service fromcities throughout the United States.  Theprincipal segments of Reno’s leisure traveler market are independent travelers,package tour and travel guests, guests we reach through the world-wide-web andhigh-end players.  We attempt to maximizeour gaming revenues and hotel occupancy through a balanced marketing approachthat addresses each market segment.

 

Independent travelers make reservations directly with hotels of theirchoice or through independent travel agents. We strive to attract the middle to upper-middle income strata of thisconsumer segment through advertising and direct marketing.  This segment represents a large portion ofthe Atlantis’ guests.

 

The package tour and travel segment consists of visitors who utilizetravel packages offered by wholesale operators. We market to this segment through relationships with select wholesalers,primarily to generate guest visits and supplement mid-week occupancy.

 

We welcome domestic and international reservations on the Atlantis’website www.atlantiscasino.com and are featured on major package tour andtravel websites.

 

We market to high-end players selectively through direct sales.  We utilize complimentary rooms, food andbeverage, special events and the extension of gaming credit to attract, andmaintain patronage from, high-end players.

 

CONVENTIONEERS:  Convention business, like package tour andtravel business, supplements occupancy during lower-demand periods.  Conventioneers also typically pay higheraverage room rates than non-conventioneers. We selectively seek convention and meeting groups that we believe will

 

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materiallyenhance the Atlantis’ occupancy and daily room rates, as well as those webelieve will be more likely to utilize our gaming products.  As the only hotel-casino within easy walkingdistance of the Reno-Sparks Convention Center, the Atlantis is, in our view,uniquely positioned to capitalize on this expanding segment.  We believe the Reno-Sparks Convention Centerhas created, and we expect will continue to create, additional guest trafficfor the Atlantis within this market segment that is presently underserved inthe Reno area.  As described in the “THEATLANTIS CASINO RESORT SPA” section above, an enclosed pedestrian skybridge over Peckham Lanehas been constructed that connects the Atlantis directly into the Reno-SparksConvention Center facilities.

 

Wemarket to all guest segments, including conventioneers, on the basis of thelocation, quality and ambiance of the Atlantis facility, gaming values, friendly,efficient service, and the quality and relative value of Atlantis rooms, foodand beverage offerings, entertainment and promotions.

 

Ourfrequent player club, “Club Paradise,” allows our guests to be eligible toreceive rewards and privileges based on the amount of their play, whileallowing us to track their play through a computerized system. We use thisinformation to determine appropriate levels of complimentary awards, and forguiding our direct marketing efforts. We believe that Club Paradise significantlyenhances our ability to build guest loyalty and generate repeat guest visits.

 

NORTHERNNEVADA RESIDENTS:  We market to northernNevada residents (referred to from time to time as “Locals”) on the basis ofthe Atlantis’ location and accessibility; convenient surface parking; gamingvalues; ambiance; friendly efficient service; quality and relative value offood and beverage offerings.

 

**COMPETITION**

 

Competitionin the Reno area gaming market is intense. Based on information obtained from the December 31, 2009 GamingRevenue Report published by the Nevada State Gaming Control Board, there areapproximately 10 casinos in the Reno area which generate more than $12.0million each in annual gaming revenues.

 

Webelieve that the Atlantis’ primary competition for leisure travelers comes fromother large-scale casinos that offer amenities that appeal to middle toupper-middle income guests.  We competefor leisure travelers on the basis of the desirability of our location, thequality and ambiance of the Atlantis facility, friendly, efficient service, thequality and relative value of its rooms and food and beverage offerings,entertainment offerings, promotions and gaming values. We believe that ourlocation away from downtown Reno is appealing to newer and more affluentguests.

 

Webelieve that the Atlantis’ primary competition for conventioneers comes fromother large-scale hotel casinos in the Reno area that actively target theconvention market segment, and from other cities in the western United Stateswith large convention facilities and substantial hotel capacity, including LasVegas.  We compete for conventioneersbased on the desirability of our location, the quality and ambiance of theAtlantis facility, meeting and banquet rooms designed to appeal to conventionsand groups, friendly, efficient service, and the quality and relative value ofits rooms and food and beverage offerings. We believe that the Atlantis’ proximity to the Reno-Sparks ConventionCenter, and the enclosed pedestrian skybridge over Peckham Lane that connectsthe Atlantis directly into the Reno-Sparks Convention Center facilities,affords us a distinct competitive advantage in attracting conventioneers.

 

Webelieve that the Atlantis’ competition for northern Nevada residents comesprimarily from other large-scale casinos located outside of downtown Reno thatoffer amenities that appeal to middle to upper-middle income guests, andsecondarily with those casinos located in downtown Reno that offer similaramenities.  We compete for northernNevada residents primarily on the basis of the desirability of 

 

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ourlocation, the quality and ambiance of the Atlantis facility, friendly,efficient service, the quality and relative value of our food and beverageofferings, entertainment offerings, promotions and gaming values.  We believe the Atlantis’ proximity toresidential areas in south Reno and its abundant surface parking provide us anadvantage over the casinos located in downtown Reno in attracting Locals.

 

TheAtlantis also competes for gaming guests with hotel casino operations locatedin other parts of Nevada, especially Las Vegas and Lake Tahoe, and with hotelcasinos, Native American owned casinos, and riverboat casinos located elsewherethroughout the United States and the world. We believe that the Atlantis also competes to a lesser extent withstate-sponsored lotteries, off-track wagering, card parlors, and other forms oflegalized gaming, particularly in northern California and the PacificNorthwest.

 

Theconstitutional amendment approved by California voters in 2000 allowing theexpansion of Native American casinos in California has had an adverse impact oncasino revenues in Nevada in general, and many analysts have continued topredict the impact will be more significant on the Reno-Lake Tahoe market.  The extent of this continued impact isdifficult to predict, but we believe that the impact on us will continue to bemitigated to some extent by the revenue generated from the Reno area residentsand our proximity to the Reno-Sparks Convention Center.  However, if other Reno area casinos continueto suffer business losses due to increased pressure from California NativeAmerican casinos, they may intensify their marketing efforts to Reno-arearesidents as well. However, we believe our numerous amenities, such as a widearray of restaurants, banquet facilities, spa and surface parking are keyadvantages in our ability to attract Locals that competitor facilities cannoteasily match without major capital expenditures.

 

Certain experiencedNevada gaming operators have agreements to build and manage Native Americancasino facilities near San Francisco, one of Reno’s key feeder markets. Oncethese facilities receive all the required permits and are built, they couldprovide an alternative for drive market guests to Reno area casinos, especiallyduring certain winter periods when auto travel through the Sierra Nevadamountain passes is hampered. One major facility near Sacramento has beenoperating since June 2003 and a second Sacramento area facility opened in2008.  Both have been very successful,adversely impacting many hotel casinos in Reno.

 

Wealso believe that the legalization of unlimited land-based casino gaming in ornear any major metropolitan area in the Atlantis’ feeder markets, such as SanFrancisco or Sacramento, could have a material adverse impact on our business.

 

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

 

**REGULATIONAND LICENSING**

** **

Theownership and operation of casino gaming facilities in Nevada are subject tothe Nevada Gaming Control Act and the regulations promulgated thereunder,referred to as the Nevada Act, and various local regulations.  Our gaming operations are subject to thelicensing and regulatory control of the Nevada Gaming Commission, the NevadaState Gaming Control Board, and the Reno City Council, referred to collectivelyas the Nevada Gaming Authorities.

 

Thelaws, regulations and supervisory procedures of the Nevada Gaming Authoritiesare based upon declarations of public policy that are concerned with, amongother things:

 

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·                  the prevention of unsavoryor unsuitable persons from having a direct or indirect involvement with gamingat any time or in any capacity;

·                  the establishment andmaintenance of responsible accounting practices and procedures;

·                  the maintenance of effectivecontrols over the financial practices of licensees, including the establishmentof minimum procedures for internal fiscal affairs and the safeguarding ofassets and revenues, providing reliable record keeping and requiring the filingof periodic reports with the Nevada Gaming Authorities;

·                  the prevention of cheatingand fraudulent practices; and

·                  providing a source of stateand local revenues through taxation and licensing fees.

 

Changesin such laws, regulations and procedures could have an adverse effect on ourgaming operations.

 

GoldenRoad, our subsidiary which operates the Atlantis, is required to be licensed bythe Nevada Gaming Authorities.  Thegaming license requires the periodic payment of fees and taxes and is nottransferable.  We are registered by theNevada Gaming Commission as a publicly traded corporation, or RegisteredCorporation.  As such, we are requiredperiodically to submit detailed financial and operating reports to the NevadaGaming Commission and furnish any other information that the Nevada GamingCommission may require.  No person maybecome a stockholder of, or receive any percentage of profits from, Golden Roadwithout first obtaining licenses and approvals from the Nevada GamingAuthorities.  Golden Road and Monarchhave obtained from the Nevada Gaming Authorities the various registrations,approvals, permits and licenses required in order to engage in gamingactivities in Nevada.

 

TheNevada Gaming Authorities may investigate any individual who has a materialrelationship to, or material involvement with, Golden Road or Monarch in orderto determine whether that individual is suitable or should be licensed as abusiness associate of a gaming licensee. Officers, directors and key employeesof Golden Road must file applications with the Nevada Gaming Authorities andmay be required to be licensed or found suitable by the Nevada GamingAuthorities.  Our officers, directors andkey employees who are actively and directly involved in gaming activities ofGolden Road may be required to be licensed or found suitable by the NevadaGaming Authorities.  The Nevada GamingAuthorities may deny an application for licensing for any cause that they deemreasonable. A finding of suitability is comparable to licensing, and bothrequire submission of detailed personal and financial information followed by athorough investigation.  Applicants forlicensing or a finding of suitability must pay all costs of the investigation.Changes in licensed positions must be reported to the Nevada Gaming Authorities.In addition to their authority to deny an application for a finding ofsuitability or licensure, the Nevada Gaming Authorities also have jurisdictionto disapprove a change in a corporate position.

 

Ifthe Nevada Gaming Authorities were to find an officer, director or key employeeunsuitable for licensing or unsuitable to continue having a relationship withGolden Road or us, the companies involved would have to sever all relationshipswith that person.  In addition, theNevada Gaming Commission may require that we terminate the employment of anyperson who refuses to file appropriate applications.  Determinations of suitability or of questionspertaining to licensing are not subject to judicial review in Nevada.

 

Weare required to submit detailed financial and operating reports to the NevadaGaming Commission.  Substantially allmaterial loans, leases, sales of securities and similar financing transactionsby us must be reported to, or approved by, the Nevada Gaming Commission.

 

Ifit were determined that we violated the Nevada Act, our gaming licenses andregistrations with the Nevada Gaming Commission could be limited, conditioned,suspended or revoked, subject to compliance with certain statutory andregulatory procedures.  In addition, weand the persons involved 

 

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could be subject tosubstantial fines for each separate violation of the Nevada Act at thediscretion of the Nevada Commission. Further, the Nevada Gaming Commission could appoint a supervisor tooperate our gaming properties and, under certain circumstances, earningsgenerated during the supervisor’s appointment (except for the reasonable rentalvalue of our gaming properties) could be forfeited to the State of Nevada.  The limitation, conditioning or suspension ofany gaming license or the appointment of a supervisor could (and revocation ofany gaming license would) materially adversely affect our gaming operations.

 

Anybeneficial holder of our voting securities, regardless of the number of sharesowned, may be required to file an application, be investigated, and have hissuitability as a beneficial holder of our voting securities determined if theNevada Gaming Commission has reason to believe that such ownership wouldotherwise be inconsistent with the declared policies of the State ofNevada.  The applicant must pay all costsof investigation incurred by the Nevada Gaming Authorities in conducting anysuch investigation.

 

TheNevada Gaming Act requires any person who acquires more than 5% of Monarch’svoting securities to report the acquisition to the Nevada GamingCommission.  The Nevada Act requires thatbeneficial owners of more than 10% of our voting securities apply to the NevadaGaming Commission for a finding of suitability within 30 days after theChairman of the Nevada Gaming Control Board mails the written notice requiringsuch filing.  Under certaincircumstances, an “institutional investor,” as defined in the Nevada Act, whichacquires more than 10%, but not more than 25%, of our voting securities mayapply to the Nevada Gaming Commission for a waiver of such finding ofsuitability if the institutional investor holds the voting securities forinvestment purposes only, and for a waiver of the requirement for an approvalof a change of control if the acquisition is above 20% of the votingsecurities.  An institutional investor isnot deemed to hold voting securities for investment purposes unless they wereacquired and are held in the ordinary course of business as an institutionalinvestor and not for the purpose of causing, directly or indirectly, theelection of a majority of the members of our board of directors, any change inour corporate charter, bylaws, management, policies or operations, or any ofour gaming affiliates, or any other action that the Nevada Gaming Commissionfinds to be inconsistent with holding our voting securities for investmentpurposes only.  Activities that are notdeemed to be inconsistent with holding voting securities for investmentpurposes only include:

 

·                  voting on all matters votedon by stockholders;

·                  making financial and otherinquiries of management of the type normally made by securities analysts forinformational purposes and not to cause a change in its management, policies oroperations; and

·                  such other activities as theNevada Gaming Commission may determine to be consistent with such investmentintent.

 

Ifthe beneficial holder of voting securities who must be found suitable is acorporation, partnership or trust, it must submit detailed business andfinancial information including a list of beneficial owners.  The applicant is required to pay all costs ofinvestigation.

 

Anyperson who fails or refuses to apply for a finding of suitability or a licensewithin 30 days after being ordered to do so by the Nevada Gaming Commission orthe Chairman of the Nevada State Gaming Control Board may be foundunsuitable.  The same restrictions applyto a record owner if the record owner, after request, fails to identify thebeneficial owner.  Any stockholder foundunsuitable and who holds, directly or indirectly, any beneficial ownership ofthe common stock of a Registered Corporation beyond such period of time as maybe prescribed by the Nevada Gaming Commission may be guilty of a criminaloffense.  We are subject to disciplinaryaction if, after we receive notice that a person is unsuitable to be astockholder or to have any other relationship with us, we:

 

·                  pay that person any dividendor interest upon voting securities,

 

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·                  allow that person toexercise, directly or indirectly, any voting right conferred through securitiesheld by that person,

·                  pay remuneration in any formto that person for services rendered or otherwise, or

·                  fail to pursue all lawfulefforts to require such unsuitable person to relinquish his voting securitiesfor cash at fair market value.

 

TheNevada Gaming Commission may, in its discretion, require the holder of any debtsecurity of a Registered Corporation to file applications, be investigated andbe found suitable to own the debt security of a Registered Corporation.  If the Nevada Gaming Commission determinesthat a person is unsuitable to own such security, then pursuant to the NevadaAct, the Registered Corporation can be sanctioned, including the loss of itsapprovals if, without the prior approval of the Nevada Gaming Commission, it:

 

·                  pays to the unsuitableperson any dividend, interest, or any distribution;

·                  recognizes any voting rightby such unsuitable person in connection with such securities;

·                  pays the unsuitable personremuneration in any form; or

·                  makes any payment to theunsuitable person by way of principal, redemption, conversion, exchange,liquidation or similar transaction.

 

Weare required to maintain a current stock ledger in Nevada, and the NevadaGaming Authorities may examine the ledger at any time.  If any securities are held in trust by anagent or a nominee, the record holder may be required to disclose the identityof the beneficial owner to the Nevada Gaming Authorities.  A failure to make such disclosure may begrounds for finding the record holder unsuitable.  We are also required to render maximumassistance in determining the identity of the beneficial owner.  The Nevada Gaming Commission has the power torequire our stock certificates to bear a legend indicating that the securitiesare subject to the Nevada Act.

 

Wemay not make a public offering of our securities without the prior approval ofthe Nevada Gaming Commission if the securities or proceeds there from areintended to be used to construct, acquire or finance gaming facilities inNevada, or to retire or extend obligations incurred for purposes ofconstructing, acquiring or financing gaming facilities.  Any approval, if granted, does not constitutea finding, recommendation or approval by the Nevada Gaming Commission or theNevada Gaming Control Board as to the accuracy or adequacy of the prospectus orthe investment merits of the securities offered.  Any representation to the contrary isunlawful.

 

Changesin our control through merger, consolidation, stock or asset acquisitions,management or consulting agreements, or any act or conduct by a person wherebythat person obtains control (including foreclosure on the pledged shares), maynot occur without the prior approval of the Nevada Gaming Commission.  Entities seeking to acquire control of aRegistered Corporation must satisfy the Nevada State Gaming Control Board andNevada Gaming Commission in a variety of stringent standards prior to assumingcontrol of such Registered Corporation. The Nevada Gaming Commission may also require controlling stockholders,officers, directors and other persons having a material relationship orinvolvement with the entity proposing to acquire control, to be investigatedand licensed as part of the approval process relating to the transaction.

 

TheNevada legislature has declared that some corporate acquisitions opposed bymanagement, repurchases of voting securities and corporate defense tacticsaffecting Nevada gaming licensees, and Registered Corporations that areaffiliated with those operations, may be injurious to stable and productivecorporate gaming.  The Nevada GamingCommission has established a regulatory scheme to ameliorate the potentiallyadverse effects of these business practices upon Nevada’s gaming industry andto further Nevada’s policy to:

 

·                  assure the financialstability of corporate gaming operators and their affiliates;

 

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·                  preserve the beneficialaspects of conducting business in the corporate form; and

·                  promote a neutralenvironment for the orderly governance of corporate affairs.

 

Weare, in certain circumstances, required to receive approval from the NevadaGaming Commission before we can make exceptional repurchases of votingsecurities above their current market price and before we can consummate acorporate acquisition opposed by management. The Nevada Act also requires prior approval of a plan ofrecapitalization proposed by our board of directors in response to a tenderoffer made directly to a Registered Corporation’s stockholders for the purposesof acquiring control of the Registered Corporation.

 

Licenseefees and taxes, computed in various ways depending on the type of gaming oractivity involved, are payable to the State of Nevada and to the counties andcities in which the Nevada licensee’s respective operations are conducted.  Depending upon the particular fee or taxinvolved, these fees and taxes are payable monthly, quarterly or annually andare based upon either:

 

·                  a percentage of the grossrevenues received;

·                  the number of gaming devicesoperated; or

·                  the number of table gamesoperated.

 

Alive entertainment tax is also paid where entertainment is furnished inconnection with the selling of food or refreshments.  Nevada licensees that hold a license as anoperator of a slot route, a manufacturer or a distributor also pay certain feesand taxes to the State of Nevada.

 

Anyperson who is licensed, required to be licensed, registered, required to beregistered, or is under common control with such persons, referred to asLicensees, and who is or proposes to become involved in a gaming ventureoutside of Nevada is required to deposit with the Nevada State Gaming ControlBoard, and thereafter maintain, a revolving fund in the amount of $10,000 topay the expenses of investigation by the Nevada State Gaming Control Board oftheir participation in foreign gaming. The revolving fund is subject to increase or decrease in the discretionof the Nevada Gaming Commission.  Thereafter,Licensees are required to comply with certain reporting requirements imposed bythe Nevada Act.  Licensees are alsosubject to disciplinary action by the Nevada Gaming Commission if theyknowingly violate any laws of the foreign jurisdiction pertaining to theforeign gaming operation, fail to conduct the foreign gaming operation inaccordance with the standards of honesty and integrity required of Nevadagaming operations, engage in activities that are harmful to the State of Nevadaor its ability to collect gaming taxes and fees, or employ a person in theforeign operation who has been denied a license or finding of suitability inNevada on the ground of personal unsuitability.

