MCRI

Business Context and Reporting Period

Company: Monarch Casino & Resort, Inc. (MCRI)
Reporting Period: Fiscal Year Ended December 31, 2005
Primary Asset: The Atlantis Casino Resort in Reno, Nevada (wholly-owned subsidiary: Golden Road Motor Inn, Inc.)
Operations: The Company operates a single property featuring 975 hotel rooms, approximately 51,000 square feet of casino space, nine food outlets, and convention facilities. The business model targets Reno area residents ("Locals"), leisure travelers, and conventioneers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 8.0% to $139.8 million, driven by a 12.3% increase in casino revenues (primarily slot and video poker) and a 20.5% increase in other revenues. This was partially offset by a 1.7% decline in hotel revenues due to lower occupancy (93.0% vs 93.6%) and Average Daily Rate ($63.24 vs $64.16) caused by fewer conventions and the absence of a major bowling tournament in 2005.
• Profitability: Net income rose 27.3% to $21.0 million. Operating income increased 25.9% due to improved margins across revenue centers and a $1.2 million reduction in depreciation and amortization.
• Debt Reduction: Long-term debt outstanding decreased significantly from $32.4 million in 2004 to $8.1 million in 2005. Interest expense dropped 36.0% to $1.0 million, aided by the elimination of stockholder guarantee fees following a 2004 refinancing.
• Development Costs: The Company expensed approximately $440,000 in gaming development costs in 2005 related to failed acquisition attempts (Fitzgerald's Reno) and a rejected zoning application for a new South Reno property.

Outlook, Risks, and Contingencies

• Capital Resources: Management expects operating cash flow and the $24.0 million available under the New Credit Facility (maturing February 2009) to fund operations and capital expenditures. The Company has achieved a leverage ratio of 1:1 for two consecutive quarters, waiving scheduled principal reductions until maturity.
• Expansion: The Company owns a 16-acre parcel adjacent to the Atlantis suitable for future expansion. However, efforts to acquire the Fitzgerald's Reno Casino Hotel were abandoned in early 2006 after the seller filed for bankruptcy.
• Key Risks:
  • Competition: Intense competition from California Native American casinos and potential new developments in Reno (e.g., Station Casinos) could impact market share.
  • Single Property Dependence: The Company relies entirely on the Atlantis for cash flow.
  • Regulatory: Operations are subject to strict Nevada Gaming Control Board regulations; license revocation would be catastrophic.
  • Economic Sensitivity: Business is sensitive to economic conditions in Reno and California, as well as winter weather affecting drive-in traffic.
• Legal Proceedings: The Company is defending a trademark infringement suit filed by Kerzner International regarding the "Atlantis" name and an appeal regarding a class action lawsuit concerning slot machine operations (summary judgment previously granted in Monarch's favor).

Investor Verification Checklist

• Verify the sustainability of the 12.3% casino revenue growth given the decline in hotel occupancy and ADR.
• Confirm the status of the $24.0 million available credit facility and adherence to leverage ratio covenants.
• Monitor the outcome of the Kerzner International trademark litigation and the appeal of the slot machine class action.
• Assess the impact of new competitive casino developments in the Reno area and California Indian casino expansion.
• Review the Company's capital expenditure plan for 2006 to ensure maintenance of the property's competitive position.