MCRI

Monarch Casino & Resort Inc. - 10-K Summary (Fiscal Year Ended Dec 31, 2006)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006, for Monarch Casino & Resort Inc. (Monarch). The Company operates a single property, the Atlantis Casino Resort Spa, located in Reno, Nevada. The facility includes 975 hotel rooms, approximately 51,000 square feet of casino space, nine food outlets, and convention facilities. Monarch is an accelerated filer and is not a shell company.

Key Financial Metrics

Revenue Composition (2006): Casino revenues accounted for $103.33 million (68% of net revenues), Food & Beverage $41.04 million, and Hotel $26.41 million. Hotel occupancy averaged 93.3% with an Average Daily Rate (ADR) of $69.87.

Material Changes vs. Prior Period

• Debt Elimination: The Company paid off all bank-related debt in the first quarter of 2006. Consequently, interest expense dropped from $1.01 million in 2005 to $98,000 in 2006, while interest income increased by $466,000 due to investments of surplus cash.
• Accounting Change: Effective January 1, 2006, the Company adopted SFAS 123R, recognizing stock-based compensation expense. This resulted in a $3.3 million pre-tax charge, $3.1 million of which was recorded in Selling, General, and Administrative (SG&A) expenses. This adoption reduced reported Net Income and EPS compared to what they would have been under the previous accounting method.
• Revenue Growth: Net revenues increased 8.7% year-over-year, driven by growth in all segments: Casino (+9.3%), Food & Beverage (+6.2%), and Hotel (+10.5%).
• Expense Increases: SG&A expenses rose 21.5% to $46.3 million, primarily due to the new stock option expense, increased marketing, higher energy costs, and higher bad debt expense.

Guidance, Outlook, and Risks

Expansion Plans: Management expects to begin construction in Q2 2007 on a major expansion project estimated to cost approximately $50 million (excluding a potential skywalk). The project will add 116,000 square feet, including a 20% expansion of the casino floor, a new sports book, an enlarged poker room, and doubled convention space. Funding is expected to come from existing cash and operating cash flow.

Outlook: The Company anticipates continued growth driven by the affluent south Reno market and proximity to the Reno-Sparks Convention Center. However, management notes that construction activities may cause operational disruptions in late 2007 and early 2008.

Risks and Contingencies:

• Competition: Intense competition from California Indian casinos and potential new entrants in Reno, specifically Station Casinos, which plans to build a casino within one mile of the Atlantis.
• Legal Proceedings: Kerzner International Limited has sued Monarch regarding the use of the "Atlantis" name. Monarch is vigorously defending the suit and has filed a counterclaim.
• Single Property Risk: The Company is entirely dependent on the Atlantis for all cash flow, making it vulnerable to local economic downturns or property-specific issues.
• Regulatory: Strict Nevada gaming regulations require suitability findings for major shareholders and officers; failure to comply could result in license revocation.

Investor Verification Checklist

• Verify the status and potential financial impact of the trademark litigation with Kerzner International Limited.
• Monitor the progress and cost adherence of the $50 million expansion project scheduled to begin in Q2 2007.
• Assess the competitive impact of Station Casinos' planned new facility in the immediate vicinity.
• Review the Company's ability to maintain high occupancy rates (93%+) amidst increased regional competition.
• Confirm the sustainability of the debt-free balance sheet and the utilization of the $5 million remaining credit facility.