 

**EMPLOYEES**

 

As ofMarch 4, 2010, we had approximately 1,770 employees.  None of our employees are covered bycollective bargaining agreements.  Webelieve that our relationship with our employees is good.

 

**ITEM 1A. RISKFACTORS**

 

Ourbusiness prospects are subject to various risks and uncertainties that impactour business. You should carefully consider the following discussion of risks,and the other information provided in this annual report on Form 10-K. Therisks described below are not the only ones facing us; however, they dorepresent all material risks currently known to us.  Additional risks that are presently unknownto us or that we currently deem immaterial may also impact our business.

 

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**RECENTINSTABILITY IN THE FINANCIAL MARKETS MAY HAVE AN IMPACT ON OUR BUSINESS**

Recently, the residential real estate market in Reno and the U.S. hasexperienced a significant downturn due to declining real estate values,substantially reducing mortgage loan originations and securitizations, andprecipitating more generalized credit market dislocations and a significantcontraction in available liquidity globally. These factors, combined withdeclining business and consumer confidence and increased unemployment, haveprecipitated an economic recession. Individual consumers are experiencinghigher delinquency rates on various consumer loans and defaults on indebtednessof all kinds have increased.  Furtherdeclines in real estate values in Reno and the U.S. or elsewhere and continuingcredit and liquidity concerns could have an adverse affect on our results ofoperations.

 

**OUR BUSINESS MAY BE ADVERSELYIMPACTED BY WEAKENED ECONOMIC CONDITIONS IN CALIFORNIA AND THE PACIFICNORTHWEST**

**Because California and the Pacific Northwest aresignificant markets for our leisure traveler and conventioneer guests, ourbusiness may be adversely impacted in the event of further weakened economicconditions in those geographical markets.**

** **

**OURBUSINESS IS PARTICULARLY SENSITIVE TO REDUCTIONS IN DISCRETIONARY CONSUMERSPENDING AS A RESULT OF DOWNTURNS IN THE ECONOMY**

Consumerdemand for entertainment and other amenities at hotel-casino properties, suchas ours, are particularly sensitive to downturns in the economy and thecorresponding impact on discretionary spending on leisure activities. Forexample, the year ended December 31, 2009 was one of the toughest periodsin Reno Locals history. Changes in discretionary consumer spending or consumerpreferences brought about by factors such as perceived or actual generaleconomic conditions, effects of the current decline in consumer confidence inthe economy, including the current housing crisis and credit crisis, the impactof high energy and food costs, the increased cost of travel, the potential forcontinued bank failures, perceived or actual disposable consumer income andwealth, or fears of war and future acts of terrorism could further reducecustomer demand for the amenities that we offer, thus imposing practical limitson pricing and negatively impacting our results of operations and financialcondition.

 

Thecurrent housing crisis and economic slowdown in the United States has resultedin a significant decline in the amount of tourism and spending in the Renoarea. If this decline continues, our financial condition, results of operationsand cash flows would be adversely affected.

 

**INTENSE COMPETITION EXISTS IN THEGAMING INDUSTRY, AND WE EXPECT COMPETITION TO CONTINUE TO****INTENSIFY**

Thegaming industry is highly competitive for both customers and employees,including those at the management level. We compete with numerous casinos andhotel-casinos of varying quality and size in our market. We also compete withother non-gaming resorts and vacation destinations, and with various othercasino and other entertainment businesses, and could compete with any new formsof gaming that may be legalized in the future. The casino entertainmentbusiness is characterized by competitors that vary considerably in their size,quality of facilities, number of operations, brand identities, marketing andgrowth strategies, financial strength and capabilities, level of amenities,management talent and geographic diversity. We compete directly with othercasino facilities operating in the immediate and surrounding market areas. Insome markets, we face competition from nearby markets in addition to directcompetition within our market areas.

 

Inrecent years, with fewer new markets opening for development, competition inexisting markets has intensified. We have invested in expanding the Atlantis.In addition, our competitors have also invested in expanding their existingfacilities and developing new facilities. This expansion of existing casinoentertainment properties, the increase in the number of properties and theaggressive marketing strategies of many of our competitors have increasedcompetition in our market, and this intense competition can be expected tocontinue. In addition, competition may intensify if our 

 

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competitorscommit additional resources to aggressive pricing and promotional activities inorder to attract customers.

 

Ifour competitors operate more successfully than we do, if they attract customersaway from us as a result of aggressive pricing and promotion, if they are moresuccessful than us in attracting and retaining employees, if their propertiesare enhanced or expanded, if they operate in jurisdictions that gives themoperating advantages due to differences or changes in gaming regulations ortaxes, or if additional hotels and casinos are established in and around  our market, we may lose market share or theability to attract or retain employees. In particular, the expansion of casinogaming in or near any geographic area from which we attract or expect to attracta significant number of our customers could have a significant adverse effecton our business, financial condition and results of operations.

 

**WE ARE SUBJECT TO EXTENSIVETAXATION POLICIES, WHICH MAY HARM OUR BUSINESS**

Thefederal government has, from time to time, considered a federal tax on casinorevenues and may consider such a tax in the future. In addition, gamingcompanies are currently subject to significant state and local taxes and fees,in addition to normal federal corporate income taxes, and such taxes and feesare subject to increase at any time.  In a Special Legislative Session in February 2010,the Nevada Legislature was asked to consider an increase in Nevada gamingtaxes. While the measure did not succeed, the Nevada Legislature will meetagain in 2011, and Nevada’s budget deficit is expected to cause pressure on theLegislature to consider new and additional taxes. If there is any materialincrease in state and local taxes and fees, our business, financial conditionand results of operations could be adversely affected.

 

**THE GLOBAL FINANCIAL CRISIS ANDDECLINE IN CONSUMER SPENDING MAY HAVE AN EFFECT ON OUR BUSINESS ANDFINANCIAL CONDITION IN WAYS THAT WE CURRENTLY CANNOT ACCURATELY PREDICT**

Thecontinued credit crisis, economic downturn and related turmoil in the globalfinancial system have had and may continue to have an effect on our businessand financial condition. We are not able to predict the duration or severity ofthe economic downturn.  The significant distress recently experienced byfinancial institutions has had, and may continue to have, far-reaching adverseconsequences across many industries, including the gaming industry. The ongoingcredit and liquidity crisis has greatly restricted the availability of capitaland has caused the cost of capital (if available) to be much higher than it hastraditionally been. Accessing the capital markets in this environment couldincrease the costs of our projects, which could have an impact on ourflexibility to react to changing economic and business conditions and ourability or willingness to fund any future expansion projects. All of theseeffects could have a material adverse effect on our business, financialcondition and results of operations.

 

**ENERGY PRICE INCREASES MAY ADVERSELYAFFECT OUR COST OF OPERATIONS AND OUR REVENUES**

TheAtlantis uses significant amounts of electricity, natural gas and other formsof energy.  While no shortages of energyor fuel have been experienced to date, substantial increases in energy and fuelprices, in the United States have, and may continue to, negatively affect ourresults of operations. The extent of the impact is subject to the magnitude andduration of the energy and fuel price increases, of which the impact could bematerial. In addition, energy and gasoline price increases could result in adecline of disposable income of potential customers, an increase in the cost oftravel and a corresponding decrease in visitation and spending at ourproperties, which could have a significant adverse effect on our business,financial condition and results of operations.

 

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**CERTAIN OF STOCKHOLDERS OWN LARGEINTERESTS IN OUR CAPITAL STOCK AND MAY SIGNIFICANTLY INFLUENCE OUR AFFAIRS**

John Farahi and BobFarahi, officers and directors of the Company, together with theirbrother Ben Farahi, beneficially own approximately 44% of the Company’soutstanding shares of common stock.   Assuch, members of the Farahi family, if voting together, have the ability tosignificantly influence our affairs, including the election of members of ourBoard of Directors and, except as otherwise provided by law, approving ordisapproving other matters submitted to a vote of our stockholders, including amerger, consolidation, or sale of assets.

 

**TO SERVICE OUR INDEBTEDNESS, WEWILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL**

Ourability to make payments on and to refinance our indebtedness and to fundfuture capital expenditures and expansion efforts will depend upon our abilityto generate cash in the future. This, to a certain extent, is subject togeneral economic, financial, competitive, legislative, regulatory and otherfactors that are beyond our control.  Itis possible that our business will generate insufficient cash flows fromoperations, or that future borrowings will be available to us under our bankcredit facility, in amounts sufficient to enable us to pay our indebtedness asit matures and to fund our other liquidity needs. We believe that we will needto refinance all or a portion of our indebtedness at maturity, and cannotprovide assurances that we will be able to refinance any of our indebtedness oncommercially reasonable terms, or at all. We may have to adopt one or morealternatives, such as reducing or delaying planned expenses and capitalexpenditures, selling assets or obtaining additional equity or debt financingor joint venture partners. These financing strategies may not be effected onsatisfactory terms, if at all.

 

**LIMITATIONS OR RESTRICTIONS ON OUR CREDITFACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY**

**Any renegotiation or refinancing of our Credit Facilitywould likely result in the amendment of material provisions of the CreditFacility, such as the interest rate charged and other material covenants.  Our Credit Facility is an important componentof our liquidity.  Any materialrestriction on our ability to use our Credit Facility or the failure to obtaina new credit facility upon either the maturity of the existing Credit Facilityor the depletion of funds remaining under the existing Credit Facility couldadversely impact our operations and future growth options.**

** **

**OUR BUSINESS MAY BE ADVERSELYIMPACTED IF THE RENO ECONOMY CONTINUES TO DECLINE**

**We market to and rely upon business from Reno arearesidents.  Adverse changes in thebusiness and employment conditions in Reno brought on by the economic recessionhave adversely impacted our business. There can be no guarantee that such conditions will improve or will notcontinue to worsen.  Additional erosionin business and employment conditions in Reno could adversely impact ourbusiness.**

** **

**THE GAMING INDUSTRY IS HIGHLY COMPETITIVEAND INCREASED COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTUREOPERATIONS**

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

 

Several Native Americancasinos have opened in Northern California since passage of the 2000constitutional amendment. Certain experienced Nevada gaming operators manageNative American casino facilities near Sacramento, one of Reno’s key feedermarkets.  One major facility near Sacramentohas been operating since June 2003 and a second facility near Sacramentoopened in 2008.  Both have been verysuccessful, adversely impacting many hotel casinos in Reno. Central andNorthern California gaming facilities could provide an alternative to Reno areacasinos, especially during certain winter 

 

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periods when auto travelthrough the Sierra Nevada mountain passes is hampered. This loss of Californiadrive-in guests could adversely affect our operations.

 

Wealso believe that the legalization of unlimited land-based casino gaming in ornear 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 ourbusiness.

 

In June 2004, fiveCalifornia Native American tribes signed compacts with the state that allow thetribes to increase the number of slot machines beyond the previous2,000-per-tribe limit in exchange for higher fees from each of the five tribes.  In February 2008, the voters of theState of California approved compacts with four tribes located in SouthernCalifornia that increase the limit of Native American operated slot machines inthe State of California.

 

Otherstates are also considering legislation that would enable the development andoperation of casinos or casino-like operations.

 

Inaddition, Native American gaming facilities in California and otherjurisdictions in some instances operate under regulatory requirements lessstringent than those imposed on Nevada licensed casinos, which could providethem a competitive advantage in our markets.  Moreover, there is apossibility of competition from internet and other account wagering gamingservices, which would allow their guests to wager on a wide variety of sportingevents and play Las Vegas-style casino games from home, and this could have amaterial adverse effect on our business, financial condition, operating resultsand prospects.

 

**OUR BUSINESS MAY BEADVERSELY IMPACTED BY THE ENTRY OF STATION CASINOS IN THE RENO MARKET**

StationCasinos, Inc., a casino operator operating primarily in the Las Vegasmarket and catering mainly to Las Vegas area residents, has acquired severalparcels in the Reno area and has announced plans to build two casinos, one ofwhich would be located within one mile of our Atlantis Casino Resort Spa.Station Casinos is the dominant casino operator catering to local residents inthe Las Vegas market. Should Station Casinos proceed with its plans, it willcreate additional competition for us in the Reno area resident, conventioneerand tour and travel markets and could have a material adverse impact on ourbusiness.

 

**OUR BUSINESS MAY BE ADVERSELYIMPACTED IF WE ARE UNABLE TO ADEQUATELY STAFF OUR OPERATIONS**

Duringperiods of robust business growth in Reno, the competition for employeesincreases.  During such times, new andgrowing business in the area may create job opportunities that at times haveexceeded the area’s supply of qualified employees.  If we are unable to attract and retainqualified employees, or if competition for employees results in materiallyincreased wages, our ability to maintain and grow our business could beadversely impacted.

 

**OURBUSINESS MAY BE ADVERSELY IMPACTED BY DOMESTIC AND INTERNATIONAL EVENTS**

Theterrorist attacks that took place in the United States on September 11,2001, were unprecedented events that created economic and businessuncertainties, 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 conflicts in Iraq and Afghanistan, have created economicand political uncertainties that could materially adversely affect ourbusiness, results of operations and financial condition in ways we cannotpredict.

 

**AN OUTBREAK OF HIGHLY INFECTIOUSDISEASE COULD ADVERSELY AFFECT THE NUMBER OF VISITORS TO OUR FACILITIES ANDDISRUPT OUR OPERATIONS,**

 

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**RESULTING IN A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION,RESULTS OF OPERATIONS AND CASH FLOWS**

Therehave been recent fears concerning the spread of an “avian flu”, H1N1 or “swineflu” and cruise ships have reported other highly infectious virus outbreaks.  Potential future outbreaks of highlyinfectious diseases may adversely affect the number of visitors to our propertyand our business and prospects. Furthermore, an outbreak might disrupt ourability to adequately staff our business and could generally disrupt ouroperations. If any of our guests or employees is suspected of having contractedcertain highly contagious diseases, we may be required to quarantine thesecustomers or employees or the affected areas of our facilities and temporarilysuspend part or all of our operations at affected facilities. Any new outbreakof such a highly infectious disease could have a material adverse effect on ourfinancial condition, results of operations and cash flows.

 

**FAILURE OF THE RENO-SPARKS CONVENTIONCENTER TO BOOK AND ATTRACT CONVENTION BUSINESS COULD ADVERSELY IMPACT OURBUSINESS**

TheAtlantis is the closest hotel-casino to the Reno-Sparks Convention Center. Ifthe Reno-Sparks Convention Center does not succeed in booking the anticipatedlevel of conventions, our future results of operations could be adverselyimpacted.

 

**BECAUSE WE ARE CURRENTLYDEPENDENT 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 OPERATINGPROPERTIES OR THAT OPERATES IN MORE MARKETS**

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

 

**OUR BUSINESS IS SUBJECT TO RESTRICTIONSAND LIMITATIONS IMPOSED BY GAMING REGULATORY AUTHORITIES THAT COULD ADVERSELYAFFECT US**

Theownership and operation of casino gaming facilities are subject to extensivestate and local regulation.  The State ofNevada 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 otherthings, limit, condition, suspend, revoke or decline to renew a license orapproval to own the stock of our Nevada subsidiary for any cause deemedreasonable by such licensing authority. If we violate gaming laws or regulations, substantial fines could belevied against us, our subsidiary and the persons involved, and we could beforced to forfeit a portion of our assets. The suspension, revocation or non-renewal of any of our licenses or thelevy on us of substantial fines or forfeiture of assets would have a materialadverse effect on our business, financial condition and results of operations.

 

Todate, we have obtained all governmental licenses, findings of suitability,registrations, permits and approvals necessary for the operation of our currentgaming activities.  However, gaminglicenses and related approvals are deemed to be privileges under Nevadalaw.  We cannot assure you that ourexisting licenses, permits and approvals will be maintained or extended.

 

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

Although we have general property insurance covering damage caused by acasualty loss (such as fire and natural disasters), each such policy hascertain exclusions. In addition, our property insurance is in an amount thatmay be less than the expected replacement cost of rebuilding the complex ifthere was a total loss. Our level of insurance coverage may not be adequate tocover all losses in the event of a major casualty. In addition, certaincasualty events, such as labor strikes, nuclear events, acts of war, loss ofincome due to cancellation of room reservations or conventions due to fear ofterrorism, deterioration 

 

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orcorrosion, insect or animal damage and pollution, might not be covered at allunder our policies. Therefore, certain acts could expose us to heavy, uninsuredlosses.

 

In addition, although we currently have insurance coverage foroccurrences of terrorist acts and for certain losses that could result fromthese acts, our terrorism coverage is subject to the same risks anddeficiencies as those described above for our general property coverage. Thelack of sufficient insurance for these types of acts could expose us to heavylosses in the event that any damages occur, directly or indirectly, as a resultof terrorist attacks or otherwise, which could have a significant negativeimpact 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 sufferbusiness disruption as a result of these events or be subject to claims bythird parties injured or harmed. While we carry business interruption insuranceand general liability insurance, this insurance may not be adequate to coverall losses in such event.

 

We renew our insurance policies on an annual basis. The cost ofcoverage may become so high that we may need to reduce our policy limits oragree to certain exclusions from our coverage. Among other factors, it ispossible that the situation in Iraq, Afghanistan, homeland security concerns,other catastrophic events or any change in government legislation governinginsurance coverage for acts of terrorism could materially adversely affectavailable insurance coverage and result in increased premiums on availablecoverage (which may cause us to elect to reduce our policy limits) andadditional 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 coveragefor losses due to acts of terrorism.

 

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

 

**IF THE STATE OF NEVADA OR THE CITY OFRENO INCREASES GAMING TAXES AND FEES, OUR RESULTS OF OPERATIONS COULD BEADVERSELY AFFECTED**

Stateand local authorities raise a significant amount of revenue through taxes andfees on gaming activities. From time to time, legislators and officials haveproposed changes in tax laws, or in the administration of such laws, affectingthe gaming industry. In addition, worsening economic conditions could intensifythe efforts of state and local governments to raise revenues through increasesin gaming taxes or other fees.  If theState of Nevada or the City of Reno were to increase gaming taxes and fees, ourresults of operations could be adversely affected.

 

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

Wedepend on the continued performances of John Farahi and Bob Farahi, our ChiefExecutive Officer and our President, respectively, and their managementteam.  If we lose the services of theFarahi brothers, or other senior Atlantis management personnel, and cannotreplace such persons in a timely manner, our business could be materiallyadversely affected.

 

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

Adversewinter weather conditions, particularly snowfall, can prevent customers fromtraveling or make it difficult for them to drive to the Atlantis.  Adverse winter weather would mostsignificantly affect our drive-in customers from northern California and thePacific Northwest.  If the Reno areaitself were to experience prolonged adverse winter weather conditions, ourresults of operations and financial condition could also be materiallyadversely affected.

 

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

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

 

**ENERGY PRICE INCREASES MAY ADVERSELY AFFECT OUR COST OFOPERATIONS AND OUR REVENUES**

Ourfacility uses significant amounts of electricity, natural gas and other formsof energy. While no shortages of energy or fuel have been experienced to date,increases in energy and fuel prices in the United States may negatively affectour operating results. The extent of the impact is subject to the magnitude andduration of the energy and fuel price increases, but this impact could bematerial. In addition, energy and gasoline price increases in cities thatconstitute a significant source of customers for our properties could result ina decline in disposable income of potential customers and a correspondingdecrease in visitation and spending at our properties, which would negativelyimpact revenues.

 

**CHANGES IN REGULATIONS ONLAND USE REQUIREMENTS COULD ADVERSELY IMPACT OUR BUSINESS**

Achange in regulations on land use requirements with regard to development ofnew hotel casinos in the proximity of the Atlantis could have an adverse impacton our business, results of operations, and financial condition.  A relaxation in such regulations could makeit easier for competitors to enter our immediate market.  A tightening of such regulations couldadversely impact our future expansion opportunities.

 

**OUR RESULTSOF OPERATIONS MAY BE ADVERSELY AFFECTED BY HIGH-END PLAYERS’ WINNINGS**

Althoughnot the major focus of our marketing efforts, we have selectively targetedhigh-end players. Should one or more of these high-end players win large sumsin our casino, or should a material amount of credit extended to such playersnot be repaid, our results of operations could be adversely impacted.

 

**OUR COMMON STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY, AND ASTOCKHOLDER’S INVESTMENT COULD DECLINE IN****VALUE**

The market price of ourcommon stock may fluctuate substantially due to many factors, including:

 

·      actual oranticipated fluctuations in our results of operations;

 

·      announcementsof significant acquisitions or other agreements by us or by our competitors; 

 

·      our sale of common stock orother securities in the future; 

 

·      trading volume of our commonstock; 

 

·      conditions and trends in thegaming and destination entertainment industries; 

 

·      changes in theestimation of the future size and growth of our markets; and 

 

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·      generaleconomic conditions, including, without limitation, changes in the cost of fueland air travel. 

 

Inaddition, the stock market in general has experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to companies’operating performance. Broad market and industry factors may materially harmthe market price of our common stock, regardless of our operating performance.In the past, following periods of volatility in the market price of a company’ssecurities, stockholder derivative lawsuits and/or securities class actionlitigation has often been instituted against that company. Such litigation, ifinstituted against us, could result in substantial costs and a diversion ofmanagement’s attention and resources.

 

**WE HAVE THE ABILITY TO ISSUE ADDITIONAL EQUITY SECURITIES,WHICH WOULD LEAD TO DILUTION OF OUR ISSUED AND OUTSTANDING COMMON STOCK**

Theissuance of additional equity securities or securities convertible into equitysecurities would result in dilution of our existing stockholders’ equityinterests in us. Our Board of Directors has the authority to issue, withoutvote or action of stockholders, preferred stock in one or more series, and hasthe ability to fix the rights, preferences, privileges and restrictions of anysuch 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 ofour common stock. If we issue convertible preferred stock, a subsequentconversion may dilute the current common stockholders’ interest.

 

**WE DO NOT INTEND TO PAY CASH DIVIDENDS.  AS A RESULT, STOCKHOLDERS WILL BENEFIT FROMAN INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES IN VALUE**

Wehave never paid a cash dividend on our common stock, and we do not plan to payany cash dividends on our common stock in the foreseeable future. We currentlyintend to retain any future earnings to finance our operations and furtherexpansion and growth of our business, including acquisitions. As a result, thesuccess of an investment in our common stock will depend upon any futureappreciation in its value. We cannot guarantee that our common stock willappreciate in value or even maintain the price at which stockholders havepurchased their shares.

 

**ITEM 1B.UNRESOLVED STAFF COMMENTS**

 

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

 

**ITEM 2.PROPERTIES**

 

Ourproperties consist of:

 

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

 

(b)  Anapproximately 16-acre site, adjacent to the Atlantis and connected to theAtlantis by the Sky Terrace, which includes approximately 11 acres of pavedparking used for customer, employee and valet parking.  The remainder of the site isundeveloped.  This site is compliant withall casino zoning requirements and is suitable and available for futureexpansion of the Atlantis facilities, parking, or complementary resort casinoand/or entertainment amenities.  We havenot determined the ultimate use of this site.

 

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

 

(d)  Leased landconsisting of 37,368 square-feet next door to the Atlantis serving as adriveway entrance to the Atlantis.  Theleast term ends in 2019.  For a furtherdescription of the least terms, see Item 8, “FINANCIAL STATEMENTS, Notes toConsolidated Financial Statements, Notes 4 and 10”.

 

(e) An approximate2.3-acre site with a 27,508 square foot building adjacent to the AdministrativeSite utilized for storage and administrative offices.  The parcel was subject to a lease in 2009until its acquisition in November 2009. For a further description of the least terms, see Item 8, “FINANCIALSTATEMENTS, Notes to Consolidated Financial Statements, Notes 4 and 10”.

 

(f) An approximate5.3-acre site with a 14,376 square foot building across Coliseum Way from theAtlantis.  A portion of the site, and thebuilding, have been leased back to the seller. We expect to use the site for additional parking, storage andadministrative offices for Atlantis staff.

 

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

 

**ITEM 3.LEGAL PROCEEDINGS**

 

As previously disclosed,litigation was filed against Monarch on January 27, 2006, by KerznerInternational Limited (“Kerzner”) owner of the Atlantis, Paradise Island,Bahamas in the United States District Court, District of Nevada.  The casenumber assigned to the matter is 3:06-cv-00232-ECR (RAM).  The complaintseeks declaratory judgment prohibiting Monarch from using the name “Atlantis”in connection with offering casino services other than at Monarch’s AtlantisCasino Resort Spa located in Reno, Nevada, and particularly prohibiting Monarchfrom using the “Atlantis” name in connection with offering casino services inLas Vegas, Nevada; injunctive relief enforcing the same; unspecifiedcompensatory and punitive damages; and other relief. Monarch believes Kerzner’sclaims to be entirely without merit and is defending vigorously against thesuit. Further, Monarch has filed a counterclaim against Kerzner seeking tocancel Kerzner’s registration of the Atlantis mark for casino services and toobtain declaratory relief on these issues.  Upon conclusion of discovery,various motions were filed by the parties. On December 14, 2009, the court ruled on the pending motions,significantly narrowing the issues for trial. Kerzner next filed a Request for Certification of Interlocutory Appeal asto the court’s December 14, 2009 Orders. Kerzner’s Request was rejected by the court in its Order issued February 25,2010, and the parties are proceeding with pre-trial preparation.  No trial date has been set as of this filing.

 

We are party to other claimsthat arise in the normal course of business.  Management believes that theoutcomes of such claims will not have a material adverse impact on ourfinancial condition, cash flows or results of operations.

 

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

 

Therewere no matters submitted to a vote of our security holders during the fourthquarter of 2009.

 

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**PART II**

 

**ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

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

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $        | 12.26      |     | $          | 3.59 |   | $ | 24.47 |   | $ | 15.89 |   |
| Second quarter |       | $        | 11.08      |     | $          | 5.16 |   | $ | 19.23 |   | $ | 11.52 |   |
| Third quarter  |       | $        | 13.32      |     | $          | 6.89 |   | $ | 14.53 |   | $ | 10.20 |   |
| Fourth quarter |       | $        | 10.93      |     | $          | 6.22 |   | $ | 11.81 |   | $ | 5.16 |   |

 

Asof March 5, 2010, there were approximately 85 holders of record of ourcommon stock, and approximately 2,033 beneficial stockholders.

 

We have never paiddividends. We presently intend to retain earnings and use free cash flow tofinance our operating activities, for maintenance capital expenditures and topay down our debt. We do not anticipate declaring cash dividends in theforeseeable future. Our bank loan agreement also contains provisions thatrequire the achievement of certain financial ratios before we can pay ordeclare dividends to our stockholders. See Item 8, “FINANCIAL STATEMENTS, Notesto Consolidated Financial Statements, Note 5.”

 

Forinformation relating to securities authorized for issuance under equitycompensation plans, see Part III, Item 12 -Security Ownership of Certain Beneficial Owners and Management.

 

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**STOCK PERFORMANCE GRAPH**

 

The followingchart reflects the cumulative total return (change in stock price plusreinvested dividends) of a $100 investment in the Company’s Common Stock fromthe five-year period from December 31, 2004 through December 31,2009, in comparison to the Standard & Poor’s 500 Composite Stock Indexand an industry peer group index. The comparisons are not intended to forecastor be indicative of possible future performance of the Company’s Common Stock.

 

 
| ** **                                  | ** ** | **Period Ending** | ** ** |
|---------------------------------------------|------------|-------------------|------------|
| **Index**                                   | ** ** | **12/31/04**      | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** | **12/31/09** | ** ** |
| Monarch Casino & Resort, Inc. |       | 100.00            |       | 111.47 |   | 117.78 |   | 118.77 |   | 57.46 |   | 39.95 |   |
| S&P 500                                 |       | 100.00            |       | 104.91 |   | 121.48 |   | 128.16 |   | 80.74 |   | 102.11 |   |
| Peer Group Index*                           |       | 100.00            |       | 92.88 |   | 160.96 |   | 194.25 |   | 30.90 |   | 46.41 |   |

 

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**Peer Group index comprised of:  Ameristar Casinos, Inc.; Boyd GamingCorp; 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.; and Wynn Resorts,Ltd*

 

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**ITEM 6.SELECTED FINANCIAL DATA**

 
| ** **                                                                        | ** ** | **Years ended December 31,  (Amounts in thousands, except per share amounts)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING RESULTS                                                                 |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Casino revenues                                                                   |       | $                                                                              | 94,511     |   | $ | 100,904 |   | $ | 110,259 |   | $ | 103,333 |   | $ | 94,501 |   |
| Other revenues                                                                    |       | 64,941                                                                         |       | 66,688 |   | 75,117 |   | 72,329 |   | 67,165 |   |
| Gross revenues                                                                    |       | 159,452                                                                        |       | 167,592 |   | 185,376 |   | 175,662 |   | 161,666 |   |
| Promotional allowances                                                            |       | (25,720                                                                        | )          | (26,222 | ) | (25,519 | ) | (23,693 | ) | (21,881 | ) |
| Net revenues                                                                      |       | 133,732                                                                        |       | 141,370 |   | 159,856 |   | 151,969 |   | 139,785 |   |
| Income from operations                                                            |       | 9,142                                                                          | (F1)       | 14,686 | (F2) | 35,688 | (F3) | 33,492 | (F4) | 33,069 | (F5) |
| Income before income tax                                                          |       | 7,163                                                                          |       | 14,518 |   | 37,464 |   | 33,860 |   | 32,056 |   |
| Net income                                                                        |       | $                                                                              | 4,841      |   | $ | 9,541 |   | $ | 24,480 |   | $ | 22,080 |   | $ | 21,035 |   |
|                                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |
| INCOME PER SHARE OF COMMON STOCK                                                  |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net income per share                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | $                                                                              | 0.30       |   | $ | 0.56 |   | $ | 1.28 |   | $ | 1.16 |   | $ | 1.12 |   |
| Diluted                                                                           |       | $                                                                              | 0.30       |   | $ | 0.56 |   | $ | 1.27 |   | $ | 1.15 |   | $ | 1.10 |   |
|                                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of common shares and  potential common shares outstanding |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | 16,123                                                                         |       | 16,958 |   | 19,058 |   | 18,990 |   | 18,849 |   |
| Diluted                                                                           |       | 16,159                                                                         |       | 17,017 |   | 19,329 |   | 19,275 |   | 19,094 |   |
|                                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |
| OTHER DATA                                                                        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                     |       | $                                                                              | 12,501     |   | $ | 9,892 |   | $ | 8,138 |   | $ | 8,559 |   | $ | 8,379 |   |
| Other (expense) income                                                            |       | $                                                                              | (1,979     | ) | $ | (168 | ) | $ | 1,776 |   | $ | 368 |   | $ | (1,013 | ) |
| Capital expenditures (F6)                                                         |       | $                                                                              | 15,845     |   | $ | 67,882 |   | $ | 17,287 |   | $ | 5,795 |   | $ | 6,113 |   |
|                                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |
| BALANCE SHEET DATA                                                                |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Total assets                                                                      |       | $                                                                              | 185,787    |   | $ | 182,502 |   | $ | 154,286 |   | $ | 138,381 |   | $ | 117,670 |   |
| Current maturities of long-term debt                                              |       | $                                                                              | 1,000      |   | $ | 2,500 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt, less current maturities                                           |       | $                                                                              | 47,500     |   | $ | 47,500 |   | $ | — |   | $ | — |   | $ | 8,100 |   |
| Stockholders’ equity (F7)                                                    |       | $                                                                              | 112,504    |   | $ | 105,595 |   | $ | 129,419 |   | $ | 115,646 |   | $ | 87,559 |   |

 

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Footnotesto Selected Financial Data:

(F1)        2009 includes a $64 thousandgain on disposal of fixed assets and a $1.4 million one-time, non-cash chargerelated to the implementation of a new frequent player club (see additionaldiscussion in Item 8, “FINANCIAL STATEMENTS, Notes to Consolidated FinancialStatements, Note 1, Promotional Allowance.”

(F2)        2008 includes a $34 thousandgain on disposal of fixed assets

(F3)        2007 includes a $7 thousandgain on disposal of fixed assets

(F4)        2006 includes a $55 thousandloss on disposal of fixed assets

(F5)        2005 includes a $42 thousandgain on disposal of fixed assets.

(F6)        Includes amounts financed with debt or capitalizedlease obligations.

(F7)        We paid no dividends during the five year periodended December 31, 2009.

 

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

MonarchCasino & Resort, Inc., through its wholly-owned subsidiary,Golden Road Motor Inn, Inc. (“Golden Road”), owns and operates thetropically-themed Atlantis Casino Resort Spa, a hotel/casino facility in Reno,Nevada (the “Atlantis”).  Monarch’s otherwholly owned subsidiary, High Desert Sunshine, Inc., owns a parcel of landlocated adjacent to the Atlantis. Monarch was incorporated in 1993 under Nevada law for the purpose ofacquiring all of the stock of Golden Road. The principal asset of Monarch is the stock of Golden Road, which holdsall of the assets of the Atlantis.

 

Oursole operating asset, the Atlantis, is a hotel/casino resort located in Reno,Nevada.  Our business strategy is tomaximize the Atlantis’ revenues, operating income and cash flow primarilythrough our casino, our food and beverage operations and our hoteloperations.  We capitalize on theAtlantis’ location for tour and travel visitors, conventioneers and Locals byoffering exceptional service, value and an appealing theme to our guests.  Our hands-on management style focuses oncustomer service and cost efficiencies.

 

Unlessotherwise indicated, “Monarch,” “Company,” “we,” “our” and “us” refer toMonarch Casino & Resort, Inc. and its Golden Road and High DesertSunshine, Inc subsidiaries.

 

**OPERATINGRESULTS SUMMARY**

 

Belowis a summary of our results for the years ended December 31 for 2009, 2008and 2007, respectively:

 

*Amounts in millions, except per share amounts*

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage**            | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase / (Decrease)** | ** ** |
| ** **                   | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **09 vs 08**              | ** ** | **08 vs 07** | ** ** |
| Casino revenues              |       | $          | 94.5       |       | $          | 100.9      |       | $                         | 110.3      |   | (6.3 | )% | (8.5 | )% |
| Food and beverage revenues   |       | 38.2       |       | 39.5       |       | 42.4       |       | (3.3                      | )%         | (6.8 | )% |
| Hotel revenues               |       | 22.4       |       | 22.3       |       | 27.9       |       | 0.4                       | %          | (20.1 | )% |
| Other revenues               |       | 4.4        |       | 5.0        |       | 4.9        |       | (12.0                     | )%         | 2.0 | % |
| Net revenues                 |       | 133.7      |       | 141.4      |       | 159.9      |       | (5.4                      | )%         | (11.6 | )% |
| Sales, general and admin exp |       | 47.9       |       | 51.2       |       | 50.0       |       | (6.4                      | )%         | 2.4 | % |
| Income from operations       |       | 9.1        |       | 14.7       |       | 35.7       |       | (38.1                     | )%         | (58.8 | )% |
|                         |       |       |       |       |       |       |       |                      |       |   |   |
| Net income                   |       | 4.8        |       | 9.5        |       | 24.5       |       | (49.5                     | )%         | (61.2 | )% |
|                         |       |       |       |       |       |       |       |                      |       |   |   |
| Earnings per share - diluted |       | 0.30       |       | 0.56       |       | 1.27       |       | (46.4                     | )%         | (55.9 | )% |
|                         |       |       |       |       |       |       |       |                      |       |   |   |
| Operating margin             |       | 6.8        | %          | 10.4       | %          | 22.3       | %          | (3.6                      | )pts       | (11.9 | )pts |
|                              |            |            |            |            |            |            |            |                           |            |  |  |  |  |  |

 

Ourresults for the year ended December 31, 2009 reflect the effects of thechallenging operating environment that began in the three month period ended December 31,2007.  As in many other areas around thecountry, the economic downturn in northern Nevada in the fourth quarter of 2007has deepened throughout 2008 and 2009. Other factors causing negative financial impact that continued from thefourth quarter of 2007 were aggressive discounting programs by ourcompetitors.  In response to thesechallenges, we increased promotional expenditures to attract and retainguests.  Furthermore, based on statisticsreleased by the Nevada Gaming Control Board, the Reno gaming market has shrunkin the aggregate.  We anticipate thatdownward pressure on profits will persist as long as we continue to

 

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experiencethe adverse effects of the negative macroeconomic environment and theaggressive marketing programs of our competitors.

 

Ourresults also reflect a one-time, non-cash charge of $1.4 million related to thelaunch of our new EZ Comp(SM) program on October 6, 2009.  This program allows Atlantis patrons toredeem complimentary food, beverages and other services (“Complimentaries”)directly at Atlantis food outlets or other points of service throughout thecasino.  Before the launch of EZComp(SM), Atlantis patrons were required to obtain vouchers from Atlantisservice personnel prior to redeeming a Complimentary.  The new EZ Comp(SM) system also allowsAtlantis patrons to see their unredeemed Complimentary point balances andcorresponding point values.  Prior to thelaunch of the EZ Comp(SM) program, we recognized expense at the timeComplimentary points were redeemed and the redemption value was at ourdiscretion.  Under the new program, werecognize Complimentaries expense at the time points are earned, which occurscommensurate with casino patron play. The redemption value is now known to the patron.  This change in our program resulted in aone-time, non-cash charge in the fourth quarter of 2009 of approximately $1.4million to recognize the liability for redemable Complimentary point balanceson the date the EZ Comp(SM) program was launched.

 

Thesefactors were the primary drivers of:

 

·                  Decreases of 6.3% and 3.3% in our casino andfood and beverage revenues, respectively, resulting in a net revenue decreaseof 5.4%.

 

·                  A decrease in our 2009 operating margin by3.6 points or 34.6%.

 

**CAPITALSPENDING AND DEVELOPMENT**

 

Weseek to continuously upgrade and maintain the Atlantis facility in order topresent a fresh, high quality product to our guests.

 

In June 2007, webroke ground on an expansion project several phases of which we completed andopened in the second half of 2008.  Newspace was added to the first floor casino level, the second and third floorsand the basement level totaling approximately 116,000 square feet.  The existing casino floor was expanded byover 10,000 square feet, or approximately 20%. The first floor casino expansion includes a redesigned, updated andexpanded race and sports book of approximately 4,000 square feet and anenlarged poker room.   The expansion alsoincluded the new “Manhattan Deli”, a New York deli-style restaurant.  The second floor expansion created additionalballroom and convention space of approximately 27,000 square feet, doubling theexisting facilities.  We constructed andopened a pedestrian skywalk over Peckham Lane that connects the Reno-SparksConvention Center directly to the Atlantis. In January 2009, we opened the final phase of the expansionproject, the new Spa Atlantis featuring an atmosphere, amenities and treatmentsthat are unique from any other offering in our market.  Additionally, many of the pre-expansion areasof the Atlantis were remodeled to be consistent with the upgraded look and feelof the new facilities.    Through December 31,2009, the Company had incurred approximately $80 million related to thesecapital projects.

 

Withthe opening of the new skywalk the Atlantis became the only hotel-casino to bephysically connected to the Reno-Sparks Convention Center.  The Reno-Sparks Convention Center offersapproximately 500,000 square feet of leasable exhibition, meeting room,ballroom and lobby space.

 

Wehave continuously invested in upgrading the Atlantis.  Our capital expenditures at the Atlantis were$15.8 million in 2009; $67.9 million in 2008 and $17.3 million in 2007.

 

During 2009, 2008 and2007 capital expenditures primarily consisted of construction costs associatedwith the expansion, skybridge and redesign capital projects that commenced in June 2007.****During 2009 we spent approximately $5.2million to acquire two additional land parcels with buildings 

 

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within close proximity to the Atlantis (see additionaldiscussion of these parcels above under “Properties” in ITEM 2.).

 

Future cash needed tofinance ongoing capital expenditures is expected to be available from operatingcash flow, the Credit Facility (see “THE CREDIT FACILITY” below) and, ifnecessary, additional borrowings.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States. Certain of our policies, including the estimated lives assigned to ourassets, the determination of bad debt reserves, self insurance reserves,concentration of credit risk, the calculation of income tax liabilities and thecalculation of share-based compensation, require that we apply significantjudgment in defining the appropriate assumptions for calculating financialestimates.  By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Our judgments are based on historicalexperience, terms of existing contracts, observation of trends in the industry,information provided by customers and information available from other outsidesources, as appropriate.  There can be noassurance that actual results will not differ from our estimates.  To provide an understanding of themethodologies applied, our significant accounting policies are discussed whereappropriate in this discussion and analysis and in the Notes to ConsolidatedFinancial Statements.

 

The consolidatedfinancial statements include the accounts of Monarch, Golden Road, High Desertand Golden North. Intercompany balances and transactions are eliminated.

 

Self-insurance Reserves

 

We are currently selfinsured up to certain stop loss amounts for workers’ compensation and certainmedical benefit costs provided to our employees.  The Company reviews self-insurance reservesat least quarterly. The reserve is determined by reviewing the actualexpenditures for the previous twelve-month period and reports prepared by thethird party plan administrator for any significant unpaid claims.  The reserve is an amount estimated to payboth reported and unreported claims as of the balance sheet date.  We believe changes in medical costs, trendsin claims of our employee base, accident frequency and severity and otherfactors could materially affect the estimate for this reserve.  Unforeseen developments in existing claims,or the possibility that our estimate of unreported claims differs materiallyfrom the actual amount of unreported claims, could result in the over or underestimation of our self-insurance reserve.

 

Casino Revenues

 

Casino revenues representthe net win from gaming activity, which is the difference between wins andlosses.  Additionally, net win is reducedby a provision for anticipated payouts on slot participation fees, progressivejackpots and any pre-arranged marker discounts. Progressive jackpot provision estimates are determined based on theaward amount and the statistical probability of a player receiving thataward.  The frequency of futureprogressive jackpot awards could vary from the statistical probability used indetermining the estimate.

 

Promotional Allowances

 

Ourfrequent player program, Club Paradise, allows members, through the frequencyof their play at the casino, to earn and accumulate points which may beredeemed for a variety of goods and services at the Atlantis. Points may beapplied toward room stays at the hotel, food and beverage consumption at thefood outlets, gift shop items as well as goods and services at the spa andbeauty salon. Points earned may also be applied toward off-property events suchas concerts, shows and sporting events. Points may not be redeemed for cash.

 

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Theretail value of hotel, food and beverage services provided to customers withoutcharge is included in gross revenue and deducted as promotionalallowances.  The cost of the products andservices provided is reported as casino operating expense.

 

Income Taxes

 

Income taxes are recordedin accordance with the liability method pursuant to authoritativeguidance.  Under the asset and liabilityapproach for financial accounting and reporting for income taxes, the followingbasic principles are applied in accounting for income taxes at the date of thefinancial statements: (a) a current liability or asset is recognized forthe estimated taxes payable or refundable on taxes for the current year; (b) adeferred income tax liability or asset is recognized for the estimated futuretax effects attributable to temporary differences and carryforwards; (c) themeasurement of current and deferred tax liabilities and assets is based on theprovisions of the enacted tax law; the effects of future changes in tax laws orrates are not anticipated; and (d) the measurement of deferred incometaxes is reduced, if necessary, by the amount of any tax benefits that, basedupon available evidence, are not expected to be realized.

 

Our income tax returnsare subject to examination by tax authorities. We assess potentiallyunfavorable outcomes of such examinations based on accounting standards foruncertain income taxes.  Under theaccounting guidance, we may recognize the tax benefit from an uncertain taxposition only if it is more likely than not that the tax position will besustained on examination by the taxing authorities based on the technicalmerits of the position.  The tax benefitsrecognized in the financial statements from such a position should be measuredbased on the largest benefit that has a greater than 50.0% likelihood of beingrealized upon ultimate settlement.  It also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods and disclosure

 

Share-based Compensation

 

We account for stock-basedcompensation in accordance with authoritative guidance which establishesstandards for the accounting for transactions in which an entity exchanges itsequity instruments for goods and services or incurs a liability in exchange forgoods and services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equity instruments.It requires an entity to measure the costs of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award and recognize that cost over the service period.  We calculate the grant-date fair value usingthe Black-Scholes valuation model.

 

The Black-Scholesvaluation model requires the input of highly subjective assumptions whichinclude the expected term of options granted, risk-free interest rates,expected volatility, and expected rates of dividends.  We estimated an expected term for each stockoption grant based on the weighted-average time between grant date and exercisedate and the risk-free interest rate assumption was based on U.S. Treasuryrates appropriate for the expected term. We used historical data andprojections to estimate expected volatility and expected employee behaviorsrelated to option exercises and forfeitures.

 

Changes in theassumptions used can materially affect the estimate of the stock options’ fairvalue. In our judgment, the most volatile input for our Company has been theexpected volatility assumption which has increased significantly from 50.3% to111.7% and then again to 64.1 % for the years ended December 31, 2007,2008 and 2009, respectively.  The tablebelow presents the amount that stock-based compensation expense would havechanged if the expected volatility input into the Black-Scholes model isincreased or decreased by 10 percentage points for the stock options issued ineach year presented.

 

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Total stock-basedcompensation, before taxes:

 
| ** **                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| IF  EXPECTED VOLATILITY IS INCREASED BY 10 PERCENTAGE POINTS: |       |                         |       |   |   |   |   |
| Expected  volatility input becomes                            |       | 74.1                         | %          | 121.7 | % | 60.3 | % |
| Resultant  expense increase                                   |       | $                            | 17,475     |   | $ | 20,716 |   | $ | 28,081 |   |
|                                                          |       |                         |       |   |   |   |   |
| IF  EXPECTED VOLATILITY IS DECREASED BY 10 PERCENTAGE POINTS: |       |                         |       |   |   |   |   |
| Expected  volatility input becomes                            |       | 54.1                         | %          | 101.7 | % | 40.3 | % |
| Resultant  expense decrease                                   |       | $                            | 17,938     |   | $ | 21,197 |   | $ | 29,153 |   |

 

**RESULTSOF OPERATIONS**

 

2009 Compared with 2008

 

For the year ended December 31,2009, we earned net income of $4.8 million, or $0.30 per diluted share, on netrevenues of $133.7 million, compared to net income of $9.5 million, or $0.56per diluted share, on net revenues of $141.4 million for the year ended December 31,2008.  Income from operations totaled$9.1 million for 2009, a 38.1% decrease when compared to $14.7 million for2008.

 

Casino revenues totaled$94.5 million in 2009, a decrease of 6.3% from the $100.9 million reported in2008, driven by decreases in slot, table games, poker and keno win due to thedecrease in guest discretionary spending and greater competitor promotionalprograms.  Casino operating expenses were37.8% of casino revenues in 2009 compared to 36.9% in 2008.  The increase was primarily due to thedecreased casino revenue combined with the cost of increased complimentaryfood, beverages and other services provided to casino patrons.

 

#### **Food and beverage revenues decreased 3.3% to $38.2 millionin 2009 from $39.5 million in 2008, due primarily due to a 0.7% increase inaverage revenue per cover combined with a 4.5% decrease in the number of coversserved. Food and beverage operating expenses as a percentage of food andbeverage revenue decreased to 46.9% in 2009 from 48.6% in 2008 primarilyrelated to lower food and other commodity prices.**

#### ** **

Hotel revenues increasedslightly from $22.3 million in 2008 to $22.4 million in 2009.  Decreases in hotel occupancy and the averagedaily room rate (“ADR”) were offset by higher revenue from our new spa whichopened in January 2009 and revenue from a $10 per day resort fee (“ResortFee”), paid by our hotel guests, which we implemented on June 1,2009.  Hotel revenues for the first sixmonths of 2009, and all of 2008, also include a $3 per occupied room energysurcharge.  The Atlantis’ ADR was $64.91in 2009 compared to $65.52 in 2008.  Theaverage occupancy rate at the Atlantis was 80.6% compared to 84.9% in2008.  Hotel operating expenses increasedslightly to 35.9% of hotel revenues in 2009, compared to 35.4% in 2008.  This increase was primarily due to increasedoperating costs of the new spa.

 

Promotional allowancesdecreased to $25.7 million in 2009 compared to $26.2 million in 2008.  As a percentage of gross revenue, the amountin 2009 increased to 16.1% as compared to 15.6% for 2008.  The increase is attributable to continuedpromotional efforts to maintain existing, and generate additional, revenues.

 

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Other revenues in 2009decreased $569 thousand, or 11.5%, compare to 2008 primarily due to lower salesin our gift and sundry shops and lower revenues from ancillary services westopped billing for when we implemented the Resort Fee in June 2009.

 

Selling,general and administrative (“SG&A”) expenses totaled $47.9 million, or35.8% of net revenues, in 2009 compared to $51.2 million, or 36.2% of netrevenues, in 2008 for a year over year decrease of $3.3 million or 6.4%.  This decrease is primary due to reductionsin: marketing expense of approximately $1.4 million, payroll and benefitsexpense of approximately $960 thousand, repairs expense of approximately $370thousand, professional fees of approximately $240 thousand and rental expenseof approximately $200 thousand.  Thesedecreases were primarily the result of several cost reduction programs weimplemented to reduce expenses in areas that would not impact the quality ofour guest service.

 

Depreciation andamortization expense was $12.5 million in 2009, an increase of 26.3% comparedto $9.9 million in 2008 due primarily to the completion and capitalization ofthe Capital Projects described under the “CAPITAL SPENDING AND DEVELOPMENT”section above.

 

Interest expenseincreased to $2.1 million in 2009 from $539 thousand in 2008 due to increasedborrowings under our credit facility (see “THE CREDIT FACILITY” below).  Interest income derived from investment ofsurplus cash in short-term, interest bearing instruments and interest earned onthe Note from Triple J. (see additional discussion in described in Item 8, “FINANCIALSTATEMENTS, Notes to Consolidated Financial Statements and NOTE 10.  RELATED PARTY TRANSACTIONS) decreased to $125thousand in 2009 from $371 thousand in 2008. This increase was driven primarily by lower surplus cash invested in2009 as compared to 2008.  The surpluscash was used through the second quarter of 2008 for our capital projects (see “CAPITALSPENDING AND DEVELOPMENT” above) and share repurchases.

 

2008 Compared with 2007

 

For the year ended December 31,2008, we earned net income of $9.5 million, or $0.56 per diluted share, on netrevenues of $141.4 million, compared to net income of $24.5 million, or $1.27per diluted share, on net revenues of $159.9 million for the year ended December 31,2007.  Income from operations totaled$14.7 million for 2008, a 58.8% decrease when compared to $35.7 million for2007.

 

Casino revenues totaled$100.9 million in 2008, a decrease of 8.5% from the $110.3 million reported in2007, driven by decreases in slot, table games, poker and keno win due to thedecrease in discretionary spending, disruption from construction and competitorpromotional programs.  Casino operatingexpenses were 36.9% of casino revenues in 2008 compared to 32.6% in 2007.  The increase was primarily due to thedecreased casino revenue combined with the cost of increased complimentaryfood, beverages and other services provided to casino patrons.

 

#### **Food and beverage revenues decreased 6.8% to $39.5 millionin 2008 from $42.4 million in 2007, due primarily due to a 3.7% increase inaverage revenue per cover combined with a 10.2% decrease in the number ofcovers served. Food and beverage operating expenses as a percentage of food andbeverage revenue increased to 48.6% in 2008 from 47.9% in 2007 primarilyrelated to higher commodity costs and a 12% increase in the legal minimum wagein July 2008.**

#### ** **

Hotel revenues totaled$22.3 million in 2008, a decrease of 20.1% from $27.9 million in 2007. Thedecrease reflects decreases in both the average daily room rate (“ADR”) andoccupancy rate during the twelve month period of 2008 compared to the sameperiod in 2007.  The Atlantis’ ADR was$65.52 in 2008 compared to $74.04 in 2007. The average occupancy rate at the Atlantis was 84.9% in 2008 compared to93.8% in 2007.  Hotel operating expensesincreased to 35.4% of hotel revenues in 2008, 

 

28

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compared to 30.0% in 2007.  This increase in operating expenses as apercentage of hotel revenues resulted primarily from the decreased revenuepartially offset by lower direct hotel operating expenses.

 

Promotional allowancesincreased to $26.2 million in 2008 compared to $25.5 million in 2007.  As a percentage of gross revenue, the amountin 2008 increased to 15.6% as compared to 13.8% for 2007.  The increase is attributable to continuedpromotional efforts to maintain existing, and generate additional, revenues.

 

Other revenues in 2008increased slightly to $5.0 million as compared to $4.9 million in 2007.

 

Selling,general and administrative (“SG&A”) expenses totaled $51.2 million, or36.2% of net revenues, in 2008 compared to $50.0 million, or 31.3% of netrevenues, in 2007 for a year over year increase of $1.2 million or 2.4%.  The primary drivers of this increase are: i)higher marketing and promotional expense primarily related to our efforts tomitigate the negative effects of the disruption our guests experienced relatedto construction of our expansion project (see additional discussion above under“CAPITAL SPENDING AND DEVELOPMENT”), aggressive marketing discount programs byour nearest competitor to promote the grand opening of its major expansionproject and negative macroeconomic trends experienced in Reno, our feedermarkets and the nation as a whole and ii) higher bad debt expense partiallyoffset by iii) lower legal expense and iv) lower payroll and benefits expenserelated to lower headcount in 2008 as compared to 2007.

 

Depreciation andamortization expense was $9.9 million in 2008, an increase of 21.6% compared to$8.1 million in 2007.

 

Interestexpense increased to $539 thousand in 2008 from $152 thousand in 2007 due toincreased borrowings under our credit facility (see “THE CREDIT FACILITY”below).  Interest income derived frominvestment of surplus cash in short-term, interest bearing instrumentsdecreased to $371,000 from  $1.9 millionin 2007.  This increase was drivenprimarily by lower surplus cash invested in 2008 as compared to 2007.  The surplus cash was used in 2007 and throughthe second quarter of 2008 for our capital projects (see “CAPITAL SPENDING ANDDEVELOPMENT” above) and share repurchases.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Forthe year ended December 31, 2009, net cash provided by operatingactivities totaled $26.1 million, an increase of $2.3 million or 10.0% comparedto the same period last year.  Thisincrease was primarily related to lower net income offset by higherdepreciation and amortization related to the capitalization of our capitalprojects (see “CAPITAL SPENDING AND DEVELOPMENT” above), higher deferred incometaxes, higher other assets and higher accrued expenses in 2009 compared to2008.

 

Netcash used in investing activities totaled $21.2 million and $64.4 million inthe years ended December 31, 2009 and 2008, respectively.  During 2009 and 2008, net cash used ininvesting activities consisted primarily of construction costs associated withthe recent expansion phase of the Atlantis (see further discussion of theCapital Projects in the “CAPITAL SPENDING AND DEVELOPMENT” section above) andthe acquisition of property and equipment. Because the construction was completed in January 2009, we used$43.2 million, or 67.1%, less net cash in investing activities during 2009compared to 2008.

 

Netcash used in financing activities of $2.3 million during 2009 primarilyrepresents net payments of our Credit Facility (see “THE CREDIT FACILITY”below).  During 2008, net cash providedby financing activities totaled $14.3 million which consisted of $35.7 millionto purchase Monarch common stock pursuant to a stock repurchase plan that wasin place in the prior year offset by borrowings under our Credit Facility of$50.0 million.

 

29

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Webelieve that our existing cash balances, cash flow from operations andborrowings available under the Credit Facility will provide us with sufficientresources to fund our operations, meet our debt obligations, and fulfill ourcapital expenditure plans; however, our operations are subject to financial,economic, competitive, regulatory, and other factors, many of which are beyondour control. If we are unable to generate sufficient cash flow, we could berequired to adopt one or more alternatives, such as reducing, delaying oreliminating planned capital expenditures, selling assets, restructuring debt orobtaining additional equity capital.  Seeitem 1A. Risk Factors.

 

**COMMITMENTSAND CONTINGENCIES**

 

Ourcontractual cash obligations as of December 31, 2009 and the next fiveyears and thereafter are as follows:

 
| ** **                                         | ** ** | **Payments Due by Period (4)** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| **Contractual  Cash**                              | ** ** | ** **                     | ** ** | **less than** | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **more than** | ** ** |
| **Obligations**                                    | ** ** | **Total**                      | ** ** | **1 year** | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| Operating Leases(1)                                |       | $                              | 3,607,500  |   | $ | 370,000 |   | $ | 740,000 |   | $ | 740,000 |   | $ | 1,757,500 |   |
| Maturities of Borrowings Under Credit Facility (2) |       | 48,500,000                     |       | 1,000,000 |   | 47,500,000 |   | — |   | — |   |
| Purchase Obligations(3)                            |       | 3,371,200                      |       | 3,371,200 |   | — |   | — |   | — |   |
| Total Contractual Cash Obligations                 |       | $                              | 55,478,700 |   | $ | 4,741,200 |   | $ | 48,240,000 |   | $ | 740,000 |   | $ | 1,757,500 |   |

 

----

(1) Operatingleases include $370,000 per year in lease and common area expense payments tothe shopping center adjacent to the Atlantis.

 

(2) Theamount represents outstanding draws against our Credit Facility (see “THECREDIT FACILITY” below) as of December 31, 2009.

 

(3) Purchaseobligations represent approximately $1.6 million of commitments related to theCapital Projects and approximately $1.8 million of materials and supplies usedin the normal operation of our business. Of the total purchase order and capital project commitments,approximately $1.8 million are cancelable by us upon providing a 30-day notice.

 

(4) Becauseinterest payments under our Credit Facility are subject to factors that in ourjudgment vary materially, the amount of future interest payments is notpresently determinable.  These factorsinclude: 1) future short-term interest rates; 2) our future leverage ratiowhich varies with EBITDA and our borrowing levels and 3) the speed with whichwe deploy capital and other spending which in turn impacts the level of futureborrowings.  The interest rate under ourCredit Facility is LIBOR, or a base rate (as defined in the Credit Facilityagreement), plus an interest rate margin ranging from 2.00% to 3.375% dependingon our leverage ratio.  The interest rateis adjusted quarterly based on our leverage ratio which is calculated usingoperating results over the previous four quarters and borrowings at the end ofthe most recent quarter.  At December 31,2009 our leverage ratio was such that pricing for borrowings was LIBOR plus2.875%.  At December 31, 2009, theone-month LIBOR rate was 0.25%.

 

30

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**THE CREDIT FACILITY**

 

Until February 20,2004, we had a reducing revolving term loan credit facility with a consortiumof banks (the “First Credit Facility”). On February 20, 2004, the Original Credit Facility was refinanced(the “Second Credit Facility”) for $50 million. The maturity date of the SecondCredit Facility was to be April 18, 2009; however, on January 20,2009, the Second Credit Facility was amended and refinanced (the “New CreditFacility”) for $60 million.  The NewCredit Facility may be utilized by us for working capital needs, generalcorporate purposes and for ongoing capital expenditure requirements.

 

The maturity date of the New Credit Facility is January 20,2012.  Borrowings are secured by liens onsubstantially all of the real and personal property of the Atlantis and areguaranteed by Monarch.

 

The New Credit Facility contains covenants customaryand typical for a facility of this nature, including, but not limited to,covenants requiring the preservation and maintenance of our assets andcovenants restricting our ability to merge, transfer ownership of Monarch,incur additional indebtedness, encumber assets and make certaininvestments.  The New Credit Facilitycontains covenants requiring that we maintain certain financial ratios andachieve a minimumlevel of Earnings-Before-Interest-Taxes-Depreciation and Amortization (EBITDA)on a two-quarter rolling basis.  It also containsprovisions that restrict cash transfers between Monarch and its affiliates andcontains provisions requiring the achievement of certain financial ratiosbefore we can repurchase our common stock or pay dividends. Management does notconsider the covenants to restrict normal functioning of day-to-day operations.

 

The maximum principal available under the New CreditFacility is reduced by $2.5 million per quarter beginning on December 31,2009.  We may permanently reduce themaximum principal available at any time so long as the amount of such reductionis at least $500 thousand and a multiple of $50 thousand.

 

We may prepay borrowings under the New CreditFacility without penalty (subject to certain charges applicable to theprepayment of LIBOR borrowings prior to the end of the applicable interestperiod).  Amounts prepaid may be reborrowedso long as the total borrowings outstanding do not exceed the maximum principalavailable.

 

We paid various one-time fees and other loan costsupon the closing of the refinancing of the New Credit Facility that will beamortized over the facility’s term using the straight-line method.

 

At December 31,2009, we had $48.5 million outstanding under the New Credit Facility, $1.0million of which was classified as short-term debt.  Short-term debt represents the differencebetween the amount outstanding at December 31, 2009 and the maximumprincipal allowed of $47.5 million under the New Credit Facility on December 31,2010.  The interest rate under our CreditFacility is LIBOR, or a base rate (as defined in the Credit Facilityagreement), plus an interest rate margin ranging from 2.00% to 3.375% dependingon our leverage ratio.  The interest rateis adjusted quarterly based on our leverage ratio calculated using operatingresults over the previous four quarters and borrowings at the end of the mostrecent quarter.  At December 31,2009 our leverage ratio was such that pricing for borrowings was LIBOR plus2.875%.  At December 31, 2009, theone-month LIBOR rate was 0.25%.

 

**STATEMENT ON FORWARD LOOKINGINFORMATION**

 

Certain informationincluded herein contains statements that may be considered forward-looking,such as statements relating to projections of future results of operations orfinancial condition, expectations for our casino and expectations of thecontinued availability of capital resources. Any forward-looking statement madeby us necessarily is based upon a number of estimates and assumptions that,while considered reasonable by us, is inherently subject to significantbusiness, economic and competitive uncertainties and contingencies, many ofwhich are beyond our control, and are subject to 

 

31

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change.  Actual results of our operations may varymaterially from any forward-looking statement made by us or on our behalf.  Forward-looking statements should not beregarded as representation by us or any other person that the forward-lookingstatements will be achieved.  Unduereliance should not be placed on any forward-looking statements.  Some of the contingencies and uncertaintiesto 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. RiskFactors.”

 

**RECENTLYISSUED ACCOUNTING STANDARDS**

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issued guidanceon subsequent events. The guidance establishes general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. In addition,under the guidance, an entity is required to disclose the date through whichsubsequent events have been evaluated, as well as whether that date is the datethe financial statements were issued or the date the financial statements wereavailable to be issued. The guidance does not apply to subsequent events ortransactions that are within the scope of other applicable GAAP that providedifferent guidance on the accounting treatment for subsequent events ortransactions. The guidance is effective for interim or annual financial periodsending after June 15, 2009, and shall be applied prospectively. We adoptedthe guidance as of June 30, 2009, as required. The adoption of theguidance did not have a material impact on our consolidated financialstatements.

 

InJune 2009, the FASB issued new authoritative guidance to establish theFASB Accounting Standards Codification as the single source of authoritativenon-governmental GAAP. The guidance is effective for interim and annualreporting periods ending after September 15, 2009. We adopted the guidanceeffective July 1, 2009 and the adoption did not have an effect on ouraudited Consolidated Financial Statements.

 

InJune 2009, the FASB issued new authoritative guidance regarding a transferof financial assets, the effects of a transfer on its financial statements, andany continued involvement in transferred financial assets. Additionally, theconcept of a qualifying special-purpose entity was removed. The guidance iseffective for annual reporting periods beginning after November 15, 2009and the adoption did not have an effect on our audited Consolidated FinancialStatements.

 

InJune 2009, the FASB issued new authoritative guidance for enterprisesinvolved with variable interest entities. The guidance is effective for annualreporting periods beginning after November 15, 2009 and the adoption didnot have an effect on our audited Consolidated Financial Statements.

 

InAugust 2009, the FASB issued new authoritative guidance on measuringliabilities at fair value. The guidance addresses restrictions on the transferof a liability and clarifies how the price of a traded debt security should beconsidered in estimating the fair value of the issuer’s liability. Thisguidance is effective for the first reporting period beginning after itsissuance. We adopted the guidance effective October 1, 2009 and theadoption did not have a material effect on our audited Consolidated FinancialStatements.

 

Avariety of proposed or otherwise potential accounting standards are currentlyunder review and study by standard-setting organizations and certain regulatoryagencies. Because of the tentative and preliminary nature of such proposedstandards, we have not yet determined the effect, if any, that theimplementation of any such proposed or revised standards would have on ouraudited Consolidated Financial Statements.

 

32

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**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Marketrisk is the risk of loss arising from adverse changes in market risks andprices, such as interest rates, foreign currency exchange rates and commodityprices.  We do not have any cash or cashequivalents as of December 31, 2009 that are subject to market risk.  As of December 31, 2009 we had $48.5million of outstanding debt under our Second Credit Facility that was subjectto credit risk.  A 1% increase in theinterest rate on the balance outstanding under the Second Credit Facility at December 31,2009 would result in a change in our annual interest cost of approximately $485thousand.

 

33

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** **

**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**TheBoard of Directors and Stockholders of Monarch Casino & Resort, Inc.:**

Wehave audited the accompanying consolidated balance sheets of Monarch Casino &Resort, Inc. and subsidiaries (the “Company”) as of December 31, 2009and 2008, and the related consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2009.  Our audits also included the financial statements schedule listedin the index at Item 15(2). These financial statements and schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Monarch Casino &Resort, Inc. and subsidiaries at December 31, 2009 and 2008, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2009, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statements schedule, when considered in relation to the basicfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2009, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 15,2010 expressed an unqualified opinion thereon.

 

 
|   | /s/  Ernst & Young LLP |
|--------|---------------------------------|

 

 

LasVegas, Nevada

March 15,2010

 

34

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**TheBoard of Directors and Stockholders of Monarch Casino & Resort, Inc.:**

** **

We have auditedMonarch Casino & Resort, Inc. and subsidiaries (the “Company”)internal control over financial reporting as of December 31, 2009 based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over FinancialReporting.  Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased on our audit.

 

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

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, Monarch Casino & Resort, Inc. and subsidiariesmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2009, based on the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofMonarch Casino & Resort, Inc. and subsidiaries as of December 31, 2009and 2008, and the related consolidated statements of income, stockholders’equity and cash flows for each of the three years in the period ended December 31,2009 of Monarch Casino & Resort, Inc. and subsidiaries and ourreport dated March 15, 2010 expressed an unqualified opinion thereon.

 
|   | /s/  Ernst & Young LLP |
|--------|---------------------------------|

 

 

LasVegas, Nevada

March 15,2010

 

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**MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                                          |       |                              |       |   |   |   |   |
| Casino                                                                            |       | $                                 | 94,510,933 |   | $ | 100,904,355 |   | $ | 110,259,104 |   |
| Food  and beverage                                                                |       | 38,172,149                        |       | 39,465,734 |   | 42,364,225 |   |
| Hotel                                                                             |       | 22,385,927                        |       | 22,270,776 |   | 27,885,858 |   |
| Other                                                                             |       | 4,382,441                         |       | 4,951,006 |   | 4,866,536 |   |
| Gross  revenues                                                                   |       | 159,451,450                       |       | 167,591,871 |   | 185,375,723 |   |
| Less  promotional allowances                                                      |       | (25,719,594                       | )          | (26,222,402 | ) | (25,519,352 | ) |
| Net  revenues                                                                     |       | 133,731,856                       |       | 141,369,469 |   | 159,856,371 |   |
|                                                                              |       |                              |       |   |   |   |   |
| Operating  Expenses                                                               |       |                              |       |   |   |   |   |
| Casino                                                                            |       | 35,756,975                        |       | 37,275,786 |   | 35,927,672 |   |
| Food  and beverage                                                                |       | 17,890,429                        |       | 19,186,872 |   | 20,283,267 |   |
| Hotel                                                                             |       | 8,042,023                         |       | 7,879,234 |   | 8,357,541 |   |
| Other                                                                             |       | 1,167,040                         |       | 1,289,489 |   | 1,485,550 |   |
| Selling,  general and administrative                                              |       | 47,865,432                        |       | 51,160,484 |   | 49,976,753 |   |
| Depreciation  and amortization                                                    |       | 12,501,048                        |       | 9,891,803 |   | 8,137,886 |   |
| Player  club implementation expense                                               |       | 1,366,614                         |       | — |   | — |   |
| Total  operating expenses                                                         |       | 124,589,561                       |       | 126,683,668 |   | 124,168,669 |   |
| Income  from operations                                                           |       | 9,142,295                         |       | 14,685,801 |   | 35,687,702 |   |
|                                                                              |       |                              |       |   |   |   |   |
| Other  income (expense)                                                           |       |                              |       |   |   |   |   |
| Interest  income                                                                  |       | 124,661                           |       | 370,632 |   | 1,928,450 |   |
| Interest  expense                                                                 |       | (2,103,798                        | )          | (538,684 | ) | (152,274 | ) |
| Total  other (expense) income                                                     |       | (1,979,137                        | )          | (168,052 | ) | 1,776,176 |   |
| Income  before income taxes                                                       |       | 7,163,158                         |       | 14,517,749 |   | 37,463,878 |   |
| Provision  for income taxes                                                       |       | (2,321,679                        | )          | (4,976,781 | ) | (12,983,660 | ) |
| Net  income                                                                       |       | $                                 | 4,841,479  |   | $ | 9,540,968 |   | $ | 24,480,218 |   |
|                                                                              |       |                              |       |   |   |   |   |
| Earnings per share of common stock                                                |       |                              |       |   |   |   |   |
|                                                                              |       |                              |       |   |   |   |   |
| Basic                                                                             |       | $                                 | 0.30       |   | $ | 0.56 |   | $ | 1.28 |   |
| Diluted                                                                           |       | $                                 | 0.30       |   | $ | 0.56 |   | $ | 1.27 |   |
|                                                                              |       |                              |       |   |   |   |   |
| Weighted  average number of common shares and potential common shares outstanding |       |                              |       |   |   |   |   |
| Basic                                                                             |       | 16,123,027                        |       | 16,957,692 |   | 19,057,583 |   |
| Diluted                                                                           |       | 16,159,415                        |       | 17,017,859 |   | 19,329,131 |   |

 

*Theaccompanying Notes to Consolidated Financial Statements are an integral part ofthese statements.*

 

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**MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                    | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                    | ** ** | **2009**              | ** **  | **2008** | ** ** |
| ASSETS                                                                                                                                                        |       |                  |        |   |   |
| Current  assets                                                                                                                                               |       |                  |        |   |   |
| Cash  and cash equivalents                                                                                                                                    |       | $                     | 14,420,323  |   | $ | 11,756,900 |   |
| Receivables,  net                                                                                                                                             |       | 2,294,703             |        | 3,344,441 |   |
| Inventories                                                                                                                                                   |       | 1,706,867             |        | 1,564,347 |   |
| Prepaid  expenses                                                                                                                                             |       | 2,623,650             |        | 2,851,872 |   |
| Deferred  income taxes                                                                                                                                        |       | 1,090,063             |        | 429,300 |   |
| Total  current assets                                                                                                                                         |       | 22,135,606            |        | 19,946,860 |   |
| Property  and equipment                                                                                                                                       |       |                  |        |   |   |
| Land                                                                                                                                                          |       | 13,172,522            |        | 12,162,522 |   |
| Land  improvements                                                                                                                                            |       | 3,511,484             |        | 3,511,484 |   |
| Buildings                                                                                                                                                     |       | 140,522,106           |        | 133,332,232 |   |
| Building  improvements                                                                                                                                        |       | 10,410,770            |        | 10,435,062 |   |
| Furniture  and equipment                                                                                                                                      |       | 107,655,784           |        | 96,767,076 |   |
| Leasehold  improvements                                                                                                                                       |       | 1,346,965             |        | 1,346,965 |   |
|                                                                                                                                                          |       | 276,619,631           |        | 257,555,341 |   |
| Less  accumulated depreciation and amortization                                                                                                               |       | (113,538,145          | )           | (101,825,190 | ) |
|                                                                                                                                                          |       | 163,081,486           |        | 155,730,151 |   |
| Construction  in progress                                                                                                                                     |       | —                |        | 4,026,536 |   |
| Net  property and equipment                                                                                                                                   |       | 163,081,486           |        | 159,756,687 |   |
| Other  assets, net                                                                                                                                            |       | 569,622               |        | 2,797,949 |   |
| Total  assets                                                                                                                                                 |       | $                     | 185,786,714 |   | $ | 182,501,496 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                     |       |                  |        |   |   |
| Current  liabilities                                                                                                                                          |       |                  |        |   |   |
| Borrowings  under credit facility                                                                                                                             |       | $                     | 1,000,000   |   | $ | 2,500,000 |   |
| Accounts  payable                                                                                                                                             |       | 8,984,010             |        | 10,213,418 |   |
| Construction  payable                                                                                                                                         |       | —                |        | 5,404,372 |   |
| Accrued  expenses                                                                                                                                             |       | 11,056,079            |        | 8,940,110 |   |
| Federal  income taxes payable                                                                                                                                 |       | 46,546                |        | 233,736 |   |
| Total  current liabilities                                                                                                                                    |       | 21,086,635            |        | 27,291,636 |   |
| Long-term  debt, less current maturities                                                                                                                      |       | 47,500,000            |        | 47,500,000 |   |
| Deferred  income taxes                                                                                                                                        |       | 4,695,657             |        | 2,115,371 |   |
| Total  Liabilities                                                                                                                                            |       | 73,282,292            |        | 76,907,007 |   |
| Stockholders’  equity                                                                                                                                    |       |                  |        |   |   |
| Preferred  stock, $.01 par value, 10,000,000 shares authorized; none issued                                                                                   |       | —                |        | — |   |
| Common  stock, $.01 par value, 30,000,000 shares authorized; 19,096,300 shares  issued; 16,125,388 outstanding at 12/31/09 16,122,048 outstanding at 12/31/08 |       | 190,963               |        | 190,963 |   |
| Additional  paid-in capital                                                                                                                                   |       | 30,041,083            |        | 28,051,009 |   |
| Treasury  stock, 2,970,912 shares at 12/31/09 2,974,252 shares at 12/31/08, at cost                                                                           |       | (48,864,979           | )           | (48,943,359 | ) |
| Retained  earnings                                                                                                                                            |       | 131,137,355           |        | 126,295,876 |   |
| Total  stockholders’ equity                                                                                                                              |       | 112,504,422           |        | 105,594,489 |   |
| Total  liability and stockholder’s equity                                                                                                                |       | $                     | 185,786,714 |   | $ | 182,501,496 |   |

 

*The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.*

 

37

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**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, 2007                            |       | 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            |       | 265,870     |       | —       |       | 629,286      |        | 895,393 |   |
| Purchase  of treasury stock                               |       | (555,508          | )          | —         |       | —      |       | —       |       | (13,874,046  | )           | (13,874,046 | ) |
| Share  based compensation expense                         |       | —            |       | —         |       | 2,271,057   |       | —       |       | —       |        | 2,271,057 |   |
| 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 |   |
| Purchase  of treasury stock                               |       | (2,444,492        | )          | —         |       | —      |       | —       |       | (35,674,454  | )           | (35,674,454 | ) |
| Share  based compensation expense                         |       | —            |       | —         |       | 2,309,037   |       | —       |       | —       |        | 2,309,037 |   |
| Net  income                                               |       | —            |       | —         |       | —      |       | 9,540,968    |       | —       |        | 9,540,968 |   |
| Balance,  December 31, 2008                          |       | 16,122,048        |       | 190,963        |       | 28,051,009  |       | 126,295,876  |       | (48,943,359  | )           | 105,594,489 |   |
| Exercise  of stock options, including related tax benefit |       | 3,340             |       | —         |       | (58,697     | )          | —       |       | 78,380       |        | 19,683 |   |
| Share  based compensation expense                         |       | —            |       | —         |       | 2,048,771   |       | —       |       | —       |        | 2,048,771 |   |
| Net  income                                               |       | —            |       | —         |       | —      |       | 4,841,479    |       | —       |        | 4,841,479 |   |
| Balance,  December 31, 2009                          |       | 16,125,388        |       | $              | 190,963    |        | $          | 30,041,083   |       | $            | 131,137,355 |   | $ | (48,864,979 | ) | $ | 112,504,422 |   |

 

*The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.*

 

38

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**MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash  flows from operating activities:                                             |       |                              |       |   |   |   |   |
| Net  income                                                                        |       | $                                 | 4,841,479  |   | $ | 9,540,968 |   | $ | 24,480,218 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation  and amortization                                                     |       | 12,501,048                        |       | 9,891,803 |   | 8,137,886 |   |
| Amortization  of deferred loan costs                                               |       | 265,630                           |       | 19,893 |   | 148,838 |   |
| Share  based compensation                                                          |       | 2,048,771                         |       | 2,309,037 |   | 2,271,057 |   |
| Provision  for bad debts                                                           |       | 1,120,333                         |       | 1,225,145 |   | 554,891 |   |
| Gain  on disposal of assets                                                        |       | (63,948                           | )          | (33,652 | ) | (6,969 | ) |
| Deferred  income taxes                                                             |       | 1,919,523                         |       | (55,078 | ) | (1,542,439 | ) |
| Changes  in operating assets and liabilities:                                      |       |                              |       |   |   |   |   |
| Receivables,  net                                                                  |       | (70,595                           | )          | 562,636 |   | (2,418,143 | ) |
| Inventories                                                                        |       | (142,520                          | )          | (68,301 | ) | (24,379 | ) |
| Prepaid  expenses                                                                  |       | 228,221                           |       | 292,502 |   | (311,248 | ) |
| Other  assets                                                                      |       | 2,735,433                         |       | — |   | (2,735,433 | ) |
| Accounts  payable                                                                  |       | (1,229,408                        | )          | (626,900 | ) | 2,249,649 |   |
| Accrued  expenses                                                                  |       | 2,115,968                         |       | (290,047 | ) | (648,694 | ) |
| Federal  income taxes payable                                                      |       | (187,190                          | )          | 233,736 |   | (16,457 | ) |
| Net  cash provided by operating activities                                         |       | 26,082,745                        |       | 23,001,742 |   | 30,138,777 |   |
|                                                                               |       |                              |       |   |   |   |   |
| Cash  flows from investing activities:                                             |       |                              |       |   |   |   |   |
| Proceeds  from sale of assets                                                      |       | 83,425                            |       | 42,400 |   | 6,969 |   |
| Change  in construction payable                                                    |       | (5,404,372                        | )          | 3,433,350 |   | 1,971,022 |   |
| Acquisition  of property and equipment                                             |       | (15,845,321                       | )          | (67,881,958 | ) | (17,287,483 | ) |
| Net  cash used in investing activities                                             |       | (21,166,268                       | )          | (64,406,208 | ) | (15,309,492 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| Cash  flows from financing activities:                                             |       |                              |       |   |   |   |   |
| Proceeds  from exercise of stock options                                           |       | 13,009                            |       | — |   | 602,636 |   |
| Tax  benefit of stock option exercise                                              |       | 6,674                             |       | — |   | 292,757 |   |
| Borrowings  under credit facility                                                  |       | 11,750,000                        |       | 50,000,000 |   | — |   |
| Loan  issuance costs                                                               |       | (772,737                          | )          | — |   | — |   |
| Principal  payments on long-term debt                                              |       | (13,250,000                       | )          | — |   | — |   |
| Purchase  of treasury stock                                                        |       | —                            |       | (35,674,454 | ) | (13,874,045 | ) |
| Net  cash (used in) provided by financing activities                               |       | (2,253,054                        | )          | 14,325,546 |   | (12,978,652 | ) |
| Net  increase (decrease) in cash                                                   |       | 2,663,423                         |       | (27,078,920 | ) | 1,850,633 |   |
| Cash  and cash equivalents at beginning of year                                    |       | 11,756,900                        |       | 38,835,820 |   | 36,985,187 |   |
| Cash  and cash equivalents at end of year                                          |       | $                                 | 14,420,323 |   | $ | 11,756,900 |   | $ | 38,835,820 |   |
|                                                                               |       |                              |       |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                              |       |   |   |   |   |
| Cash  paid for interest net of $0, $499,990 and $0 capitalized respectively        |       | $                                 | 1,948,457  |   | $ | 398,119 |   | $ | 3,437 |   |
| Cash  paid for income taxes                                                        |       | $                                 | 2,240,000  |   | $ | 3,800,000 |   | $ | 15,247,923 |   |

 

*Theaccompanying Notes to Consolidated Financial Statements are an integral part ofthese statements.*

 

39

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**MONARCH CASINO & RESORT, INC. AND SUBSIDIARIES NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE1.  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

Basisof Presentation

 

MonarchCasino & Resort, Inc. (“Monarch”), a Nevada corporation, wasincorporated in 1993.  Monarch’swholly-owned subsidiary, Golden Road Motor Inn, Inc. (“Golden Road”),operates the Atlantis Casino Resort Spa (the “Atlantis”), a hotel/casinofacility in Reno, Nevada.  Monarch’sother wholly owned subsidiaries, High Desert Sunshine, Inc. and GoldenNorth, Inc., each own separate parcels of land located adjacent to theAtlantis.  Unless stated otherwise, the “Company”refers collectively to Monarch and its subsidiaries.

 

Theconsolidated financial statements include the accounts of Monarch and GoldenRoad. Intercompany balances and transactions are eliminated.

 

Useof Estimates

 

Inpreparing financial statements in conformity with U.S. generally acceptedaccounting principles, management is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand revenues and expenses during the year. Actual results could differ from those estimates.

 

Self-insuranceReserves

 

The Company reviewsself-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for theprevious twelve-month period and reports prepared by the third party planadministrator for any significant unpaid claims.  The reserve is accrued at an amount thatapproximates amounts needed to pay both reported and unreported claims as ofthe balance sheet date, which management believes are adequate.

 

CapitalizedInterest

 

The Company capitalizes interest costs associated with debt incurred inconnection with major construction projects. When no debt is specifically identified as being incurred in connectionwith a construction project, the Company capitalizes interest on amountsexpended on the project at the Company’s average borrowing cost.  Interest capitalization is ceased when theproject is substantially complete.  TheCompany capitalized interest of $499,990 during the year ended December 31,2008.The Company didnot capitalize interest during the years ended December 31, 2009 and 2007.

 

Cashand Cash Equivalents

 

Cashand cash equivalents include cash on hand, as well as investments purchasedwith an original maturity of 90 days or less.

 

Inventories

 

Inventories, consistingprimarily of food, beverages, and retail merchandise, are stated at the lowerof cost or market.  Cost is determined ona first-in, first-out basis.

 

40

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Propertyand Equipment

 

Propertyand equipment are stated at cost, less accumulated depreciation andamortization.  Property and equipment isdepreciated principally on a straight line basis over the estimated servicelives as follows:

 
| Land improvements     | 15-40 years |   |   |
|-----------------------|-------------|--------|--------|
| Buildings             | 30-40 years |   |   |
| Building improvements | 15-40 years |   |   |
| Furniture             | 5-10 years  |   |   |
| Equipment             | 5-20 years  |   |   |

 

The Company evaluatesthe carrying value of its long-lived assets for impairment at least annually orwhenever events or changes in circumstances indicate that the carrying value ofthe assets may not be recoverable from related future undiscounted cashflows.  Indicators which could trigger animpairment review include legal and regulatory factors, market conditions andoperational performance.  Any resultingimpairment loss, measured as the difference between the carrying amount and thefair value of the assets, could have a material adverse impact on the Company’sfinancial condition and results of operations. All recognized impairment losses, whether for assets to be disposed orfor assets to be held and used, are recorded as operating expenses.  The Company has not recognized any impairmentlosses in the current year.

 

CasinoRevenues

 

Casino revenuesrepresent the net win from gaming activity, which is the difference betweenwins and losses.  Additionally, net winis reduced by a provision for anticipated payouts on slot participation fees,progressive jackpots and any pre-arranged marker discounts.

 

PromotionalAllowances

 

TheCompany’s frequent player program, Club Paradise, allows members, through thefrequency of their play at the Company’s casino, to earn and accumulate pointswhich may be redeemed for a variety of goods and services at the Atlantis.Points may be applied toward room stays at the hotel, food and beverageconsumption at the food outlets, gift shop items as well as goods and servicesat the spa and beauty salon. Points earned may also be applied towardoff-property events such as concerts, shows and sporting events. Points may notbe redeemed for cash.

 

InOctober 2009, the Company launched a new program under the Club Paradiseprogram called “EZ Comp(SM)”.  Amongother things, the technology allows Atlantis patrons to see their redeemable Complimentarypoint balances.  Prior to the launch ofthe EZ Comp(SM) program, the Company recognized expense at the timeComplimentary points were redeemed and the redemption value was at theCompany’s discretion.  Under the newprogram, the Company recognizes Complimentaries expense at the time points areearned, which occurs commensurate with casino patron play.  The redemption value is now known to thepatron.  This change in the Company’sprogram resulted in a one-time, non-cash charge in 2009 of approximately $1.4million to recognize the liability for redeemable Complimentary point balanceson the date the EZ Comp(SM) program was launched.

 

Theretail value of hotel, food and beverage services provided to customers withoutcharge is included in gross revenue and deducted as promotionalallowances.  The estimated departmentalcosts of providing such promotional allowances are included in casino costs andexpenses as follows:

 

41

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| ** **        | ** ** | **Years ended December 31,** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| ** **        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Food and beverage |       | $                                 | 13,844,611 |   | $ | 13,979,386 |   | $ | 12,735,942 |   |
| Hotel             |       | 3,023,164                         |       | 2,948,354 |   | 2,143,988 |   |
| Other             |       | 641,404                           |       | 623,766 |   | 460,099 |   |
|              |       | $                                 | 17,509,179 |   | $ | 17,551,506 |   | $ | 15,340,029 |   |

 

AdvertisingCosts

 

Alladvertising costs are expensed as incurred. Advertising expense, which is included in selling, general andadministrative expense, was $3,844,432, $4,368,908 and $3,657,712 for the yearsended December 31, 2009, 2008 and 2007, respectively.

 

IncomeTaxes

 

Income taxes arerecorded in accordance with the liability method pursuant to authoritativeguidance.  Under the asset and liabilityapproach for financial accounting and reporting for income taxes, the followingbasic principles are applied in accounting for income taxes at the date of thefinancial statements: (a) a current liability or asset is recognized forthe estimated taxes payable or refundable on taxes for the current year; (b) adeferred income tax liability or asset is recognized for the estimated futuretax effects attributable to temporary differences and carryforwards; (c) themeasurement of current and deferred tax liabilities and assets is based on theprovisions of the enacted tax law; the effects of future changes in tax laws orrates are not anticipated; and (d) the measurement of deferred incometaxes is reduced, if necessary, by the amount of any tax benefits that, basedupon available evidence, are not expected to be realized.

 

Under the accounting guidance, we mayrecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained on examination by thetaxing authorities based on the technical merits of the position.  The tax benefits recognized in the financialstatements from such a position should be measured based on the largest benefitthat has a greater than 50.0% likelihood of being realized upon ultimatesettlement.  It also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods anddisclosure.

 

Allowance for Doubtful Accounts

 

The Company extendsshort-term credit to its gaming customers. Such credit is non-interest bearingand is due on demand. In addition, the Company also has receivables due fromhotel guests which are primarily secured with a credit card at the time acustomer checks in. An allowance for doubtful accounts is set up for allCompany receivables based upon the Company’s historical collection andwrite-off experience, unless situations warrant a specific identification of anecessary reserve related to certain receivables.  The Company charges off its uncollectiblereceivables once all efforts have been made to collect such receivables. Thebook value of receivables approximates fair value due to the short-term natureof the receivables.

 

Stock Based Compensation

 

The Company accounts forstock-based compensation in accordance with the authoritative guidancerequiring the compensation cost relating to share-based payment transactions berecognized in the Company’s consolidated statements of income. The cost ismeasured at the grant date, based on the calculated fair value of the awardusing the Black-Scholes option pricing model for stock options, and based onthe closing share price of the Company’s stock on the grant date for restrictedstock awards. The cost is recognized as an expense over the employee’s requisiteservice period (the vesting period of the equity award). The Company’sstock-based employee compensation plan is more fully discussed in Note 8 -Share-Based Compensation.

 

42

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EarningsPer Share

 

Basicearnings per share is computed by dividing reported net earnings by theweighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect theadditional dilution for all potentially dilutive securities such as stockoptions.

 

Thefollowing is a reconciliation of the number of shares (denominator) used in thebasic and diluted earnings per share computations (shares in thousands):

 
| ** **                      | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Shares**                        | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| Net income                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic                           |       | 16,123                            |       | $ | 0.30 |   | 16,958 |   | $ | 0.56 |   | 19,058 |   | $ | 1.28 |   |
| Effect of dilutivestock options |       | 36                                |       | — |   | 60 |   | — |   | 271 |   | (0.01 | ) |
| Diluted                         |       | 16,159                            |       | $ | 0.30 |   | 17,018 |   | $ | 0.56 |   | 19,329 |   | $ | 1.27 |   |

 

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

 
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Options to purchase shares ofcommon stock (in  thousands) |       | 1,528                             |       | 861 |   | 232 |   |
| Exercise prices                                           |       | $9.00-$29.00                      |       | $13.82-$29.00 |   | $27.39-$30.07 |   |
| Expiration dates (mo./yr.)                                |       | 11/14-11/18                       |       | 11/14-5/18 |   | 5/16-10/17 |   |

 

FairValue of Financial Instruments

 

The estimated fair valueof the Company’s financial instruments has been determined by the Company,using available market information and valuation methodologies.  However, considerable judgment is required todevelop the estimates of fair value; thus, the estimates provided herein arenot necessarily indicative of the amounts that the Company could realize in acurrent market exchange.

 

Thecarrying amounts of cash, receivables, accounts payable and accrued expensesapproximate fair value because of the short-term nature of these instruments.

 

Concentrationsof Credit Risk

 

Financialinstruments which potentially subject the Company to concentrations of creditrisk consist principally of bank deposits and trade receivables.  The Company maintains its surplus cash inbank accounts which, at times, may exceed federally insured limits.  The Company has not experienced any losses insuch accounts.  Concentrations of creditrisk with respect to trade receivables are limited due to the large number ofcustomers comprising the Company’s customer base.  The Company believes it is not exposed to anysignificant credit risk on cash and accounts receivable.

 

43

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Impactof Recently Issued Accounting Standards

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issuedguidance on subsequent events. The guidance establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued. Inaddition, under the guidance, an entity is required to disclose subsequentevents through the date the financial statements were issued or the date thefinancial statements were available to be issued. The guidance does not applyto subsequent events or transactions that are within the scope of otherapplicable GAAP that provide different guidance on the accounting treatment forsubsequent events or transactions. The guidance is effective for interim orannual financial periods ending after June 15, 2009, and shall be appliedprospectively. The Company adopted the guidance as of June 30, 2009, asrequired. The adoption of the guidance did not have a material impact on theCompany’s consolidated financial statements.

 

InJune 2009, the FASB issued new authoritative guidance to establish theFASB Accounting Standards Codification as the single source of authoritativenon-governmental GAAP. The guidance is effective for interim and annualreporting periods ending after September 15, 2009. We adopted the guidanceeffective July 1, 2009 and the adoption did not have an effect on theCompany’s consolidated financial statements.

 

InJune 2009, the FASB issued new authoritative guidance regarding a transferof financial assets, the effects of a transfer on its financial statements, andany continued involvement in transferred financial assets. Additionally, theconcept of a qualifying special-purpose entity was removed. The guidance iseffective for annual reporting periods beginning after November 15, 2009and the adoption did not have an effect on the Company’s consolidated financialstatements.

 

InJune 2009, the FASB issued new authoritative guidance for enterprisesinvolved with variable interest entities. The guidance is effective for annualreporting periods beginning after November 15, 2009 and the adoption didnot have an effect on the Company’s consolidated financial statements.

 

InAugust 2009, the FASB issued new authoritative guidance on measuringliabilities at fair value. The guidance addresses restrictions on the transferof a liability and clarifies how the price of a traded debt security should beconsidered in estimating the fair value of the issuer’s liability. Thisguidance is effective for the first reporting period beginning after itsissuance. We adopted the guidance effective October 1, 2009 and theadoption did not have a material effect on the Company’s consolidated financialstatements.

 

Avariety of proposed or otherwise potential accounting standards are currentlyunder review and study by standard-setting organizations and certain regulatoryagencies. Because of the tentative and preliminary nature of such proposedstandards, we have not yet determined the effect, if any, that theimplementation of any such proposed or revised standards would have on theCompany’s consolidated financial statements.

 

Reclassifications

 

Certainamounts in the consolidated financial statements for prior years have beenreclassified to conform to the 2009 presentation. These reclassifications hadno effect on the previously reported net income.

 

44

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NOTE 2.  ACCOUNTS RECEIVABLE

 

Accountsreceivable consist of the following:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Casino                               |       | $                     | 4,189,190  |   | $ | 4,686,816 |   |
| Hotel                                |       | 433,658               |       | 403,830 |   |
| Other                                |       | 83,138                |       | 141,991 |   |
|                                 |       | 4,705,986             |       | 5,232,637 |   |
| Less allowance for doubtful accounts |       | (2,411,283            | )          | (1,888,196 | ) |
|                                 |       | $                     | 2,294,703  |   | $ | 3,344,441 |   |

 

TheCompany recorded bad debt expense of $1,120,333, $1,225,145 and $554,891 in2009, 2008 and 2007, respectively.  TheCompany calculates an allowance for doubtful accounts by applying a percentage,estimated by management based on historical aging experience, to the accountsreceivable balance.

 

NOTE3.  ACCRUED EXPENSES

 

Accruedexpenses consist of the following:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Accrued salaries, wagesand related benefits       |       | $                     | 3,340,695  |   | $ | 3,336,069 |   |
| Progressive slot machineand other gaming accruals |       | 3,431,896             |       | 3,132,586 |   |
| Accrued gaming taxes                              |       | 526,402               |       | 365,093 |   |
| Accrued interest                                  |       | 35,917                |       | 146,205 |   |
| Other accrued liabilities                         |       | 3,721,169             |       | 1,960,157 |   |
|                                              |       | $                     | 11,056,079 |   | $ | 8,940,110 |   |

 

NOTE4.  LEASE COMMITMENTS

 

In 2004, a driveway wasconstructed that is being shared between the Atlantis and the adjacent SierraMarketplace Shopping Center that is owned and controlled by affiliates of theCompany’s principal stockholders (the “Shopping Center”). A traffic signal waserected at mid-block on South Virginia Street, serving the driveway.  As part of this project, the Company isleasing a 37,368 square-foot corner section of the Shopping Center for aminimum lease term of 15 years at an annual rent of $300,000, subject toincrease every 60 months based on the Consumer Price Index.  The Company is also using part of the commonarea of the Shopping Center and pays its proportional share of the common areaexpense of the Shopping Center. The Company has the option to renew the leasefor 3 five-year terms, and at the end of the extension periods, the Company hasthe option to purchase the leased section of the Shopping Center at a price tobe determined based on an MAI appraisal. The Company uses the leased drivewayspace for pedestrian and vehicle access to the Atlantis, and the Company hasuse of a portion of the parking spaces at the Shopping Center. The total costof the project was $2.0 million; the Company was responsible for two thirds ofthe total cost, or $1.35 million. The project was completed, the driveway wasput into use and the Company began paying rent on September 30, 2004. Thecost of the driveway is being

 

45

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depreciated over the initial15-year lease term; some components of the driveway are being depreciated overa shorter period of time.

 

OnDecember 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 foradministrative staff offices.  Themanaging partner of Triple J is a first-cousin of John and Bob Farahi, theCompany’s Chief Executive Officer and President, respectively.  The term of the lease was two years requiringmonthly rental payments of $20,256. Commensurate with execution of the lease, the Company entered into anagreement that provided the Company with a purchase option on the Property atthe expiration of the lease period while also providing Triple J with a putoption to cause the Company to purchase the Property during the leaseperiod.  The purchase price of theProperty was established by a third party appraisal company.  Lastly, as a condition of the lease andpurchase option, the Company entered into a promissory note (the “Note”) withTriple J whereby the Company advanced a $2.7 million loan to Triple J.  The Note required interest only payments at5.25% and matured on the earlier of i) the date the Company acquires theProperty or ii) January 1, 2010.  InNovember 2009, Triple J exercised its put option causing the Company tocomplete the purchase transaction on November 12, 2009 in accordance withthe terms described above.

 

The Company accounts forits rental expense using the straight-line method over the original leaseterm.  Rental increases based on thechange in the CPI are contingent and accounted for prospectively.

 

Followingis a summary of future minimum payments under operating leases that haveinitial or remaining noncancelable lease terms in excess of one year at December 31,2009:

 
| ** **                    | ** ** | **Operating********Leases** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| Year ending December 31, |       |                        |       |
| 2010                          |       | 370,000                     |       |
| 2011                          |       | 370,000                     |       |
| 2012                          |       | 370,000                     |       |
| 2013                          |       | 370,000                     |       |
| 2014                          |       | 370,000                     |       |
| Thereafter                    |       | 1,757,500                   |       |
| Total minimum lease payments  |       | $                           | 3,607,500  |   |
|                               |            |                             |            |  |

 

Rental expense foroperating leases amounted to $1,153,753, $1,316,835 and $1,043,415 in 2009,2008 and 2006, respectively, as reported in selling, general and administrativeexpenses in the statements of income.

 

NOTE5.  LONG-TERM DEBT

 

THE CREDIT FACILITY

 

Until February 20,2004, the Company had a reducing revolving term loan credit facility with aconsortium of banks (the “First Credit Facility”).  On February 20, 2004, the OriginalCredit Facility was refinanced (the “Second Credit Facility”) for $50 million.The maturity date of the Second Credit Facility was to be April 18, 2009;however, on January 20, 2009, the Second Credit Facility was amended andrefinanced (the “New Facility”) for $60 million.  The New Credit Facility may be utilized bythe Company for working capital needs, general corporate purposes and forongoing capital expenditure requirements.

 

46

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The maturity date of the New Credit Facilityis January 20, 2012.  Borrowings aresecured by liens on substantially all of the real and personal property of theAtlantis and are guaranteed by Monarch.

 

The New Credit Facility contains covenantscustomary and typical for a facility of this nature, including, but not limitedto, covenants requiring the preservation and maintenance of Company assets andcovenants restricting the Company’s ability to merge, transfer ownership ofMonarch, incur additional indebtedness, encumber assets and make certaininvestments.  The New Credit Facilitycontains covenants requiring that the Company maintain certain financial ratiosand achieve a minimumlevel of Earnings-Before-Interest-Taxes-Depreciation and Amortization (EBITDA)on a two-quarter rolling basis.  It also containsprovisions that restrict cash transfers between Monarch and its affiliates andcontains provisions requiring the achievement of certain financial ratiosbefore the Company can repurchase its common stock or pay dividends. Managementdoes not consider the covenants to restrict normal functioning of day-to-dayoperations.

 

As of December 31, 2009, the Company wasrequired to maintain a leverage ratio, defined as consolidated debt divided byEBITDA , of no more than 2.875:1 and a fixed charge coverage ratio (EBITDAdivided by fixed charges, as defined) of at least 1.25:1.  As of December 31, 2009, the Company’sleverage ratio and fixed charge coverage ratios were 1.9:1 and 9.0:1,respectively.  As of December 31,2008, the Company’s leverage ratio and fixed charge coverage ratios were 1.9:1and 21.6:1, respectively.

 

The maximum principal available under the NewCredit Facility is reduced by $2.5 million per quarter beginning on December 31,2009.  The Company may permanently reducethe maximum principal available at any time so long as the amount of suchreduction is at least $500 thousand and a multiple of $50 thousand.  Maturities of the Company’s borrowings foreach of the next three years and thereafter as of December 31, 2009 are asfollows (amounts in thousands):

 
| **Year** | ** ** | **Maturities** | ** ** |
|----------|------------|----------------|------------|
| 2010     |       | $              | 1,000      |   |
| 2011     |       | 10,000         |       |
| 2012     |       | 37,500         |       |
|     |       | $              | 48,500     |   |

 

The Company may prepay borrowings under theNew Credit Facility without penalty (subject to certain charges applicable tothe prepayment of LIBOR borrowings prior to the end of the applicable interestperiod).  Amounts prepaid may bereborrowed so long as the total borrowings outstanding do not exceed themaximum principal available.

 

The Company paid various one-time fees andother loan costs upon the closing of the refinancing of the New Credit Facilitythat will be amortized over the facility’s term using the straight-line method.

 

At December 31,2009, the Company had $48.5 million outstanding under the New Facility.  At that time its leverage ratio was such thatpricing for borrowings under the New Facility was LIBOR plus 2.875%.  At December 31, 2008, the Company had$50 million outstanding under the First Credit Facility.  At that time its leverage ratio was such thatpricing for borrowings under the First Credit Facility was LIBOR plus1.25%.  At December 31, 2009 theone-month LIBOR interest rate was 0.25% while at December 31, 2008 theone-month LIBOR interest rate was 0.44%. At December 31, 2007, the Company had no outstanding borrowings;however, its leverage ratio was such that the pricing for borrowings would havebeen the Base Rate plus 0.00 percent or LIBOR plus 1.00 percent.  The carrying value of the debt outstandingunder the New Facility approximates fair value because the interest fluctuateswith the lender’s prime rate or other market rates of interest.

 

47

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NOTE6.  INCOME TAXES

 

Incometax provision (benefit) consists of the following:

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current provision            |       | $                                 | 402,156    |   | $ | 5,790,922 |   | $ | 14,494,634 |   |
| Deferred provision (benefit) |       | 1,919,523                         |       | (814,141 | ) | (1,510,974 | ) |
|                         |       | $                                 | 2,321,679  |   | $ | 4,976,781 |   | $ | 12,983,660 |   |

 

Incometax benefits were recognized through stockholders’ equity of $6,673, $0 and$292,757 during the years of 2009, 2008 and 2007, respectively, as compensationexpense for tax purposes in excess of amounts recognized for financialreporting purposes.

 

Thedifference between the Company’s provision for federal income taxes aspresented in the accompanying Consolidated Statements of Income, and theprovision for income taxes computed at the statutory rate is comprised of theitems shown in the following table as a percentage of pre-tax earnings.

 
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income tax at the statutory rate |       | 35.00                             | %          | 35.00 | % | 35.00 | % |
| Tax credits                      |       | (2.60                             | )%         | (0.70 | )% | (0.30 | )% |
|                             |       | 32.40                             | %          | 34.30 | % | 34.70 | % |

 

Thecomponents of the deferred income tax assets and liabilities at December 31,2009 and 2008, as presented in the Consolidated Balance Sheets, are as follows:

 
| ** **                        | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
| DEFERRED TAX ASSETS               |       |       |       |       |       |
| Share based compensation          |       | $          | 2,951,416  |       | $          | 2,236,090 |   |
| Compensation and benefits         |       | 540,765    |       | 418,222    |       |
| Bad debt reserves                 |       | 843,949    |       | 660,869    |       |
| Accrued gaming liabilities        |       | 859,635    |       | 599,064    |       |
| Accrued interest                  |       | 8,937      |       | 8,937      |       |
| Accrued other                     |       | 181,154    |       | 198,654    |       |
| Deferred income tax asset         |       | $          | 5,385,856  |       | $          | 4,121,836 |   |
| DEFERRED TAX LIABILITIES          |       |       |       |       |       |
| Impairment of assets              |       | $          | (72,260    | )          | $          | (72,260 | ) |
| Depreciation                      |       | (7,468,267 | )          | (4,193,760 | )          |
| Land basis                        |       | (285,706   | )          | (285,706   | )          |
| Prepaid expenses                  |       | (845,720   | )          | (895,758   | )          |
| Real estate taxes                 |       | (319,497   | )          | (360,423   | )          |
| Deferred income tax liability     |       | $          | (8,991,450 | )          | $          | (5,807,907 | ) |
| NET DEFERRED INCOME TAX LIABILITY |       | $          | (3,605,594 | )          | $          | (1,686,071 | ) |

 

48

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TheJanuary 1, 2007 adoption of authoritative guidance on accounting foruncertainty in income taxes did not affect the Company’s financialposition.  The Company is required tofile a federal tax return only.  As of December 31, 2009, tax years2006 through 2009 were subject to examination by the Internal Revenue Service(IRS).  During 2009, the IRS began its field examination of the Company’s2007 and 2008 tax years.  The Companybelieves that its income tax filing positions and deductions will be sustainedon audit and does not anticipate any adjustments that will result in a materialadverse effect on the Company’s financial condition, results of operations, orcash flow. Therefore, no reserves for uncertain income tax positions have beenrecorded. The Company expects resolution of the exam in the next 12 months.

 

NOTE7.  BENEFIT PLANS

 

SavingsPlan - Effective November 1, 1995, the Company adopted a savings plan,which qualifies under Section 401(k) of the Internal RevenueCode.  Under the plan, participatingemployees may defer up to 15% of their pre-tax compensation, but not more thanstatutory limits. Prior to 2007, the Company contributed twenty five cents foreach dollar contributed by a participant, with a maximum contribution of 4% ofa participant’s compensation.  Effective January 1,2007, the Company increased its contribution to fifty cents for each dollarcontributed by a participant and effective January 1, 2009, the Companysuspended its contribution altogether. The Company’s matching contributions were approximately $0, $236,869 and$238,510 for years ended December 31, 2009, 2008 and 2007, respectively.

 

NOTE8. SHARE-BASED COMPENSATION

 

The Company’s three stockoption plans, consisting of the Directors’ Stock Option Plan, the ExecutiveLong-term Incentive Plan and the Employee Stock Option Plan (the “Plans”),which collectively provide for the granting of options to purchase up to3,250,000 common shares. The exercise price of stock options granted under thePlans is established by the respective plan committees, but the exercise pricemay not be less than the market price of the Company’s common stock on the datethe option is granted. The Company stock options typically vest on a gradedschedule, typically in equal, one-third increments, although the respectivestock option committees have the discretion to impose different vesting periodsor modify existing vesting periods. Options expire ten years from the grantdate. By their amended terms, the Plans will expire in June 2013 afterwhich no options may be granted.

 

Asummary of the stock option activity as of and for the year ended December 31,2009 is presented below:

 
| ** **                          | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **                       | ** ** |
|-------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------|------------|
| **Options**                         | ** ** | **Shares** | ** ** | **Exercise  Price**  | ** ** | **Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Outstanding  at beginning of period |       | 1,560,040  |       | $                    | 18.01      |                             | —     |   | — |   |
| Granted                             |       | 305,640    |       | 4.52                 |       | —                           |       | — |   |
| Exercised                           |       | (3,340     | )          | 3.40                 |       | —                           |       | — |   |
| Forfeited                           |       | (33,000    | )          | 6.97                 |       | —                           |       | — |   |
| Expired                             |       | —     |       | —               |       | —                           |       | — |   |
| Outstanding  at end of period       |       | 1,829,340  |       | $                    | 15.99      |                             | 6.9 yrs.   |   | $ | 14,417,017 |   |
| Exercisable  at end of period       |       | 1,000,007  |       | $                    | 7.48       |                             | 2.8 yrs.   |   | $ | 8,012,831 |   |

 

A summary of the statusof the Company’s nonvested shares as of, and for the year ended, December 31,2009 is presented below:

 

49

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| **Nonvested  Shares**               | ** ** | **Shares** | ** ** | **Weighted-Average Grant Date Fair  Value** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Nonvested at January 1, 2009   |       | 827,004    |       | $                                           | 8.90       |   |
| Granted                             |       | 305,640    |       | 4.52                                        |       |
| Vested                              |       | (270,311   | )          | 8.97                                        |       |
| Forfeited                           |       | (33,000    | )          | 6.97                                        |       |
| Nonvested at December 31, 2009 |       | 829,333    |       | $                                           | 7.45       |   |

 

Expense Measurement andRecognition:

 

The Company recognizesshare-based compensation for all current award grants and for the unvestedportion of previous award grants based on grant date fair values. Unrecognized costsrelated to all share-based awards outstanding at December 31, 2009 totaledapproximately $4.1 million and is expected to be recognized over a weightedaverage period of 2.5 years.

 

The Company useshistorical data and projections to estimate expected employee, executive anddirector behaviors related to option exercises and forfeitures.

 

The Company estimates thefair value of each stock option award on the grant date using the Black-Scholesvaluation model incorporating the assumptions noted in the following table.Option valuation models require the input of highly subjective assumptions, andchanges in assumptions used can materially affect the fair value estimate.  Option valuation assumptions for options grantedduring each year were as follows:

 
| ** **                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                 |       |                              |       |   |   |   |   |
| Expected  volatility                                                 |       | 64.1                              | %          | 111.7 | % | 50.3 | % |
| Expected  dividends                                                  |       | —                            |       | — |   | — |   |
| Expected  life (in years)                                            |       |                              |       |   |   |   |   |
| Directors’  Plan                                                |       | 2.5                               |       | 2.5 |   | 2.5 |   |
| Executive  Plan                                                      |       | 4.5                               |       | 4.5 |   | 4.5 |   |
| Employee  Plan                                                       |       | 3.1                               |       | 3.1 |   | 3.1 |   |
| Weighted  average risk free rate                                     |       | 1.4                               | %          | 4.1 | % | 4.1 | % |
|                                                                 |       |                              |       |   |   |   |   |
| Weighted  average grant date fair value per share of options granted |       | $                                 | 4.52       |   | $ | 5.30 |   | $ | 11.24 |   |
|                                                                 |       |                              |       |   |   |   |   |
| Total  intrinsic value of options exercised                          |       | $                                 | 15,698     |   | $ | — |   | $ | 747,770 |   |
| Cash  received for all stock option exercises                        |       | $                                 | 13,009     |   | $ | — |   | $ | 602,636 |   |
| Tax  benefit realized for tax return deductions                      |       | $                                 | 6,673      |   | $ | — |   | $ | 292,757 |   |

 

The risk-free interestrate is based on the U.S. treasury security rate in effect as of the dateof grant. The expected lives of options are based on historical data of theCompany.  The Company has determined thatan implied volatility is more reflective of market conditions and a betterindicator of expected volatility.

 

Reported stock basedcompensation expense was classified as follows:

 

50

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| ** **                                   | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Casino                                       |       | $                                         | 58,761     |   | $ | 80,148 |   | $ | 72,509 |   |
| Food and beverage                            |       | 56,600                                    |       | 72,424 |   | 53,542 |   |
| Hotel                                        |       | 23,587                                    |       | 31,536 |   | 38,071 |   |
| Selling, general and administrative          |       | 1,909,823                                 |       | 2,124,929 |   | 2,106,935 |   |
| Total stock-based compensation, before taxes |       | 2,048,771                                 |       | 2,309,037 |   | 2,271,057 |   |
| Tax benefit                                  |       | (717,069                                  | )          | (808,163 | ) | (794,870 | ) |
| Total stock-based compensation, net of tax   |       | $                                         | 1,331,702  |   | $ | 1,500,874 |   | $ | 1,476,187 |   |

 

NOTE9.  COMMITMENTS AND CONTINGENCIES

 

SelfInsurance - The Company is self-insured for health care claims for eligibleactive employees. Benefit plan administrators assist the Company in determiningits liability for self-insured claims, and such claims are not discounted. TheCompany is also self-insured for workers’ compensation. Both plans limit theCompany’s maximum liability through a benefit limitation in the case of thehealth plan and through a stop-loss insurance agreement in the case of theworker’s compensation plan. The maximum liability for health care claims is$500 thousand per calendar year, and $1 million over the lifetime, for eacheligible employee. The maximum liability for workers’ compensation under the stop-lossagreement is $500 thousand per claim.

 

On September 28,2006, the Company’s Board of Directors (the “Board”) authorized a stockrepurchase plan (the “Repurchase Plan”). Under the Repurchase Plan, the Boardauthorized a program to repurchase up to 1,000,000 shares of our common stockin 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 otherfactors.  The Repurchase Plan did notobligate the Company to acquire any particular amount of common stock.

 

On March 11, 2008,the Board increased its initial authorization by 1,000,000 shares and on April 22,2008, the Board increased its authorization a third time by 1,000,000 shareswhich increased the shares authorized to be repurchased to a total of 3,000,000shares.  During the first and secondquarters of 2008, the Company purchased 2,444,492 shares of the Company’scommon stock pursuant to the Repurchase Plan at a weighted average purchaseprice of $14.59 per share, which increased the total number of shares purchasedpursuant to the Repurchase Plan to 3,000,000 at a weighted average purchaseprice of $16.52 per share.  As of June 30,2008, the Company had purchased all shares under the three million shareRepurchase Plan authorization.

 

As previously disclosed,litigation was filed against Monarch on January 27, 2006, by KerznerInternational Limited (“Kerzner”) owner of the Atlantis, Paradise Island,Bahamas in the United States District Court, District of Nevada.  The casenumber assigned to the matter is 3:06-cv-00232-ECR (RAM).  The complaintseeks declaratory judgment prohibiting Monarch from using the name “Atlantis”in connection with offering casino services other than at Monarch’s AtlantisCasino Resort Spa located in Reno, Nevada, and particularly prohibiting Monarchfrom using the “Atlantis” name in connection with offering casino services inLas Vegas, Nevada; injunctive relief enforcing the same; unspecifiedcompensatory and punitive damages; and other relief. Monarch believes Kerzner’sclaims to be entirely without merit and is defending vigorously against thesuit. Further, Monarch has filed a counterclaim against Kerzner seeking to cancelKerzner’s registration of the Atlantis mark for casino services and to

 

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obtain declaratory reliefon these issues.   Upon conclusionof discovery, various motions were filed by the parties.  On December 14, 2009, the court ruled onthe pending motions, significantly narrowing the issues for trial.  Kerzner next filed a Request forCertification of Interlocutory Appeal as to the court’s December 14, 2009Orders.  Kerzner’s Request was rejectedby the court in its Order issued February 25, 2010, and the parties areproceeding with pre-trial preparation. No trial date has been set as of this filing.

 

The Company is party toother claims that arise in the normal course of business.  Managementbelieves that the outcomes of such claims will not have a material adverseimpact on our financial condition, cash flows or results of operations.

 

NOTE10.  RELATED PARTY TRANSACTIONS

 

The 18.95-acre shoppingcenter (the “Shopping Center”) adjacent to the Atlantis Casino Resort Spa isowned by Biggest Little Investments, L.P. (“BLI”).  BLI’s general partner is Maxum, L.L.C. (“Maxum”).  John Farahi, Bob Farahi and Ben Farahi eachindividually own non-controlling interests in BLI and Maxim.  John Farahi is Co-Chairman of the Board,Chief Executive Officer, Chief Operating Officer and a Director of Monarch.  Bob Farahi is Co-Chairman of the Board,President, Secretary and a Director of Monarch. Ben Farahi formerly was theCo-Chairman of the Board, Secretary, Treasurer, Chief Financial Officer and aDirector of Monarch.  Monarch’s board ofdirectors accepted Ben Farahi’s resignation from these positions on May 23,2006.

 

TheCompany currently rents various spaces in the Shopping Center which it uses asoffice, storage space and guest parking and paid rent of approximately $136,300****plus common area expenses in the yearended December 31, 2009. The Company paid rent of approximately $194,800and $262,700 plus common area expenses in the years ended December 31,2008 and 2007, respectively.

 

Inaddition, a driveway that is being shared between the Atlantis and the ShoppingCenter was completed on September 30, 2004.  As part of this project, in January 2004,the Company leased a 37,368 square-foot corner section of the Shopping Centerfor a minimum lease term of 15 years at an annual rent of $300,000, subject toincrease every 60 months based on the Consumer Price Index. The Company beganpaying rent to the Shopping Center on September 30, 2004. The Company alsouses part of the common area of the Shopping Center and pays its proportionalshare of the common area expense of the Shopping Center. The Company has theoption to renew the lease for 3 five-year terms, and at the end of theextension periods, the Company has the option to purchase the leased drivewaysection of the Shopping Center at a price to be determined based on an MAIAppraisal. The leased space is being used by the Company for pedestrian andvehicle access to the Atlantis, and the Company may use a portion of theparking spaces at the Shopping Center. The total cost of the project was $2.0million; the Company was responsible for two thirds of the total cost, or $1.35million. The Company paid approximately $310,000 plus common area charges forthe year ended December 31, 2009, and approximately $300,000 in each ofthe years ended December 31, 2008 and 2007, for its leased driveway spaceat the Shopping Center.

 

TheCompany leased sign space from the Shopping Center through July 2008.  The Company paid $7,460 and $12,420 for theyears ended December 31, 2008 and 2007, respectively.

 

The Company is currently leasingbillboard advertising space from affiliates of its principal stockholders for atotal cost of $38,500, $42,000 and $49,000 for the years ended December 31,2009, 2008 and 2007, respectively.

 

OnDecember 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 foradministrative staff offices.  Themanaging partner of Triple J is a first-cousin of John and Bob Farahi, theCompany’s Chief Executive Officer and President,

 

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respectively.  The term of the lease was two years requiringmonthly rental payments of $20,256. Commensurate with execution of the lease, the Company entered into anagreement that provided the Company with a purchase option on the Property atthe expiration of the lease period while also providing Triple J with a putoption to cause the Company to purchase the Property during the lease period.  The purchase price of the Property wasestablished by a third party appraisal company. Lastly, as a condition of the lease and purchase option, the Companyentered into a promissory note (the “Note”) with Triple J whereby the Companyadvanced a $2.7 million loan to Triple J. The Note required interest only payments at 5.25% and matured on theearlier of i) the date the Company acquires the Property or ii) January 1,2010.  In November 2009, Triple Jexercised its put option causing the Company to complete the purchasetransaction on November 12, 2009 in accordance with the terms describedabove.

 

NOTE11.   SUBSEQUENT EVENTS

 

TheCompany evaluated all subsequent events through the date that the consolidatedfinancial statements were issued. No material subsequent events have occurredsince December 31, 2009 that required recognition or disclosure in theconsolidated financial statements.

 

NOTE12.  SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED)

 
| ** **                      | ** ** | **2009**        | ** ** |
|---------------------------------|------------|-----------------|------------|
| ** **                      | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** | **Total** | ** ** |
| Net revenues                    |       | $               | 32,579,184 |   | $ | 34,455,358 |   | $ | 34,845,800 |   | $ | 31,851,514 |   | $ | 133,731,856 |   |
| Operating expenses              |       | 30,645,657      |       | 31,154,624 |   | 31,260,726 |   | 31,528,554 |   | 124,589,561 |   |
| Income from operations          |       | 1,933,527       |       | 3,300,734 |   | 3,585,074 |   | 322,960 |   | 9,142,295 |   |
| Net income                      |       | 922,160         |       | 1,797,918 |   | 2,037,858 |   | 83,543 |   | 4,841,479 |   |
| Income per share ofcommon stock |       |            |       |   |   |   |   |   |   |   |   |
| Basic                           |       | $               | 0.06       |   | $ | 0.11 |   | $ | 0.13 |   | $ | 0.01 |   | $ | 0.30 |   |
| Diluted                         |       | $               | 0.06       |   | $ | 0.11 |   | $ | 0.13 |   | $ | 0.01 |   | $ | 0.30 |   |

 
| ** **                      | ** ** | **2008**        | ** ** |
|---------------------------------|------------|-----------------|------------|
| ** **                      | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** | **Total** | ** ** |
| Net revenues                    |       | $               | 34,273,393 |   | $ | 35,343,765 |   | $ | 38,787,199 |   | $ | 32,965,112 |   | $ | 141,369,469 |   |
| Operating expenses              |       | 30,998,549      |       | 30,924,665 |   | 32,753,962 |   | 32,006,492 |   | 126,683,668 |   |
| Income from operations          |       | 3,274,844       |       | 4,419,100 |   | 6,033,237 |   | 958,620 |   | 14,685,801 |   |
| Net income                      |       | 2,302,031       |       | 2,802,903 |   | 4,025,695 |   | 410,339 |   | 9,540,968 |   |
| Income per share ofcommon stock |       |            |       |   |   |   |   |   |   |   |   |
| Basic                           |       | $               | 0.13       |   | $ | 0.16 |   | $ | 0.25 |   | $ | 0.03 |   | $ | 0.56 |   |
| Diluted                         |       | $               | 0.12       |   | $ | 0.16 |   | $ | 0.25 |   | $ | 0.03 |   | $ | 0.56 |   |

 

**ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

53

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**ITEM 9A.CONTROLS AND PROCEDURES**

 

Disclosure Controls andProcedures

 

Asof the end of the period covered by this Annual Report on Form 10-K, (the “EvaluationDate”), an evaluation was carried out by our management, with the participationof our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) underthe Securities Exchange Act of 1934). Based upon the evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report. No changes were made to our internal control over financialreporting (as defined by Rule 13a-15(e) under the Securities ExchangeAct of 1934) during the last fiscal quarter that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

54

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Management’sReport on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting. Our internal control system wasdesigned to provide reasonable assurance to our management and Board ofDirectors regarding the preparation and fair presentation of publishedfinancial statements.

 

Allinternal control systems, no matter how well designed, have inherentlimitations, including the possibility of human error and the circumvention oroverriding of controls. Accordingly, even effective internal controls canprovide only reasonable assurances with respect to financial statementpreparation. Further, because of changes in conditions, the effectiveness ofinternal controls may vary over time.

 

Managementassessed the effectiveness of our internal control over financial reporting asof December 31, 2009. In making this assessment, it used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-IntegratedFramework. Based on our assessment we believe that, as of December 31,2009, the Company’s internal control over financial reporting is effectivebased on those criteria.

 

TheCompany’s independent registered public accounting firm has issued an auditreport on our assessment of the Company’s internal control over financialreporting. This report appears in Item 8 of this Form 10-K.

 

**ITEM9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Thisinformation is incorporated by reference from the Company’s Proxy Statement tobe filed with the Commission in connection with the Annual Meeting ofStockholders to be held on May 21, 2010.

 

**ITEM11. EXECUTIVE COMPENSATION**

 

Thisinformation is incorporated by reference from the Company’s Proxy Statement tobe filed with the Commission in connection with the Annual Meeting of Stockholdersto be held on May 21, 2010.

 

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

 

Followingis information related to the Company’s equity compensation.

 

55

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| **Plan  Category**                                           | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of  securities remaining  available for future  issuance under  equity  compensation plans  (excluding  securities reflected  in column (a))** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                         | ** ** | **(a)**                                                                                               | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                                 | ** ** |
| Equity compensation plans approved by security  holders (F1) |       | 1,829,340                                                                                             |       | $                                                                                   | 15.99      |                                                                                                                                                    | 851,155    |   |
|                                                         |       |                                                                                                  |       |                                                                                |       |                                                                                                                                                    |       |
| Equity compensation plans not approved by security  holders  |       | —                                                                                                |       | —                                                                              |       | —                                                                                                                                                  |       |
| Total                                                        |       | 1,829,340                                                                                             |       | $                                                                                   | 15.99      |                                                                                                                                                    | 851,155    |   |

 

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(F1) Includes the 1993Directors’ Stock Option Plan, 1993 Employee Stock Option Plan and 1993Executive Long-Term Incentive Plan, as amended.

 

Additional informationis incorporated by reference from the Company’s Proxy Statement to be filedwith the Commission in connection with the Annual Meeting of Stockholders to beheld on May 21, 2010.

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Thisinformation is incorporated by reference from the Company’s Proxy Statement tobe filed with the Commission in connection with the Annual Meeting ofStockholders to be held on May 21, 2010.

 

**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Thisinformation is incorporated by reference from the Company’s Proxy Statement tobe filed with the Commission in connection with the Annual Meeting ofStockholders to be held on May 21, 2010.

 

56

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**PART IV**

 

**ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

1. Financial Statements

 

Included in Part II of this report:

 

a) Report of Independent Registered PublicAccounting Firm

 

b) Consolidated Statements of Income for theyears ended December 31, 2009, 2008 and 2007.

 

c) Consolidated Balance Sheets at December 31, 2009 and 2008.

 

d) Consolidated Statements of Stockholders’ Equity for the years ended December 31,2009, 2008 and 2007.

 

e) Consolidated Statements of Cash Flows for the years ended December 31,2009, 2008 and 2007.

 

f)Notes to Consolidated Financial Statements.

 

2.Financial Statements Schedules

 

ScheduleII. - VALUATION AND QUALIFYING ACCOUNTS

 
| **Year  ended  December 31,** | ** ** | **Balance at  beginning of  year** | ** ** | **Charged to  costs and  expenses** | ** ** | **Deductions  (F1)** | ** ** | **Other** | ** ** | **Balance at  end of year** | ** ** |
|------------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------------|------------|-----------|------------|-----------------------------|------------|
| 2007                               |       |                               |       |                                |       |                 |       |      |       |                        |       |
| Allowance for doubtful accounts    |       | $                                  | 1,253,297  |                                | $          | 554,891              |       | $         | (390,069   | )                           | $          | — |   | $ | 1,418,119 |   |
|                               |       |                               |       |                                |       |                 |       |      |       |                        |       |
| 2008                               |       |                               |       |                                |       |                 |       |      |       |                        |       |
| Allowance for doubtful accounts    |       | $                                  | 1,418,119  |                                | $          | 1,225,145            |       | $         | (755,068   | )                           | $          | — |   | $ | 1,888,196 |   |
|                               |       |                               |       |                                |       |                 |       |      |       |                        |       |
| 2009                               |       |                               |       |                                |       |                 |       |      |       |                        |       |
| Allowance for doubtful accounts    |       | $                                  | 1,888,196  |                                | $          | 1,120,333            |       | $         | (597,246   | )                           | $          | — |   | $ | 2,411,283 |   |

 

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(F1)The Company reviews receivables monthly and, accordingly, adjusts the allowancefor doubtful accounts monthly.  TheCompany records write-offs annually.  Theamount charged to Costs and Expenses reflects the bad debt expense recorded inthe consolidated statements of income, while the amount recorded for Deductionsreflects the adjustment to actual allowance for doubtful accounts reserve atthe end of the period.

 

57

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**Exhibits**

 
| **Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.01       |       | Articles  of Incorporation of Monarch Casino & Resort, Inc., filed  June 11, 1993 are incorporated herein by reference from the Company’s  Form S-1 registration statement (SEC File 33-64556), Part II, Item  16, Exhibit 3.01.                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.02       |       | Bylaws  of Monarch Casino & Resort, Inc., adopted June 14, 1993  are incorporated herein by reference from the Company’s Form S-1  registration statement (SEC File 33-64556), Part II, Item 16,  Exhibit 3.02.                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.03       |       | Articles  of Incorporation of Golden Road Motor Inn, Inc. filed March 6,  1973; Certificate Amending Articles of Incorporation of Golden Road Motor  Inn, Inc. filed August 29, 1973; and Certificate of Amendment of  Articles of Incorporation filed April 5, 1984 are incorporated herein by  reference from the Company’s Form S-1 registration statement (SEC File  33-64556), Part II, Item 16, Exhibit 3.03. |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.04       |       | Bylaws  of Golden Road Motor Inn, Inc., adopted March 9, 1973 are  incorporated herein by reference from the Company’s Form S-1  registration statement (SEC File 33-64556), Part II, Item 16,  Exhibit 3.04.                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.05       |       | Amendment  to Bylaws of Monarch Casino & Resort, Inc. adopted  January 24, 1995 is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-022088) for the fiscal year ended  December 31, 2006, Exhibit 3.05.                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.06       |       | Amendment  No. 2 to Bylaws of Monarch Casino & Resort, Inc. adopted  March 27, 2009 is incorporated herein by reference to the Company’s  Form 8-K (SEC File 0-22088) filed on April 1, 2009,  Exhibit 3.01                                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.01       |       | Specimen  Common Stock Certificate for the Common Stock of Monarch Casino &  Resort, Inc. is incorporated herein by reference from the Company’s  Form S-1 registration statement (SEC File 33-64556), Part II, Item  16, Exhibit 4.01.                                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.02       |       | Amended  and Restated Monarch Casino & Resort, Inc. 1993 Directors’  Stock Option Plan is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-022088) for the fiscal year ended  December 31, 1998, Item 14(c), Exhibit 4.02.                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.03       |       | Amended  and Restated Monarch Casino & Resort, Inc. 1993 Executive  Long-Term Incentive Plan is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-22088) for the fiscal year ended  December 31, 1997, Item 14(c), Exhibit 4.03.                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.04       |       | Amended  and Restated Monarch Casino & Resort, Inc. 1993 Employee Stock  Option Plan is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-22088) for the fiscal year ended  December 31, 1997, Item 14(c), Exhibit 4.04.                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.05       |       | Second  Amendment to Monarch Casino & Resort, Inc. 1993 Directors’  Stock Option Plan is incorporated herein by reference to the Company’s Proxy  Statement (SEC File 0-22088) in relation to the Company’s 2003 Annual Meeting  of Stockholders Exhibit A-1.                                                                                                                                                                  |

 

58

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| 4.06   |   | Second  Amendment to Monarch Casino & Resort, Inc. 1993 Employee Stock  Option Plan is incorporated herein by reference to the Company’s Proxy  Statement (SEC File 0-22088) in relation to the Company’s 2003 Annual Meeting  of Stockholders Exhibit A-2.                                                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.07   |   | Second  Amendment to Monarch Casino & Resort, Inc. 1993 Executive  Long-Term Incentive Plan is incorporated herein by reference to the Company’s  Proxy Statement (SEC File 0-22088) in relation to the Company’s 2003 Annual  Meeting of Stockholders Exhibit A-3.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.08   |   | Third  Amendment to Monarch Casino & Resort, Inc. 1993 Employee Stock  Option Plan is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-022088) for the fiscal year ended  December 31, 2006, Exhibit 4.08.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.09   |   | Third  Amendment to Monarch Casino & Resort, Inc. 1993 Executive  Long-Term Incentive Plan is incorporated herein by reference to the Company’s  Form 10-K report (SEC File 0-022088) for the fiscal year ended  December 31, 2006, Exhibit 4.09.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.01  |   | Non-standardized  401(k) Plan Adoption Agreement between Monarch Casino &  Resort, Inc. and Smith Barney Shearson dated November 7, 1995 is  incorporated herein by reference to the Company’s Form 10-K report (SEC  File 0-22088) for the fiscal year ended December 31, 1995, Item  14(a)(3), Exhibit 10.21.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.02  |   | Trademark  Agreement between Golden Road Motor Inn, Inc. and Atlantis  Lodge, Inc., dated February 3, 1996 is incorporated herein by  reference to the Company’s Form 10-K report (SEC File 0-22088) for the  fiscal year ended December 31, 1995, Item 14(a)(3), Exhibit 10.23.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.03  |   | Credit Agreement, dated  as of February 20, 2004, among Golden Road Motor Inn, Inc. as  Borrower, Monarch Casino & Resort, Inc., as Guarantor, the  Lenders as defined therein, and Wells Fargo Bank as administrative and  collateral Agent for the Lenders and Swingline Lender is incorporated herein  by reference to the Company’s Form 8-K report (SEC File 0-22088) dated  March 8, 2004, Exhibit 99.1.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.04  |   | Lease  Agreement and Option to Purchase dated as of January 29, 2004, between  Golden Road Motor Inn, Inc. as Lessee and Biggest Little Investments,  L.P. as Lessor is incorporated herein by reference to the Company’s  Form 10-K (SEC File 0-22088) dated March 11, 2004,  Exhibit 10.18.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.05  |   | First  Amendment, dated as of February 8, 2007, to the Credit Agreement, dated  as of February 20, 2004, among Golden Road Motor Inn, Inc., as  Borrower, Monarch Casino & Resort, Inc., as Guarantor, the  Lenders as defined therein, and Wells Fargo Bank as administrative and  collateral Agent for the Lenders and Swingline Lender is incorporated herein  by reference to the Company’s Form 10-K report (SEC File 0-022088) for the  fiscal year ended December 31, 2006, Exhibit 10.05. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.06  |   | Amended  and Restated Credit Agreement, dated as of January 20, 2009, among  Golden road Motor Inn, Ind., as Borrower, Monarch Casino &  Resort, Inc., as Guarantor, the Lenders as defined therein, and Wells  Fargo Bank, National Association, as Swingline Lender, L/C Issuer and Agent  Bank is incorporated herein by reference to the Company’s Form 10-K (SEC  File 0-22088) filed May 11, 2009, Exhibit 10.01.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.01  |   | Amended  and Restated List of Subsidiaries of Monarch Casino &  Resort, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1   |   | Consent  of Independent Registered Public Accounting Firm*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 is filed as an exhibit to  this Form 10-K.*                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.2   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 is filed as an exhibit to this  Form 10-K.*                                                                                                                                                                                                                                                                                                                                                                |

 

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*filed herewith.

 

59

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | MONARCH  CASINO & RESORT, INC. |   |
|--------|-----------------------------------------|--------|
|   | (Registrant)                            |   |

 

 
| Date:  March 15, 2010 | By:                                    | /s/  RONALD ROWAN |
|----------------------------|----------------------------------------|-------------------|
|                       | Ronald  Rowan, Chief Financial Officer |
|                       | and  Treasurer (Principal Financial    |
|                       | Officer  and Duly Authorized Officer)  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**           | ** ** | **Title**                               | ** ** | **Date**             |
|-------------------------|------------|-----------------------------------------|------------|----------------------|
|                    |       |                                    |       |                 |
| /S/  JOHN FARAHI        |       | Co-Chairman  of the Board of Directors  |       | March 15,  2010 |
| John  Farahi            |       | Chief  Executive Officer (Principal     |       |                 |
|                    |       | Executive  Officer) and Director        |       |                 |
|                    |       |                                    |       |                 |
| /S/  BOB FARAHI         |       | Co-Chairman  of the Board of Directors, |       | March 15,  2010 |
| Bob  Farahi             |       | President,  Secretary and Director      |       |                 |
|                    |       |                                    |       |                 |
|                    |       |                                    |       |                 |
| /S/  RONALD ROWAN       |       | Chief  Financial Officer and Treasurer  |       | March 15,  2010 |
| Ronald  Rowan           |       | (Principal  Financial Officer and       |       |                 |
|                    |       | Principal  Accounting Officer)          |       |                 |
|                    |       |                                    |       |                 |
|                    |       |                                    |       |                 |
| /S/ CRAIG. F.  SULLIVAN |       | Director                                |       | March 15,  2010 |
| Craig  F. Sullivan      |       |                                    |       |                 |
|                    |       |                                    |       |                 |
|                    |       |                                    |       |                 |
| /S/ RONALD R.  ZIDECK   |       | Director                                |       | March 15,  2010 |
| Ronald R. Zideck        |       |                                    |       |                 |

 

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